August 21

How the Invoice Terms You Choose Can Affect Profitability

By Nolan Accounting

August 21, 2019


The whole point of going into business for yourself was to have greater control over your own income. Before your business can collect any money, however, it needs to send invoices to customers that have already received goods or services. Unfortunately, this process isn’t as straightforward as it might seem. You must select the proper invoice payment terms to ensure healthy cash flow and positive relationships with your customers. Setting terms and managing expectations for payment depends heavily on your industry and the relationship you have built thus far with your customer.

What Are the Typical Invoice Payment Terms for Your Industry?

Before setting invoice terms with a new customer, it’s important to study the typical terms for your industry and offer a similar payment schedule. For example, Net 30 is the most common invoice term among small businesses across multiple industries. That means your customer has 30 days from the date of receiving the invoice to remit payment in full or make payment arrangements.

While you need the money as soon as possible, especially if you’re a new business owner, requesting payment in less than 30 days or cash on delivery can be a risky strategy because the customer can get Net 30 nearly everywhere else. If you start getting a lot of complaints about your invoice payment terms, it’s probably because they deviate from industry standards. You will most likely need to adjust them in order to remain competitive.

Consider That Your Invoicing Terms Can Affect Project Flow

Suppose your contract with a client for a large project specifies that your company must receive payment for one phase of the work before moving onto the next. While that sounds reasonable upfront, the reality is that it can slow or halt the project. This means you finish past the due date, potentially keeping your company from taking on new projects. In this case, the best thing to do would be to coordinate invoice payment dates more consistently with your work cycle.

Factors to Evaluate When Setting Your Invoice Payment Terms

One size rarely fits all, especially with business customers. When working with someone new, don’t hesitate to request the company’s business credit report to find out how timely it pays other suppliers. If your new customer shows consistent tardiness, you’re within your rights to ask for a deposit or even upfront payment until the customer creates a positive payment history with your company.

The size of the invoice is another important consideration when establishing repayment terms. Generally, businesses provide shorter deadlines for smaller invoices and longer deadlines for larger ones. However, you might consider asking for an upfront deposit and a regular installment schedule for high-dollar invoices to reduce the uncertainty of when you will receive payment. We also recommend offering early pay discounts and late payment penalties to encourage your customers to pay their invoices in a timely manner.

Need additional advice on accounts receivable management? Nolan Accounting is here to help. Please contact us today at 414-425-5690 to learn more.

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