Mentor, Paul Clements

How should I frame payment terms for my clients?

StartupSmart /

How should I frame payment terms for my clients? I don’t want to hurt my cashflow, but I also don’t want to give them an excuse to go elsewhere if I demand payment within a short timeframe. What should I do?

 

It should be remembered at all times that a sale is not a sale until payment has been received for it.

 

It is one of the most important aspects of running a small business (or any business for that matter) to ensure that debtors’ management is controlled and you remain cashflow positive.

 

The starting point is to agree your credit terms with your clients. These terms should be in writing and form part of your terms sheet or contracts with clients and wherever possible, should be discussed with your clients prior to you selling to them.

 

This clarity is one of the biggest issues in ensuring timely payment of your accounts.

 

Remember – your clientscustomers do not expect you to provide goods or services for free.

 

So you should not be shy about clearly articulating your terms and making it clear that, barring extenuating circumstances, you expect those terms to be honoured.

 

The next critical step is to follow up your clientscustomers when their account is overdue, even by one day.

 

This reinforces the communication of the terms that you have agreed on. Practically, it has the effect of prioritising your payment over others where the terms of payment are not clear or where the supplier does not actively chase and enforce their credit terms.

 

If you find that your customer then avoids payment or drags out the payment process without valid reason, you must really ask whether that customer is worth retaining.

 

You are not a bank and the customer will only cost you money if they are not a paying customer. It may be best to then walk away and focus on paying customers.

 

If you are still owed money, and you wish to collect and not write-off the debt, there have various options – continue following up yourself, use a debt collection agency, take VCAT action which is very cost-effective albeit can take time to have a hearing or engaging a solicitor.

 

The option selected will depend on the circumstances, however, the one thing that will enhance your success rate of collection is to act quickly and decisively.

 

Another step which can mitigate later losses, particularly for larger customers, is to undertake a credit assessment process.

 

Here you can have a credit terms application and can undertake a credit check to manage your risk of collection.

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