Article credit: Sage 

People always focus on the price, yet can get fazed when they are asked, so what are your payment terms? And when you get asked that question, you need some answers ready.

Payment terms are in effect all about offering someone credit. And that means, are they good for it?

Because once you issue an invoice, and don’t take cash for your goods and services at the point of sale, you are offering your customer a line of credit. And that means you take on the risk of them paying late, or worse, not at all.

Now, let’s make one thing clear, the best outcome is to get paid immediately. The best invoice you can issue is one which acts as a receipt.

Let’s hear what Stefan Fritz, Managing Director of the Lady of Avenel boat business, has got to say about how to establish payment terms. He’s skipper of the Lady of Avenel boat, a traditional sailing boat based in northern Scotland.

It’s a lifestyle business, something which Stefan and his team love doing. He is quite firm about terms: “We take a deposit before we do anything, if there is no deposit, we won’t do anything. And generally, we get paid for the trip immediately…we don’t have a problem chasing money too much.”

Great advice for anyone in business, but of course it all depends on what business you are operating. For many businesses, especially in the B2B world, payment terms must be negotiated, alongside the price. With B2C businesses, there often is more of an opportunity to dictate good terms, for you the business owner, right from the kick-off.

Examine your cash flow 

We asked expert Nicky Larkin for her opinion on how to establish payment terms. The Managing Director and founder of Goringe Accountants, Nicky was a finalist of the British Accountancy Awards 2012. She is also Chair of the FSB Reading & West Berkshire branch. Goringe, based in Reading, has around 700 clients.

She has wide experience in setting up finance teams and systems, managing all aspects of financial and management accountancy, installing the best financial practice and gaining company financing.

Nicky told us: “To establish payment terms, its key to look at your cash flow, because it’s really important to ensure that you have sustainable cash to grow your business, it’s very easy to have a profitable business, but actually you could be over trading and your growth could be stunted because you have a lack of cash.”

And, it’s fair to say, that most of your customers will be looking for good terms and those terms could make the difference between winning a deal, or not. So, you have to box cleverly.

First, there’s that question, are they good for it? You should always check companies and individuals out, especially if you are offering a lot of credit. There are services available which can give you a good steer on a customer’s financial standing and likelihood to pay.

But don’t forget, that no matter how many stars and ticks you get about a company, on the day it comes down to whether they can pay on the agreed date. So, as well as any checks you might get to help you, use your gut instinct.

Ask yourself how well do you know a company or the individual buyer? What are people saying about the company online, or better still, are you able to speak to any suppliers who already deal with the company? What do they say about them?

How long can you wait?

So, the next question is how much credit do you want to give them and for how long? It’s a good discipline for every company to adopt with a new customer, no matter how big the order, or attractive the margin. Be wary of companies that will use you to bankroll their business – selling your goods, taking the money and then delaying payment to you.

Let’s hear from Nicky again: “Obviously in each sector there are often traditions of payment terms, so you might only have a certain amount of flexibility for your payment plans, but whatever you can, try and shorten your payment terms to your customers as much as possible, so whether you can look at up-front payments, whether it’s deposits, or payments that are made early, or in advance, perhaps you might offer special little discounts by having your payments made in advance to give your clients some encouragement.

“Afterall if your clients have lots of cash in the bank and they won’t be earning a lot of interest in there, so they might appreciate a couple of percentage points off your price if they pay up in advance.”

The most common terms offered to companies is 30 days, which is a fair amount of time that suits both parties. Which might be an odd thing to say, from the seller’s point of view, but don’t forget that those 30 days can be as important to you, as the buyer, as it’s time for you to ensure that your products are delivered on time, are up to the job and perform as expected. Likewise, with services, have you offered what you promised and what was expected? It’s a fair breathing space for both parties.

Some companies require you to give them 60 days, or even 90 days (which are not uncommon requests, especially in certain sectors), but if asked for this, you have to ensure you have the cash flow to stand it (back to Nicky’s earlier point).

You have to ask yourself the very honest question, can I afford not to be paid for 60, or 90 days, effectively two to three months, for these goods, or services. And that’s not the only question. You have to say to yourself, two to three months is a long time in business, so your risk of not being paid has increased.

But, payment terms are part of the negotiating process, so remember what Nicky tells us about getting to as few days as possible. Less than 30 is great and anything over 30 requires you to make sure you can afford it.

And don’t forget that these terms must be on your invoice. They must be clear to your customer and confirmed in contracts, letters, or emails. They must not become an issue between the negotiating parties.

The last word of great advice goes to Nicky: “What’s also really good is if you try to be really strict with your payment terms. If you ask for money in advance, make sure you follow up on that. If your payment terms are 30 days make sure you are chasing up in advance of those 30 days and asking clients if they have their invoice and are set up to pay on 30 days. Make sure that you are really clear and your clients are prepared to pay within these terms.”

Article credit: Sage 

Every business owner or manager knows relationships with customers and/or clients are central to what they do. A happy customer or client is the most valuable asset.

But I’d like to suggest there’s another kind of relationship that business owners should cultivate and that can pay huge dividends if handled correctly. I’m talking about the people or organisations to which you owe money, such as your suppliers or creditors.

This might sound counter-intuitive. Why invest effort?

But there’s some solid wisdom and it goes far beyond simply managing your cash flow and balance sheet, or keeping your credit rating healthy.

Working to create a good relationship with those to whom you owe money can bring substantial intangible benefits that nonetheless have a real impact on the performance of your business.

By being a good debtor, you can also become a trusted customer or client, and receive the benefits therein. In this article, I will reveal why.

Big benefits

Think about it. Don’t you have your own natural bias towards the customers or clients of your business who pay regularly, and within the terms, without fail?

Aren’t they the customers for whom you’ve always got time when they call or email? And, of course, aren’t they the ones with whom you’re happy to do further business—perhaps even at a preferential rate just because they’re reliable and hassle-free?

Customers or clients who are tardy in their payments and demand constant attention are expensive to a business in terms of resources.

Why spend your valuable time chasing payments, or the time for your staff, when you could be focusing on the core tasks that you enjoy and build the business in the process?

So, why wouldn’t your own suppliers or other creditors view you preferentially if you not just stick to the rules agreed, such as terms of payment, but also actively seek the smoothest relationship?

Here are some benefits to being a good customer:

• Superior negotiating power: Creditors measure good customers through credit ratings and businesses use this to their advantage to negotiate the best interest rates on financing. However, a good customer is also best placed to negotiate the very best prices from suppliers—not just when placing that initial order but renegotiating at any time to take advantage of this “good customer collateral” that’s been built up.
• Better terms: If you can demonstrate that you stick to the terms agreed during each payment cycle then you’re much more likely to be able to negotiate more favourable terms moving forward. Think about the benefits to your cash flow if you could switch from 30-day terms to 60 or even 90 days. The cash could be freed up for that important equipment investment, for example, or even to fund expansion plans.

It’s not even as if you have to try hard to stand out against the competition when it comes to being a good customer. Late payments are depressingly common.

According to research by Sage, more than a third of businesses have no reason for late payments. Meanwhile, 22% of respondents in the survey said they only pay invoices at certain times of the year.

How to be a good customer

Ok, so I admit all this talk of becoming a trusted customer is all well and good, but how do you go about doing it?

You need to have full visibility into your business finances. More than this, you need to transition your processes and methodologies so you’re always prepared to take advantage of this visibility because it really is one of the key lesser-known weapons in today’s competitive business world.

Again, this is more than merely monitoring your balance sheet every day, or knowing your cash flow situation. It’s about having fine-grained insight into just about every aspect of your accounts payable and receivable, whenever you need it.

It’s about seeing this data presented in a way that’s accessible and easy for you to understand and digest within seconds.

If you’re looking to get better rates from one of your suppliers, for example, wouldn’t it be great to see instantly the dates and amounts paid to that supplier over the past year?

Wouldn’t it be useful to contrast those figures against your total outgoings or other suppliers to see what kind of benefits could be had from renegotiated prices and terms?

What we’re talking about here is the use of business intelligence (BI) tools, such as financial reports and dashboards.

Once the preserve of large businesses, nowadays even the smallest company can take advantage of BI within their accounting software. And considering that doing so can be revolutionary, there’s really no excuse not to.

Digging into an example

Below you can see an example of an accounts payable dashboard and information for a fictional bicycle retailer. Of importance is the number at the top left. This is the Creditors Days figure, and it shows as 181.44. It’s in the red.

This means that on average, the company is paying its creditors every 181.44 days compared to the average credit terms of 32.59 (listed beneath in the goals figures).

Clearly, this isn’t healthy, and not conducive to becoming a trusted customer. More information is needed. The business owner needs urgently to know the who, where, what and when about these payments.

If we move across to the Due By Age Summary graph, we see the total amount outstanding to creditors, as well as for how long it’s been outstanding.

In this example, we’re able to see straight away there’s $251k sitting in the Older Than 120 Days column. By clicking this, the owner can drill down into this summary and view how much is owed, and to whom, as well as the number of days the amounts have been outstanding.

The owner will see that most of the outstanding amount in Older Than 120 Days is split between two companies: CycleGo and MountainPro.

If they then right-click on the specific supplier and click on Drill Through, they’re able to immediately drill down to the specific supplier information.

For example, they’re able to determine who the contact person for CycleGo is, and what invoices are due and overdue.

Looking at this dashboard, they may realise there was a whole lot of stock that was sent back, which hasn’t been adjusted yet by the supplier. This explains the massive amount sitting in the Older Than 120 Days column.

Conclusion on being a good debtor

Good business advice for business owners or managers has always been to keep on top of the balance/profit and loss sheet and to know the cash flow position at all times.

But this advice is out of date in our modern world.

Businesses generate data on a minute-by-minute basis and this should be exploited to provide insights that bring real business benefits in terms of improved customer and client relationships. That, in turn, brings better negotiation potential.

As we’ve shown, it would be a mistake to believe this is about delving into arcane terminology or technologies.

With business intelligence reports and dashboards, the information is right there and is easy to understand by just about anybody. Digging down into the data is as simple as clicking or tapping on graphs or tables.

With this kind of power on offer, why wouldn’t you take advantage of it—and revolutionise the way you do business?