Are you concerned about when you get paid for your product or services? You should be, as the payment terms affect the profitability of the transaction.
The longer the period between the sale and when you get paid, the more working capital required to maintain your business. Working capital is never cheap, whether or not you have to borrow any part of it. There is an internal lost opportunity cost for money tied up
in accounts receivable – it cannot be used for growing the business.
I advise my clients to try to make invoices payable upon receipt. It is not a point you win all the time, but for the small company in particular, it is worth a try. After that we try for thirty day terms as opposed to forty-five days, and so forth. Some of the large companies will try to impose forty-five, sixty or even ninety day terms. Sometimes the point is negotiable and sometimes not, but the small company needs to push hard on this point.
If an agreement’s payment terms are not drafted carefully, they can cost you money and/or cause unnecessary confusion. A client’s salesperson recently sent me a Statement of Work attached to an email. The SOW said the client’s customer would pay $2,000/month for the client’s services. The salesperson wanted to emphasize that $2,000/month was a really good price. The email mentioned that the fee was actually payable annually up front. If it were not for that comment, I would have ignored the payment terms. The customer could have paid in monthly installments rather than a lump sum up front, no matter what had been negotiated before. Even with very low interest rates, $24,000 spread over twelve months is worth less than $24,000 right now.
Close attention should be paid to the payment terms to prevent confusion and to conserve working capital as much as possible.