Last editedSep 20212 min read
Success in business is about more than boosting revenue. Sure, your company is likely to be in a healthier position when there is a lot of money coming in. But unless you manage your finances effectively, cash flow can be stymied and that revenue can dry up remarkably quickly.
When this happens, a lot can go wrong. Employees may not be paid on time, relationships with vendors may be soured and a lack of capital investment may result in missed opportunities.
Establishing clear and equitable payment terms with vendors and clients can go a long way towards improving cash flow.
Let’s take a closer look.
What is cash flow?
Cash flow is the rate at which money flows into and out of your business during a given time period. It is often a much healthier indicator of your business’s financial health than revenue. Your financial obligations can make short work of your revenues, and unless you are judicious in managing your payments, you may find yourself in negative cash flow.
When this happens, you may have to rely on credit to pay your overheads. This in turn will result in interest putting a stranglehold on future profit margins. You can read more about cash flow in our exhaustive guide here.
In order to manage cash flow effectively, you need to be proactive in managing payment terms both with your clientele and vendors.
Managing payment terms with clients
Payment on purchase and cash upfront is the gold standard for payment terms when it comes to managing cash flow. But in an increasingly cashless climate, this often isn’t practical or feasible.
When you invoice your clients, your invoice must have clear and unambiguous terms for repayment. While 30 days is the norm, don’t be afraid to include a shorter deadline for lesser-known or riskier clients. In many cases, 14 days is a perfectly acceptable turnaround. The maximum legal payment term is 60 days.
Be wary of extending credit, and only extend this to clients with whom you have good relationships. It’s vital that terms of repayment (including punitive methods for missed or late payments) are clearly defined in your contract. A solicitor can help you with this.
Managing payment terms with vendors
There’s a fine line to be walked with vendors. While you want to keep cash in your proverbial pocket for as long as possible, you also don’t want to alienate vendors. After all, they provide the raw materials that help to make your business great.
If you’re a new business, you may find that there’s very little wiggle room for negotiating payment terms. However, as your relationship with suppliers develops, they may become more amenable to extending repayment terms.
If you’re stuck in a cash flow crisis, it helps to be open and honest about your situation and have a discussion on repayment terms. Burying your head in the sand will only spoil your relationship and potentially damage your business’ reputation among suppliers.
How to get paid faster?
The more revenue you have at your disposal, the easier it is to manage cash flow. Obviously, getting paid as quickly as possible puts you in a much more advantageous position. Here are some tips to help you get paid faster:
Agree payment terms before work commences
Offer incentives for early repayment
Set up automated reminders for clients when payments are close to being due. This can save a lot of time chasing late payments
Send your invoice as soon as possible and address it to the person paying it
Be consistent in enforcing punitive measures for missed or late payments. Otherwise, you’ll attract bad clients who keep trying to push their luck.
We Can Help
If you’re interested in finding out more about payment terms and managing cash flow, then get in touch with our financial experts. Discover how GoCardless can help you with ad hoc payments or recurring payments.