Sometimes, your invoice is the last communication that you have with your client and its very important to leave lasting impression. At ProfitBooks, we’ve seen many businesses suffer from late payments due to improper invoice payment terms. In this post, I’ve explained how to write invoice payment terms that can help you get paid faster.
A payment term indicates the number of days that are available to the client to pay for the goods or services that have been rendered by the supplier. Any business requires a steady working capital to meet its operational expenses like salary, logistics etc. as well as funds for continued expansion. Payment delays can disrupt the cash flow resulting in shortage of cash that is required to purchase raw materials in order to manufacture the end products and / or grow the business through acquisition or merger. This is especially challenging for small businesses or start ups who cannot afford the payment lag. Hence, the need arises for optimal payment terms and clarity in payment term representation on invoices.
Here are 5 tips for writing effective invoice payment terms
1) Invoice Wording
It is important to come across as polite and professional while wording your invoice. Friendly phrases like Please make the payment on time, Kindly pay your invoice within XX days and Thank you for availing our service can increase the payment probability by more than 5 per cent. Politeness creates a positive image of the company and increases the likelihood of getting paid on time.
2) Itemised Layout
A detailed description of the invoiced items e.g. Date of goods receipt, description of goods delivered, price per unit, total price, tax amount etc. will ensure that that the vendor is clear about what he or she is paying for and the invoice has a better chance of getting paid on time. Likewise, it is important to ascertain with the customer as to what all details are mandatory and should be mentioned on the invoice to avoid invoice rejection and payment delay. Many vendors have specific requirements like provision of Purchase Order number, invoice to be made attention to a particular person or department, bill to / ship to addresses etc. on the invoice copy. Non-adherence to these specifications can adversely impact timely payments.
3) Days vs. Net
While terms like net 30 or net 45 are common in business parlance, yet they are less popular amongst those who have limited understanding of finance terminologies. Terms like Due on receipt are vague and subject to ones own interpretation. Usage of words like days instead of net and inclusion of specific payment terms like Due in 60 days have a better prospect of getting through to the customer with increased chances of timely payments.
4) Hint of a late fee
It is a good idea to re-iterate the impact of late payment by putting a note on the invoice regarding the applicability of a late fee in case the payment crosses the due date. This adds urgency to the invoice and puts the onus of timely payment on to the customer. Adding a late fee caveat can influence faster payment by educating the customer about the repercussions of paying late and facilitating the prioritisation of these invoices over other pending bills.
5) Payment policy with short terms
While longer payment terms are feasible for few clients, yet it is advisable that you negotiate with clients for shorter pay terms like 15 or 30 days while establishing your relationship with the clients. A shorter pay term will ensure faster cash flow and adequate working capital to meet your business requirements.
Optimal Payment Terms
While different businesses have their own customised payment terms in accordance with their business type and capital requirements, yet there are few common invoice payment terms that are considered as industry standards. Check out these payment terms and their meaning.
- Net 7 – Payment due in 7 days from invoice date
- Net 10 – Payment due in 10 days from invoice date
- Net 30 – Payment due in 30 days from invoice date
- Net 60 – Payment due in 60 days from invoice date
- Net 90 – Payment due in 90 days from invoice date
- COD Cash on Delivery
- CIA Cash in Advance
- PIA – Payment in Advance
- 1% 10 Net 30 Customer is eligible for 1% discount if payment is received within 10 days. Full payment is required after 10 days and the overall due date is 30 days from the invoice date
- Contra Payment Payment from customer being offset against supplies purchased from customer
Now that we have understood the art of writing effective invoice payment terms, lets look at few ways to shorten the payment receipt cycle:
1) Invoice submission method
In the past, snail mail was the most preferred option of dispatching invoices to the customers or vendors. However, the pitfall of this approach is that many a times, invoices get misplaced in transit and this is not realised till such the time there is a payment delay or a reminder is sent to the customer. An alternate to this is e-invoicing wherein suppliers can easily login to a portal, upload their invoices and submit their invoices online. Suppliers and Vendors / Customers will receive a notification post successful submission allowing better control on the whole process. The other option is to issue invoices via email. Both options are paperless, quick, cost effective, easy to track and convenient for both parties.
2) Discount for early payment
Everyone likes incentives and your customers are no different. Allowing a discount for early payment can motivate customers to prioritise your bills over others and pay them ahead of time. It is a common practice to offer a 1% or 2% discount on the total invoice amount if the invoice is paid within a specific term that is ahead of the due date. E.g. 1%10 net 30. This is a win-win for both as the client can enjoy a discounted rate while the supplier can benefit from on time payments.
3) Multiple payment options
This is the era of digital banking and consumers are increasingly moving away from the traditional approach of cash or cheque payment to online banking. Payment options like EFT (Electronic Fund Transfer) and Debit / Credit payment are quicker and safer as they help you get paid faster and reduce the chances of fraud. It is prudent to include online payment options in your invoices as customers are more inclined towards accessing a payment link to make payment while at work or within the comforts of their homes, rather than having to visit the bank to deposit cash or cheque.
Learn how to add ‘Pay Now’ button on invoices by integrating a payment gateway.
4) Payment term rationalisation
Periodic rationalisation of inconsistent payment terms is a good technique to identify and do away with redundant payment terms which are prone to payment delays and are not aligned as per the original contract. A shorter pay term can improve your working capital while a longer term is beneficial for the customer. A payment term rationalisation approach looks at balancing both aspects and opting for a term that is optimal and viable.
5) Early payment reminders
An effective collections strategy, you can consider auto set up of payment reminders couple of days prior to the actual due date. Often customers do not pay late intentionally but are late as they tend to forget considering the fact that they have too many invoices on hand. Automatic reminders can act as a friendly nudge for these customers and facilitate timely payment as they approach the invoice due date.
6) Timely invoicing
It is important to generate your invoice as soon as the order is delivered as opposed to waiting for the supplier to start chasing for the payment. Having a defined billing date along with a fixed payment due date is helpful for your clients to predict the upcoming billing cycle and make timely payments. Scheduling a due date that is nearer to the clients payment run is a smart way to ensure quick and prompt payments.
7) Fostering healthy relationship with customers
A good rapport and proactive communication goes a long way in resolving payment related issues with clients. Have a transparent and candid discussion with the customer whenever you notice a trend of recurring late payments. A healthy relationship can facilitate a constructive discussion between the two parties to understand the underlying reasons for delayed payment and come to a constructive conclusion to address the issue promptly.
8) Maintaining stringency with payment terms
While an occasional waiver might be acceptable to build relationships, yet it is not a good practice to keep offering grace periods to the customers as they tend to become complacent and tend to be perennially late in paying their invoices. It is essential that you make them realise that payment terms are fixed unless formally intimated and late payments will incur penalties including and up to suspension of any new order fulfillment till the time the overdue payment is realised.
9) Weekly reconciliation
It is important to have a clear view of all unpaid invoices, both current and overdue, by conducting a weekly reconciliation of your accounts receivables. This will help you identify potential late payments so that you can initiate timely follow ups to elicit payments on time.
10) Requesting for an upfront payment
Not entirely suitable for small orders, this approach is most suited for bulk orders wherein you can request the customer to make a lump sum prepayment at the onset of the project with a promise to settle the remaining amount post order completion. This will safeguard you from potential losses and also improve your cash flow.
Final Notes
Writing perfect invoice payment terms and conditions can be tricky. Using an user friendly accounting software can help you automate this. For example, ProfitBooks offers various invoice templates and options to set invoice payment terms. Once it is setup, you can stop worrying about it and focus on getting paid faster.
Start Creating Beautiful Invoices With ProfitBooks Now
Also Read
How to create professional invoices
How to manage business expenses
How to improve cash-flow in your business
Thanks @disqus_L3lhBkX15b:disqus ! Glad you liked it.
Very informative article. It will help in efficient and clear communication with the customers eliminating confusion arising from the financial terminologies.