Here, at Elorus’s blog, we have repeatedly stressed the importance of a small business’s cash flow. Simply put, your company’s ability to stay on top of its obligations while having enough cash put aside for emergency situations.
There are many reasons why your cash flow matters, but the most important one is that smooth cash flow management allows your company to grow even more, especially in the time of economic uncertainty that has become our reality for the past few years. External factors will always play a significant role in your cash flow but, it all comes down to how you handle them as a small business owner.
Your cash flow, however, greatly depends on your receivables and payables policies which is the main topic of this article. We are going to point out the ways in which payment terms and conditions affect your collection time, which in turn, affects your cash flow.
Invoice payment terms & conditions explained
Concerning your sales, it’s a no-brainer that in order to actually get paid for your products and services (let alone get paid on time) you need to establish some policies. These policies may include the days of credit you offer, the method of payment (by cash, check, wire transfer), the number of shipping fees, and many more. Everything pertinent to how financial transactions are carried out can be a part of your “standard invoice payment terms” section, which should be printed on your invoices.
Concerning your vendors, they obviously have their own policies, which you can agree upon from the beginning of your cooperation and arrange yours accordingly so as to avoid creating a cash-flow gap.
Payment terms and conditions also enable you to create a schedule by which you can organize the payments to your suppliers. Keeping in mind when your “big client” is going to pay you off, really matters to your cash flow as that money translates to electricity bills, mortgage, rent, and payroll.
Of course, payment terms and conditions are always open for (re)negotiation, and striving to agree on what’s best for both sides is always the goal. You want to maintain good relations with clients and vendors!
Discuss them first
In order to get paid on time, terms and conditions must be negotiated before reaching an agreement with your clients. Depending on your industry, there are some norms that exist. In wholesale, for example, the 30 net days invoice rule dominates the market whereas, in online retail advance payments are a necessity.
What’s more, you can put a discount policy in place for cases where clients make massive orders. This will not only keep them happy but offering a discount enables the client to gather the amount owed easily, so you get paid faster!
Clearly state them on your invoices
Terms and conditions do not consist of company secrets; have them printed on your invoices with a polite phrase, like “Thank you for choosing [company name], please proceed with the payment until [specific date]”. Or, “We appreciate your business, please make sure to pay off this invoice within 30 days”.
Elorus has a designated section on each invoice, where you can type your payment terms and conditions for the client to see. If they apply in general, your document themes can have default payment terms so you don’t have to type them over and over again!
Offer a variety of payment options
We cannot stress that enough! Offering multiple payment options do not only serve your customers but ultimately serves your small business. Apart from the fact that customers love having options, having a variety of payment methods makes it easier for them to proceed with the payment promptly.
For example, a customer wants to buy from your little online shop but you only accept cash payments upon delivery. The chances are that they will navigate away from your page and choose a competitor. Online payments are your friend, as discussed in a previous post.
Additionally, even if you offer an online payments processor, one is never enough. Virtual wallets are becoming increasingly popular among customers, so you need to incorporate the most reliable ones, thus addressing a bigger audience.
Elorus offers integrations with the most popular online payment gateways, so all you have to do is create a business account for each of them and connect them to Elorus, with just a few clicks.
Don’t forget to apply some kind of down payment terms for cases where a project is being carried out in stages, or regarding big orders. This will help you keep your cash flow steady and make sure you have adequate cash to buy the supplies required to start the project and keep it going.
A great way, and a quite successful one, to get paid on time is rewarding clients who pay you earlier. You can offer a 5% discount if they pay you before the 30-day period expires. It might seem like a small gesture but the vast majority will take it. Who doesn’t like discounts?
Being paid faster means your cash flow is increased automatically!
On the other hand, you could apply an “overdue fee” to each invoice that stays unpaid after the credit period has elapsed. This way, customers will rush to pay you so they don’t have to pay extra.
This is also a great strategy to clear the picture a bit – meaning that, customers who repeatedly appear to be inconsistent maybe should switch to cash payments. This way, you avoid the overhead of chasing them to pay you and you get paid faster, assuming they agree to the “cash on delivery” policy.
If you have any suggestions as to how Payment Terms & Conditions policies can improve a company’s cash flow, please feel free to leave them in a comment below!