Credit management plays a crucial role in maintaining a healthy cash flow and reducing financial risks for businesses. One effective strategy is to set up your invoice payment terms (due by dates) within a short time frame i.e. due on receipt or 7 days. Could using shorter payment terms and creating a process to manage your debtors make a difference in maintaining your business cash flow?
Why Shorter Payment Terms Work Better Than Longer Terms
Many larger businesses and corporations’ invoice with due dates and payment terms that are the 20th of the month. They in turn manage their debtors in the same way, often requiring invoices to be received and processed within 5-10 working days after the end of the month and making payments on the 20th. These longer timelines can disrupt cash flow for smaller businesses.
NZ Businesses are being encouraged to use shorter payment terms i.e. 7-days ensuring quick payments, promoting a steady cash flow and more predictable revenue. With this structure, businesses reduce the likelihood of late payments and avoid the stress and administration of pursuing overdue accounts. A faster cash cycle also means businesses can pay their debtors on time. Below are some tips for discussion to ensure your cashflow remains steady.
Clear Descriptions and Timely Invoicing
Issue invoices promptly and with accuracy. Delayed invoicing leads to delayed payments, which can destabilise cash flow. The sooner an invoice is sent, the sooner customers can process the payment. Invoices should include clear, detailed descriptions to avoid confusion and disputes. Customers should be able to understand the charges and services they are paying for. It is also important to clarify whether prices are inclusive or exclusive of GST. Transparent communication about pricing helps avoid misunderstandings and builds customer trust.
Transparent Communication: Make Sure Your Customers Understand Your Terms
Establishing clear and open communication with customers is key to fostering strong business relationships. It is essential to discuss payment terms, payment expectations and any additional fees or charges upfront. This ensures both parties agree on the payment schedule from the start. If customers face financial challenges, offering them an open line of communication helping maintain a positive relationship and avoid payment issues.
Build a Valuable Customer Base
Maintaining a successful business requires building a loyal and trustworthy customer base. You can achieve this by implementing best practices such as:
- Being Upfront About Charges: Clearly state all prices, including taxes and additional fees, so customers know exactly what to expect.
- Timely and Accurate Invoicing: Issue invoices promptly with clear descriptions to expedite payments.
- Clear Communication: Make sure customers fully understand your payment terms from the start. Don’t delay addressing any overdue debt, the longer you leave it the harder it gets, and it may be a simple communication error.
- Flexibility in Payment Terms: While using 7-day payment terms, offer flexibility if customers encounter genuine difficulties. This can foster long-term loyalty.
Conclusion Use best business practices to build a good business. If you want to chat, contact Bronwyn @ Synergy in Business for bookkeeping and payroll solutions.
Bronwyn Gregory (Synergy in Business Ltd)
