Any business requires regular cash flow management, regardless of its size or industry. For small and medium companies, cash flow management is key to their survival. But it’s not easy to manage cash flows if you don’t understand the basic terms. Here are the invoicing and payment terms you need to know:
Terms of Sale
Terms of sale are a set of conditions that you and the buyer need to agree on and follow, regarding the sale of goods or services. These include conditions on the cost of the goods or services, the amount payable, delivery, payment method, and the due date.
These conditions are also part of the basic components of any invoices. With these clearly spelled out, both parties operate with the knowledge that each knows their role and what is expected of them. It helps reduce any potential misunderstandings and disagreements regarding the sale process.
If your business involves international trade, Terms of Sale is a crucial component. It shows the shipment dates and which party is responsible for the taxes and duty payments, among other required international trade terms.
Cash on Delivery (COD)
One can also use Payable on Receipt, Upon Receipt, or Immediate Payment terms. All of these mean the payment is due upon delivery of the goods or services offered. The client needs to immediately pay the seller via cash, wire transfer, cheque, or credit card. Failure to do this, the seller can repossess their goods.
Payment in Advance (PIA)
PIA refers to an advance payment one expects before starting to work on a project or delivering goods to a client. An advance payment protects one from using their money to cater to that particular job or project’s expenses, especially jobs with high costs. It also protects one from non-payment. Even if the client doesn’t pay, you will lose a small percentage of the money instead of the 100% invoice amount billed.
Net 7, 21, 30
It indicates that the payment is expected within 7, 21, or 30 days of the invoice date. Some invoices will even have a Net of 60 to 90 days, depending on the credit terms agreed with the seller.
The term can be confusing for both the Receivable and Payable teams. To avoid any misunderstandings, you should use clearer, direct, and polite terms like “please make your payment within X days.”
2/10 Net 30
As mentioned above, Net 30 means that the client should make payment within 30 days of the invoice date. When a term like 2/10 is included prior, the client will receive a 2% discount if they make payment within ten days. It doesn’t have to be 2/10; you can use the discount rate dates applicable to suit you.
However, it’s best to use simpler terms for your clients; terms are more enticing and make them see that they are saving. You can use a term like “Please make payment within ten days and save 2%.”
Quotes and Estimates
There’s a difference between the two, although some people use them interchangeably. An estimate is just that- to show the estimated cost for the products or services you offer. If you give out estimates, it’s important to clarify that to the client and avoid disagreements when the final invoice amount differs.
A quote, on the other hand, will be a bit more precise than the estimate. It includes an itemized breakdown of what you are selling, product or service, and each item costs.
The good news is that if you are using an online accounting platform, there is a chance it easily converts your quotes and estimates into invoices.
Recurring Invoices / Payments
These are invoices or payments that frequently occur, like weekly or monthly. These include receipts or payments for services like web hosting and membership subscriptions, among others.
For better cash flow management, it’s important to set a model for recurring invoices and payments.
Line of Credit Pay
It applies where a client pays on credit, allowing the client to pay for the goods or services long after delivery. Line of Credit Pay is common in larger companies. But, if you need to use it for your small or medium-sized business, ensure you know the client’s creditworthiness.
Sometimes, clients will not pay for the goods or services offered. That’s where the interest comes in, where one charges interest or a fee for any unpaid invoice. The best way to go about this is charging interest for the period the invoice remains outstanding.
Every time you send the interest invoice, it’s important to have a breakdown of the interest calculations or fees you are charging for late payment.
If you are selling your goods or services on credit, your cash flow is probably affected. What if your business is in dire need of cash, but clients are not paying? Invoice factoring can help with this.
Invoice factoring refers to selling your invoices to a factoring firm. The factoring firm will give you about 70-90 percent of the invoice value within a short period. However, factoring companies charge a fee for these services, so be sure to read their terms and conditions and the costs.
When running a small or medium business, you are probably handling accounts receivable and payable for the company. You should understand these invoicing and payment terms to help you manage your business’s cash flows.