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Advice re: Payment Terms

Date 8th August 2017 //
Author IAB
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Having both an accurate cash flow forecast and financial records that are kept up to date by a bookkeeper can greatly help to protect a business from finding itself running out of immediate funds.

Critical to the accuracy of the forecast will be an effective plan for the credit period being granted to customers, building in a realistic expectation of an element of late payment and possible defaulters. Credit checks on customers (both when taking them on and periodically) plus setting sensible credit limits can help to minimise the risk of default.

Additionally, of great importance is the setting of clear, firm but fair payment terms and that the business ensures that these are adhered to by customers.

Here are my top tips on setting payment terms and ensuring they are kept to:

  1. Credit periods for customers are at least as long as those granted by suppliers.
  2. If you don’t already have them, create a set of standard payment terms and ensure that all relevant staff (eg commercial, sales, finance) understand and apply these and follow any related policy or procedure authorising any variance of these for specific customers/sales or in situations where customers are in clear difficulty and unable to pay on time.
  3. Payment terms are clearly communicated and agreed in writing prior to/at the time of contracting.
  4. Terms are further prominently stated on invoices and any associated late payment terms and charges that will be levied (eg interest).
  5. For large sales, consider giving customers a call to check that they have received the invoice and there is no anticipated reason why they might not pay on time. Doing this can enable the holding back of dispatch/delivery where an issue is flagged up.
  6. Have a clear plan of credit control actions starting with issuing an invoice for any charges as soon as any payment period has been exceeded by the customer. Further, suggested follow-on actions are:

• Email and then call late payers seeking to ensure that they fully understand the implications and to establish a positive dialogue to resolve the matter. Consider who is best placed to make the call; often those with a good or better commercial/sales relationship can be better placed to effect a positive outcome than a ‘cold call’ to the customer from a member of the finance team.

• Carry out further credit checks on those who regularly pay late, especially those who are major customers. When combined with continuing to supply them, failure to do so could create a high risk or even worse put your own business survival in jeopardy.

If you are looking to outsource your payroll why not visit the find a bookkeeper section of the IAB’s website: https://www.iab.org.uk/find-bookkeeper/. IAB members offer a range of services including payroll and are qualified, professional and regulated.

Alternative business funding, traffic light, icon

Find your business
funding

£
Enter a funding amount between £500 and £50,000,000.
Please indicate what you need the funding for.
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