Payment Terms - Top SME Tips

Cash flow Aug 10, 2016

It is often said that the customer is the king. However, if applied to SMEs, the truth remains that it’s the cash flow that wears the crown. There is nothing more frustrating than waiting to get paid for the money we’re owed and often SMEs face the brunt of the deal. That is why SMEs should be smart about which companies they extend their credit to and the limit of the credit that can be offered.

What are payment terms?

Payment terms are the conditions under which an agreement for trade is forged between a seller and a buyer. These terms define the time period within which a buyer is allowed to pay off the due amount and may do so with cash in advance, cash on delivery, an agreed upon payment period or through other similar arrangements.

Some of the most commonly used payment terms are

  • PIA – Payment in advance (PIA) is the safest mode of payment for any business wherein the seller receives the amount for a sale from the buyer in advance. The payment is made ahead of its normal schedule before a good / service is actually delivered.
  • 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 10 – A globally used term which means that the stipulated period within which a buyer is required to make payment towards an outstanding bill is 10 days from the invoice generation date. Few organizations also offer discounts if the client pays within 10 days.
  • NET 30 – The stipulated period within which a buyer is required to make payment towards an outstanding bill is 30 days from the invoice generation date.
  • NET 45 – The stipulated period within which a buyer is required to make payment towards an outstanding bill is 45 days from the invoice generation date.

SMEs and Invoicing

As per a study by Tungsten Corporation, nearly a quarter of all small and medium sized businesses in the UK are facing a potential financial crisis due to late payment of invoices. The average SME is owed £40,857 in unpaid invoices with £20,937 of that total overdue. With UK’s 5.2 million SMEs, the total owed could be as much as £212 billion.

“These figures are a telling reminder of the challenges faced by SMEs in this country. An unpaid invoice can mean the difference between a successful month of trading and a dangerous financial shortfall. In the worst case it could lead to insolvency.” – Richard Hurwitz, CEO, Tungsten

Under the given circumstances, defining payment terms becomes very critical for small and medium enterprises. Most SMEs aim to keep their accounts receivable as low as possible and managing it starts with defining the payment terms. Payment terms establish clear demarcations and provisions ahead of time, well documented with a contract that spells out the terms and legal formalities.

For SMEs the cash flow depends on prompt payment and thorough invoicing. And even though the basics of invoicing are simple, there are always interruptions that may sometimes get in the way.

Here’s how to keep the cash flowing

  • Start with a credit check – It is strongly suggested that SMEs should carry out a thorough financial background check before embarking on a business with any new potential customer. It is also a good idea to run credit checks on existing customers as well.
  • Invoice on time – Ensure your invoices are getting out on time even when you’re busy. If taking the time out to create invoices is getting difficult, consider using automation software to overcome the issue.
  • Follow up on late payments – Send out timely reminders regarding payment terms to your customers. Remember that it’s business, so don’t be meek, be polite but be firm.
  • Have a documented credit policy – Implement a credit policy that ensures the same rules are applied to all customers. Also, make sure that all staff members clearly understand and abide by it.
  • Terms of Trade – Enforce clear terms of trade at the beginning of any business relationship. You may have these terms mentioned on your website or distributed with your invoices. It is also a good idea to include recovery of collection costs in your trade terms, which allows the passing of any debt resolution charge on to the customer.
  • Make the most of technology – Technology offers an array of digital tools and facilities that provide support with cash flow management. Consider deploying an accounting software like Deskera that can manage the complete ambit of your SME’s invoicing and accounting requirements.

What next?

One thing that SME owners need to keep in mind is that there are no hard and fast rules, there are only good practices. Think about how your business operates and implement invoicing terms that will have immediate payment and cash flow benefits. Plan your payment policies well in advance and execute them accordingly.


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