Getting your invoicing system and payment terms right can be the key to a healthy cash flow. You need to ensure your customers understand how much they need to pay and when they must settle up. Customers are more likely to pay you on time if these terms are clearly set out in writing from the start.
This guide outlines the information you should include in your terms and conditions, and how to set up payment terms. See here for part two where we cover how to write an invoice and what to include. It also explains how to pitch payment terms to customers and some of the commonly used invoice payment terms.
Setting terms and conditions
Terms and conditions - sometimes known as terms of trade - are the terms of the contract between you and your customers. They're designed to protect your rights, limit your liabilities and provide you with some security when you sell your goods or provide a service.
Many businesses supply goods and services on the basis of informal, verbal arrangements. However, there is less chance of a dispute arising if agreements are clearly set out in writing.
It's important to get your terms and conditions right. If they're inadequate, it can be difficult to pursue or prevent bad debt. You may wish to consult a solicitor when drafting your standard terms.
Your terms and conditions should cover:
- Delivery arrangements.
- Payment terms. Is it full or part payment in advance or payment in arrears? You could offer customers a discount for paying by the due date and/or for paying within, for example, seven days of the invoice date.
- Credit limits and credit periods. If you don't agree a credit period with your customers, the law sets a default period of 30 days.
- Your right to charge interest on late payments and claim compensation for debt recovery costs.
- A commitment to quality.
- Data protection.
Make your terms binding
You need to make your customer aware of, and agree to, your terms and conditions.
Explain your terms and conditions to customers at the start of your relationship, ie with your estimate or quotation, or when they place an order. Allow them to discuss with you any problems they have before you raise an invoice. When you do raise an invoice ensure your terms and conditions are included.
You should also remember that the law allows you to challenge customers who attempt to impose terms and conditions that remove your rights to claim late payment interest or compensation.
Setting suitable payment terms for your customers.
Most businesses give some level of credit to customers. However, if customers do not pay you promptly, it can place a considerable strain on your business.
Before you agree to supply credit, check up on your customer. This can be done by using information supplied by credit agencies, analysing company accounts or consulting bank references. Based on the information that you find, you can then ask for payment in advance if necessary. This will help you to safeguard your cashflow.
Payment terms and conditions
Explain your terms and conditions to customers at the start of your relationship, ie with your estimate or quotation, or when they place an order. Send out a written confirmation of their order with a copy of your terms and conditions of sale. This enables them to examine the terms and conditions and discuss any problems they have before you supply goods or services. It also sets out mutual expectations, which can avoid misunderstandings later.
You can also print the terms and conditions on the back of your invoices.
If you communicate with customers electronically your terms and conditions should encourage electronic payment, eg via BACS or CHAPS. These systems provide payment certainty and prevent the risk of bounced, missing or lost cheques.
You could also consider sending your invoices electronically along with a copy of your terms and conditions, which is much quicker than sending invoices through the post.
Early Payment Discounts
You might encourage customers to pay early by offering a discount for early payment. The level of the discount should depend on the profits you are making on orders.
Advantages to offering an early payment discount are that it:
- Speeds up payment
- Improves cashflow
- Reduces bad debts
Disadvantages to offering an early payment discount are that:
- Discounts cost your business money
- Some customers will pay early anyway, so you are giving them a discount for nothing
- When your business is bigger or more financially secure you may decide to discontinue the discount, which could result in offending or losing customers
- The discount needs to be closely controlled to stop customers who do not pay early from receiving a discounted rate
- Accounting for VAT is more complicated than with undiscounted invoices.
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