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Timely payments are the lifeblood of any successful business. Yet, a staggering 30 per cent of invoices continue to be paid late. In this guide, we will delve into the importance of payment terms and how to implement and manage them effectively.
According to The Australian Small Business and Family Enterprise Ombudsman, 30 per cent of invoices are consistently being paid late. In sectors with heightened risk, such as food services and retail, over 60 per cent of all outstanding invoices are 60 days overdue.
The ability to receive payments promptly is pivotal for a business’s success, impacting its growth, product or service enhancement, and day-to-day expense management. Payment terms play a pivotal role in facilitating this process.
In this guide, we will delve into the definition of payment terms, their importance, and how to implement and manage them effectively.
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What is a payment term?
A payment term is a document or text outlining how and when customers are expected to make payments for goods or services.
These terms set expectations for payment, including deadlines and potential penalties for missed payments.
By providing a clear outline, businesses can streamline the payment process and enhance transparency for customers.
Invoice payment terms Australia
Typical payment terms vary from industry to industry, geography, and companies’ willingness to extend credit to customers. In Australia, however, standard payment terms typically dictate a payment window 24 days from the issuance of the invoice.
Despite the prevalence of 24-day terms, many businesses still encounter delays in receiving payments. According to recent data from The Australian Chamber of Commerce and Industry, the average payment time for small business owners is 35.66 days.
Payment terms elements
It is imperative to articulate precise payment terms within contracts and invoices to facilitate prompt payments. The inclusion of key elements in your invoices is pivotal for ensuring timely settlements:
- Date of the invoice
- Terms specifying the number of days for payment
- Payment due date
- Invoice amount
- Accepted payment methods
- Information on where to make the payment
- Other payment terms and conditions
We also recommend that you nudge prompt payments by using polite language.
In fact, research shows that invoices including the words “please” and “thank you” get paid five per cent faster than other invoices.
RECOMMENDED READING: How to send an invoice (2024)
Payment terms meaning
When companies negotiate payment terms, they often operate with ‘net days’.
“Net days” is a payment terms concept that indicates the timeframe within which payment is expected about the delivery date of goods or services.
The typical payment conditions may encompass the following:
- PIA: Payment made in advance.
- Net 7: Payment due seven days after the invoice date.
- Net 10: Payment due ten days after the invoice date.
- Net 30: Payment due thirty days after the invoice date.
- Net 60: Payment due sixty days after the invoice date.
- Net 90: Payment due ninety days after the invoice date.
- EOM: End of the month.
- 21 MFI: 21st of the month following the invoice date.
How to use payment terms:
Implementing payment terms requires careful consideration of business goals, payment amounts, and term options. Some strategies include:
Prepayment
Require customers to pay in advance for immediate capital and reduce the risk of non-payment.
Upfront percentage
Allow customers to pay a percentage upfront and the remainder later, providing flexibility.
Installment agreements
Offer customers the option to pay in equal instalments over a specified period.
Payment after invoice date
Set terms that specify when payments are due after the invoice date, such as Net 30 or Net 60.
Why are payment terms important?
Payment terms are vital for understanding available funds, making informed business decisions, and maintaining a healthy cash flow.
Accurate projections enable effective tax planning, smooth business operations, and strategic growth management. Clear payment terms also reduce stress for business owners by providing insight into monthly cash flow.
Who determines payment terms?
The responsibility for determining payment terms typically lies with the business owner or head of accounting.
These terms are established before transactions begin to ensure clarity and adherence by customers. For businesses assessing construction and resource costs, payment terms may be set even before the company opens its doors.
How to set customer payment terms
Selecting the right invoice terms is a crucial aspect of managing your business finances effectively. The terms you set can establish a solid foundation for your business or put it on shaky ground.
Defining B2B credit terms is not a one-size-fits-all endeavour. Each business, customer, and situation is unique, necessitating careful consideration. Below are some key factors to keep in mind when determining credit terms for customers:
1. Consider the customer history
Assess whether you consistently chase down certain clients for payments and tailor your invoice terms based on client behaviour:
- For notoriously late payers, consider stricter policies like upfront payments or cash on delivery.
- For consistently prompt clients, offer early payment discounts to strengthen your partnership.
💡 QUICK TIP! Reduce risk by running a credit check on new clients before offering payment after delivery.
2. Look at your cash flow
Evaluate whether you consistently face cash shortages towards the end of the month or struggle to kickstart operations due to insufficient funds at the beginning of the month.
The best invoice terms for your cash flow are those that quickly gives you money, such as:
- Upfront payments
- 50 % upfront payments
3. Experiment with creative terms
Get creative with your payment terms to nudge timely payments. You could for instance offer a 5 percent discount for clients who pay within seven days.
4. Take industry standards into account
Industries may have different norms based on risk, upfront costs, and project timelines. Investigate common payment term practices in your industry and make sure you align with your peers.
5. Add late fees and interest terms
Incentivise timely payments by stating that late fees and interests will apply if the customer fails to pay on time.
What should i write in payment terms?
Here is an example of payment terms that you can use on your invoice:
“Thank you for your business! We appreciate your prompt payment. Payment is due within [number of days] days from the date of invoice. Late payments will be subject to a [percentage or flat fee] late fee. Please reference the invoice number [number] when processing payment. Any discrepancies should be reported within [number of days] days of receipt. We look forward to continuing our business relationship with you.”
What payment methods should I accept?
Selecting the right payment methods for your small business is crucial for client convenience and faster payment processing.
Consider incorporating the following popular payment methods into your business operations:
- Cash
- Bank transfers
- Debit cards
- Credit cards
- Online payment systems
- Mobile payment solutions
By offering a combination of these methods, a B2B business can provide flexibility and convenience to its clients while also streamlining its own payment processes.
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