Ensuring Cash Flow with Your Small Business Payment Terms
Whether you’re a buyer or seller, payment terms are vital for keeping on top of cash flow. Here are some tips for mastering this important aspect of operations.
It’s just one small line on an invoice, but it means so much to your small business.
Payment terms like “net 30” or “net 60” specify how many days a buyer has to pay for a sale of products or services. If you’re a buyer and your payment terms get set up incorrectly, you might not have cash on hand when a vendor wants payment. As a seller, difficult payment terms can sour an otherwise strong business connection. Set up properly, payment terms will help your small business maintain a healthy cash flow.
Whether you’re a buyer or a seller (or both), you can master payment terms with these simple tips:
- Know your best terms: The most common time period for paying invoices is net 30, but net 60, net 15 and even net 10 are widely used in business as well. Before setting a time frame, take a good look at your cash flow to determine what works for you and the business on the other side of the deal.
- Forge good relationships: Every business wants to be paid quickly, but short time frames (like “net upon receipt”) can be onerous for some buyers. If you’re the one doling out the cash and the payment terms are becoming tough to meet, ask about tweaking them. If you’re a seller, be open to changing the terms if it might foster a better long-term vendor relationship.
- Don’t forget transit time: Payment terms usually begin the moment a product leaves the seller. For example, if terms are net 30 and a widget takes 10 days to reach the buyer, the buyer has 20 days left to pay the invoice. Understanding this basic math is critical to ensuring that invoices are paid correctly and interest doesn’t start accruing.
- Keep interest penalties in mind: Unless a vendor specifically grants a grace period, assume that interest will begin accruing one day after the net terms of an invoice. In the widget example, a buyer would be socked with interest on day 31, and it would keep accruing from that point. If this becomes a frequent problem, it’s worth discussing with vendors to see if they can waive penalties as well as change payment terms.
The bottom line is that payment terms should be part of an initial conversation between buyer and seller, so that neither side feels slighted. Getting a handle on the best payment terms for your small business can reduce cash-flow issues while strengthening vendor relationships.