Defining Payment Terms - SME Accounting

Accounts Receivable Apr 27, 2016

Understanding payment terms

Defining payment terms is critical for resource constrained businesses. For Asian countries like Singapore, where Small Business Enterprises or SMEs are growing in abundance, closing a sale for their product is not the end. Though closing a sale is crucial, it is equally important to ensure that payments for the same come in on time. One of the challenges for countries like Singapore is their rapidly expanding business into countries within the continent and across the globe.

The challenge arises because of the geographical differences and implies changes not only in the applicable payment terms and methods, but also in the payment conditions along with the currencies used for payments. Eventually such variations affect the timely revenue generation for an organization.

Defining a time period for settling outstanding bills, is vital. This defined time period for clearing outstanding dues is referred as payment terms. For SMEs, it is important while demarcating a payment term, especially for cross border businesses, not only do they have to customize invoice payment terms but also adhere to supplier and vendors specifications.

While payment terms are defined by each business in their own way, there are some payment terms which are common to all.

Significance of defining payment terms

Payment terms are a way of confirming that payments come in by a specified time period. This in turn ensures that the SMEs on their part are able to clear their dues to entities like vendors, payroll expenses or facility maintenance, etc that they deal with.

Defining a payment term is not about dictating rules to be followed by the clients. These can be mutually decided timelines for payments that are convenient to both parties. These also help the clients in timely clearance of an outstanding bill and the client may even earn related discounts and lines of credit. Such advantages go a long way in drawing new clients for the businesses as well.

Appended are few popular payment terms along with their benefits and drawbacks.

  • On the spot payment – One of the common invoice payment terms is to pay for purchases on the spot. These immediate payments are cash dealings, generally phrased as ‘Payable on Receipt’ and ‘Cash on Delivery’.
  • Line of Credit – Through the line-of-credit term the buyer gets an option to make payments once in a month which is then paid via cheque or a bank transfer. In a way this term offers buyers a credit for the products and services sold.
  • Net 30 – A globally used term which means that the stipulated period within which a client is required to make payments towards an outstanding bill is 30 days from the invoice generation date. The time frame can vary from 30 days till 60 days as agreed upon. Few organizations also offer discounts if the client pays within 10 days.

Dispatching an invoice

As a business entity in the SME sector, many invoices are sent out every month for recovering outstanding bills, well on time. However to ensure payment it is crucial that the payment terms are mutually agreed on. While discussing these terms, it is always safe to adhere to the industry norms. It is advisable to take care of the invoicing nitty-gritties well before dispatching it.

Acceptance of an invoice

For businesses, outgoing and incoming invoices are a monthly fare. Like every other business, invoices that come in for clearance also come with benefits like discounts on early payments, flexibility of payment modes etc. While you may be tempted to pay off outstanding bills early to earn a good discount, be aware if this would leave you short strapped for money. Go through the invoice’s terms and conditions minutely to avoid missing out on offers included in the invoices.

Spell out payment terms clearly

Ambiguity in payment terms, takes a toll on due clearance of bills. Hence it is necessary to communicate about the invoicing process and the payment terms clearly to the clients along with sending out invoices well on time. A reliable invoicing system can be an absolute aid in executing all these on time. Clearly communicated, timely invoices stand better chances of being paid in due time.

Defining Payment Terms

For resource constrained SMEs, choosing your invoice terms can have immediate payment and cash flow benefits. Well planned payment policies and execution is important, especially when you are venturing overseas.


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