Take a quick second and think about why you started your business. You probably didn’t wake up one morning and think, “Hey! I think I’ll start a business!” No, you got into entrepreneurship because you had something unique to offer, whether that is a product, a service or just a great idea.
Although many people who become entrepreneurs and small business owners first started their businesses based on a great idea or a unique talent or trade, this doesn’t always mean that they know how to run a business. Unless your specialty or service is in accounting or bookkeeping, this is an area where a lot of businesses get hung up.
Most businesses do not realize how challenging accounting can be until they are well into operation or are struggling to get clients to pay on time so their business can pay its own bills or its employees. Cash flow management is one of the most important areas to manage when owning or operating a
However, following best accounting practices from day one can ensure your business’ chance for survival. One of the most important things you should look at first is your invoice terms, such as Net 30 or Net 60.
A Super Quick Lesson in Accounting…
If you are brand new to managing a business, then you may or may not be familiar with accounting vocabulary, such as “net terms”. Regarding invoice payments, “net” refers to the amount due. “30 or “60” refer to the number of days after the invoice is dated that the payment is due.
If your business is B2B, then you might find that some of the larger companies you provide goods and/ or services to might be delaying payments. Even if your invoice terms are 30 days, some companies might push payments to 60 days or even 90.
This isn’t necessarily due to a business’ inability to pay their bills on time. Many companies delay payments on purpose to slow down their accounts payables. This allows the company to have larger amounts of cash on hand, which leads to bigger profits.
How to Manage Invoice Terms
It seems like it should be simple and obvious: When you finish work or sell a product, you get paid. It should be that simple, but it doesn’t always work out that way. Some clients will try to negotiate their terms from 30 days to 60 days. Some clients might even have certain terms they require for all their suppliers, and your business may be required to accept those terms if you choose to work with them.
There are a few different ways that you can manage your invoice terms to make sure you’re offering a great deal to your customers while also keeping your business’ cash flow consistent.
Offer tiered invoicing (depending on invoice amounts)– One way to create a balance that is fair to customers and that also helps maintain healthy and consistent cash flow for your business is to offer different terms depending on the size of their purchase.
For example, if their purchase is small – say $100 or less – then the customer’s payment may be due immediately. If the purchase is large, then they might be eligible for net 30 or net 60 terms.
Implement payment policies– Many businesses will charge late fees if a customer does not follow a business’ payment terms. For example, some businesses may charge a late fee of $25 if payment isn’t received within the specified terms on the invoice.
On the other hand, you may also offer a discount if payment is received before net terms. For example, some businesses may offer a 1 or 2 percent discount if payment is received within 10 or 20 days before reaching the full 30 or 60-day net terms.
Manage your cash flow properly– Regardless of your invoice net terms, be sure to carefully manage your business’ cash flow. Be sure you have an adequate cash reserve on hand to pay bills and employees and try to avoid spending money you don’t have or borrowing more money than what you forecast to invoice. Remember, until your clients pay, that money doesn’t count.
Remember, cash flow management is one of the most important areas to manage when first starting a business. This not only keeps finances as healthy as possible in the early startup phases, but it can also help you prepare your business for the future. Take control of your cash flow by carefully managing your invoice terms.