What are payment terms? Everything you need to know to get paid faster

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Your business depends on customers making payments for the products and services they receive. Setting clear payment terms and processes helps businesses get paid on time consistently and avoid cash flow issues before they’re a problem.

Sending invoices and collecting payments might seem straightforward, but most businesses will deal with late or missed payments at some point. When missed payments pile up, it can lead to major problems for your business and its future. In this article, we’ll answer payment questions like: 

  • What payment terms should you include on your invoices? 
  • How do payment terms impact your company and your customer experience? 
  • What can you do to make collecting payments easier?

Learn how to set more effective payment terms for your business and more below. 

Table of contents 

What are invoice payment terms? 

Invoice payment terms are the rules you set for how and when your customers pay for your products and services. Most payment terms set a specific due date for when customers or clients must pay an invoice. They also include clear instructions for how to pay and the consequences of what happens when someone doesn’t pay after a set number of days. 

Businesses with clear invoicing processes, including payment terms, have fewer late payments and better cash flow management.

Why every business needs payment terms 

No matter what type of business you run or whether you sell products or services, you need clear payment terms. Without them, your business is at high risk of losing money on missed or late payments. 

Even with clear payment terms, many customers pay late. Here are some shocking statistics:

  • A recent study found that large businesses in Australia pay about 53% of small-to-medium (SMB) invoices late. 
  • About 82% of failed small businesses cite cash flow issues as the primary reason they closed their doors. 
  • Late payments cost Australian businesses about $1.1 billion each year. 
  • Recent findings suggest businesses waited a full week longer (from 31 to 38 days) to pay invoices in July of 2022 than in January of that same year. Growing payment delays could continue with tougher economic conditions. 

Late payments ultimately cost businesses in the long run. After all, cash flow issues mean you can’t grow as quickly, generate as much revenue, or at worst, keep the lights on. 

For these reasons, it’s also helpful to work with an accounts receivable service like Visory. Chasing down unpaid invoices is one of the least favorite parts of running a business. By outsourcing your accounts receivable, you won’t have to. Visory can also help you set better payment terms and processes to prevent more unpaid invoices from happening. 

Benefits of payment terms

Beyond avoiding late or missed payments, there are many benefits of having clear payment terms. When invoices are paid on time, it helps your business show:

  • Better cash flow for growth: On-time payments give you a clear picture of how much money you have to invest back into your business. 
  • How well you manage your business: Consistent payments are a key performance indicator (KPI) of how well you manage your company finances.
  • Creditworthiness: You’ll know what you need from suppliers and how much cash you have on hand, which can help you get loans or other funding.

What should your invoice payment terms include? 

Your business is unique, so your invoice probably looks a little different from other companies. However, invoice payment terms have consistent elements no matter the business. 

Invoices usually include basic company information like: 

  • Invoice number to track each invoice
  • Business name, registration details and address
  • The date you issued the invoice 
  • Invoice total 

When it comes to getting payments, these elements are the most important:

  • Payment due date – How much time someone has to pay is usually 30 days, but with electronic invoicing, payment turnaround can be as soon as seven days after the invoice.
  • Late payment penalties – Many businesses will charge a percentage of the invoice as a late fee for each day the recipient is late on payments.
  • A list of payment methods you accept – ACH bank transfers, wire transfers, credit cards, cash, or other methods

How to set payment terms to get paid

On-time payments directly impact your bottom line. Clear payment terms avoid confusion and make it easier for customers to pay you.  

Follow the steps below to set better payment terms to get paid consistently and faster. 

1. Send contracts 

Setting clear payment terms starts before the invoicing process, and before you even start working with a client. 

It starts with a contract, a legal agreement that you and your customers sign that details:

  • How you’ll work together
  • Services you’ll provide
  • When you’ll start and end work
  • How you’ll be paid

A contract sets expectations on both sides before you provide products or services. If someone breaks the contract, there’s a signed agreement that you can refer back to. 

When you build your contract, make sure it includes:

  • Involved parties: List your company, your customer, and any other involved party. 
  • Contract term: Outline how long the contract will be active. For example, if you provide six months of service, your contract will have a six-month term. 
  • Payment details: Describe when your clients will pay you, how they’ll make payments, and late or missed payment penalties.
  • Duties and responsibilities: Outline your duties and responsibilities to your customer. 
  • All other agreement terms: Every business, product, and service is different. Your contract may require specific terms that are unique to the way you do business. Tailor the contract to your company. 

2. Invoice promptly 

You may be tempted to put off sending an invoice by a couple of days. Maybe it’s not due for a few weeks or you’re just busy. This is a big mistake. 

Sending your invoice immediately after doing work will help you get paid for a few reasons, including: 

  • It’s top of mind: Your company’s name is fresh in your customer’s mind when they receive it. There’s no chance they’ll think it’s spam or an invoice that was sent in error, increasing your chances of being paid on time. 
  • You can get faster payment: The earlier you send your invoice, the earlier your clients are able to budget, move money around, or otherwise prepare to pay your invoice. 
  • It shows you’re professional: Sending documents promptly shows your customers that you run a tight ship. 

3. Collect deposits or upfront payments

No matter what payment terms or process you set, always prepare for some customers to make late payments. Overall, it shouldn’t happen often or be a big percentage of your business, but preparing ahead will keep your company healthy. 

However, there are some tactics you can use to prevent missed payments from happening to start, including:

  • Asking for payment in full upfront: Explain to your clients that you require upfront payment for services before they begin. For example, many software companies offer annual pricing to get upfront payment.
  • Collecting 50% upfront: Request half of the total value of the job upfront. Your customer pays the rest when the job is complete. 
  • Setting up payment milestones: For larger and high-cost projects, break up deliverables over time. For each deliverable, set a payment milestone that they’ll need to pay before you continue work. 
  • Getting a material deposit: At the very least, make sure that you’ve covered the cost of materials you use for a job. The best way to do so is to collect a material deposit. Simply work out the total cost of materials for the service and require that as the minimum deposit to get started. 

4. Track payments and set automatic reminders

You can’t collect late or missing payments if you don’t know which clients are behind. Luckily, you can track payments and set automatic reminders to lessen the burden of managing your accounts receivable. 

Accounting and invoicing software makes it easier to send and track invoices, and you can also receive alerts when customers are past their due dates. Customers can be forgetful. Reminders can help your customers keep up with their end of your agreements. 

5. Work with a bookkeeper or accounts receivable expert

How you handle invoices and payments can influence the failure or success of your business. However, many businesses don’t have the time or interest to manage it in-house. 

If that’s the case, consider working with Visory, an online bookkeeping service with accounts receivable experts. To get started, set up a time to chat with a Visory expert, who will get to know your business and invoicing needs. 

Payment terms glossary 

While preparing invoices and using accounting software, you may come across these payment terms. 

Term What it is
1MD A monthly credit to show payment for a full month’s supply
CBS You receive cash before shipping orders 
CIA or PIA You receive payment in advance
Net  Net 7, 10, 15, 30, 60, or 90 – Net before a number stands for the number of days you have to pay. For example, you need to pay a Net 15 invoice 15 days after its issue date. 

 

Is Accounts Payable an Asset, Liability, or Equity?

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Your accounting department is responsible for making sure your books are balanced. But they also need to keep the pink slips from rolling in. That means paying your bills on time, and this is where accounts payable comes in. 

First things first: Is accounts payable an asset, liability, or equity? Accounts payable refers to the short-term liabilities that your organisation is responsible for. If you hire someone to paint your office walls, their invoice would fall into this category. 

Late payments may result in damaged relationships, penalties and fees, and credit problems. Your accounts payable team is crucial. If your business starts to get overwhelmed by complex finances, hiring a virtual bookkeeping pro will pay off every time. 

Let’s talk more about assets, liabilities, and all things accounts payable. 

What is accounts payable?

Accounts payable refers to items that are ready to be paid out by your company. Any time your company pays a vendor, contract worker, or another short-term debt, it falls into this category. These debts are settled once you cut a cheque, unlike long-term liabilities, which are paid in many installments (and often with interest). 

Documents processed by your accounts payable team include:

  • Purchase orders for office supplies or maintenance services
  • Expense reports submitted by employees
  • Invoices from contract workers who are not on payroll
  • Bills for utilities, rent, and other routine expenses
  • Short-term loan financing payments

One notable short-term liability that may not always be considered accounts payable is your payroll. This often falls under its own financing scheme and is not processed as an accounts payable debt. 

What are assets and liabilities?

What is the difference between an asset and a liability? Understanding these fundamental terms is essential to creating a balance sheet and other accounting reports. Assets and liabilities are often calculated along with the company’s equity. Your equity includes the investments and ownership of all stakeholders. Your company’s assets are equal to equity less liabilities. 

What are Assets?

In short, assets are things that can bring your business future financial benefit. This can include actual cash or property that can be sold later for a financial return. Assets are included as a positive number on a balance sheet or general ledger. 

Some examples of common company assets include:

  • Cash your organisation has in your bank accounts
  • Any property that you own
  • Valuable equipment, including vehicles and appliances
  • Stocks that you own
  • Accounts receivable funds owed to you by others
  • Intellectual property, including patents and copyrights

What are Liabilities?

A liability account is one in which you are the debtor. This can include short-term (sometimes called current) debts and long-term (sometimes called non-current) debts. In other words, your financial obligations fall under accounts payable. While your non-current liabilities are also important, they would not usually be tracked under your accounts payable numbers until they are nearing payoff.

Common business liabilities include:

  • Loans used to fund company operations
  • Outstanding business taxes
  • Rent, lease, or mortgage payments
  • Shareholder loans
  • Invoices and purchase orders from outside vendors

Where does accounts payable go on a balance sheet?

Accounts payable go on the liabilities side of a balance sheet. A company will often have an itemised line for “current accounts payable,” which refers to the short-term debts that are ready to be paid off in the near future.

Your company’s balance sheet tracks both assets and liabilities. More specifically, this document takes note of a company’s assets, liabilities, and equity at a specific moment in time. You might procure this document monthly or quarterly. It helps you understand the financial health and liquidity of your business.

Who tracks accounts payable?

Your bookkeeping or accounting team is responsible for accounts payable processing and reporting. For larger ticket items, you may want someone in management to sign off on the expenditure before a payment is made.

Your accounts payable are typically handled by your accountant. In your early days as a company, the executives may cut cheques themselves to satisfy debts. As you grow, you will need assistance to keep up with the complexity of your ongoing liabilities.

Enlisting help with accounts payable

Are you at a point where you need help with short-term liability payments? A virtual team may be just the solution you need. You can outsource the payroll process with Visory, and we can also handle other accounting responsibilities. From accounts payable to all asset, liability, or equity bookkeeping, a professional team of bookkeepers can keep your numbers crunched correctly.

How to Improve Your Invoicing Process

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Your invoicing process is foundational to the rest of your business. Yet too many businesses find themselves sidelined by unpaid bills or stacks of paperwork. Without a steady revenue stream, your other core processes could come to a grinding halt — even your payroll.

That’s why it’s vital for small business owners to maintain an efficient process for invoicing and billing. Let’s take a look at how to improve your invoicing process and see how you can use these tips to keep your company running smoothly.

What Makes a Successful Invoice Process?

Every invoicing system depends on two critical elements: accuracy and speed. Errors and delays in payment can cripple your business like nothing else can. Let’s take a closer look at these two elements and how they influence your invoicing process.

Accuracy Is Crucial

Always remember the fundamental purpose of an invoice. They are sent to clients to request payment for the goods or services you’ve provided. Therefore, the final invoice needs to be as accurate as possible and record all of the details necessary to get paid on time and in full.

This means that your invoices need to contain information that includes:

  • Your company information
  • Your client’s information
  • Description of goods or services
  • Total amount due
  • Payment terms
  • Payment deadline

Naturally, this means avoiding errors in the description of your services or the price of your merchandise. But it also means presenting clear payment terms and communicating important pieces of data such as due dates and any late penalties attached. 

Ensuring the accuracy of this information is the first step to optimizing your billing process.

Speedy Invoicing Helps Get You Paid Sooner

Speed is always of the essence. The faster you get paid, the sooner you’ll have access to cash flow for other projects or products. Invoicing right after services are rendered or products are delivered increases the odds that your satisfied customers will pay for your services, creating a smooth, efficient billing process.

This also means that accuracy can influence the speed at which your invoices are sent. Having access to accurate, up-to-date data allows you to communicate with your clients in a timely manner. 

Otherwise, your invoices could be delayed until expense reports are updated or other information is collected.

How Can You Improve Your Invoicing Process?

Improving your invoicing process will demand that you keep speed and accuracy as your two highest priorities. You can accomplish this in several ways:

Use Professional, Well-Formatted Invoices

First, your invoice should be a reflection of your company. It should include your logo, your business information, and any other details necessary to highlight the unique features of your business. 

A professional invoice can give your business an added layer of legitimacy, which may encourage your clients to pay quickly for their services.

At the same time, you’ll want to keep your invoices clean, clear, and well-organized. A well-formatted invoice should be self-explanatory and easy to navigate, leaving no room for confusion. 

In fact, some companies put the word “invoice” in bold at the top of each document to leave no room for interpretation.

Include Important Details to Limit Client Confusion

A well-formatted invoice should include all relevant details to minimize any confusion about the services rendered or the payment process.

Specifically, this means that your invoice should clearly delineate the products purchased or services rendered. Make sure each item can easily be matched to a specific product or service and include the price of each.

Additionally, your invoices should also include details about the payment process, like what types of payment you accept, payment deadlines, and any charges for late fees. 

Not every business will assess late penalties, of course, but you should always be clear about deadlines and payment terms so that customers understand what to expect.

Outsource Your Invoicing Process

Of course, one of the simplest ways to optimize your invoicing process is to let the professionals handle it. 

Many online bookkeeping companies can also double as your billing department. Outsourcing your invoicing process to a financial team allows you to focus on your core business processes, confident that your invoices are optimized for your small business.

Visory is more than just a virtual bookkeeping service. While we pride ourselves in providing bookkeeping for professional services, we can also handle your business’’s invoicing process so you get paid faster than ever before. Learn how Visory’s accounts receivable services can help you stay on top of outstanding invoices.

Send Automatic Follow-Ups with Reminders and Late Notices

As every small business owner knows, outstanding and unpaid invoices can slow your revenue stream and deprive you of access to cash. Some businesses  even make a habit of ignoring initial invoices, choosing to prioritize other bills instead of smaller invoices. Whatever the reason, you’ll want an invoicing solution that helps you get paid faster.

Modern invoicing systems can send automatic follow-up messages to your clients, prompting them to respond to your invoice. Many clients may actually appreciate an electronic reminder and send payment the instant they receive it. This saves you from having to send second notices or make follow-up phone calls.

You can also send late notices, which may also include notification of any late charges assessed on any outstanding bills. These reminders prompt customers to pay their debts, all while providing a record of your attempts to collect the debt.

Billing Software Can Help Speed Up Your Invoicing Process

Perhaps most importantly, billing software can speed up your invoicing process. Integrating your software platforms can help you quickly convert estimates into invoices or record billable hours that can later be sent to your clients as a finalized invoice.

Billing software can even be used to create and send professional-looking invoices. You can save these documents as a template for future use, making it easy to reuse again and again.

Finally, modern software systems allow you to manage multiple processes at once, helping you integrate your invoicing process with other core functions such as inventory management, accounting, and more.

Together, these solutions can provide your business the accuracy and speed you need to create and send invoices with ease and efficiency.

Advances in technology influencing small business

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How will this impact us in the future?

Small businesses need to consider the rapid shifts in consumer expectations and how they can harness technology to remain competitive.

A prevailing theme of modern society is instant gratification. This has largely been attributed to significant advances in technology. We are now able to access services and interact with others instantly, from wherever we are.

As consumer expectation shifts, it’s important for small businesses to harness technology to ensure their business offering is in line with their customer’s needs and expectation.

It’s not only the consumer that benefits from new technology – savvy businesses are using it to increase efficiencies within their own business.

We’ve taken a look at a few of the big technology changes currently influencing the small business world and speculate how this might impact the world down the track.

Off in the clouds

In simple terms, cloud accounting involves accessing accounting solutions online. Some well-known cloud accounting providers include Xero and MYOB. These systems have become extremely popular with small businesses due to their ease of use and ability to decrease administration hassles.

So what does the future hold for cloud accounting?

“Soon using the cloud will just be the norm. Just like email overtook faxes, it will soon become adopted on a widespread level as people get used to it,” said Mary O’Driscoll, Findex cloud accounting expert.

“Real time data obtained from cloud accounting will also help businesses gain a deeper insight into their financials,” Ms O’Driscoll said.

Moving forward, businesses could be driven to a deep degree by cloud related data, which will enable them to implement improvements, create efficiencies and find new ways to engage customers.

Robo-delivery

Will robots one day handle product delivery to and from your business? As technology for autonomous vehicles as well as affordable drones advances, this is a very real possibility.

In 2016 we’ve already seen some amazing concepts showing this idea off domestically. Domino’s have announced plans to launch a pizza delivery droid in early-2017, which can zip around cities at 20 km/h, while Australia Post trialled the use of parcel delivery drones in April and Singapore recently launched self-driving taxis.

As this technology advances, there is great potential for businesses to significantly reduce the costs and time associated with product delivery in the long-term.

A cashless society?

The use of physical currency is becoming increasingly less common and necessary, with convenient technology solutions able to facilitate payment more efficiently.

Contactless payments have simplified the use of cards for small transactions, while cheap and easy to use point-of-sale systems have allowed businesses to craft a better way for clients to pay.

Earlier this year, there was significant media coverage about a Brisbane cafe doing away with cash. Customers could pay only via card or by purchasing a special refillable coffee cup with an embedded chip linked to a credit card.

Breaking the bank – how much will we rely on them in the future?

Meanwhile, the way we bank could also undergo a shake-up, with companies like Uber showing how technology enables businesses to run without banks.

In the US, around a third of Uber drivers joined the company with no existing bank account. To get around this, Uber themselves have made signing up for a debit card and account a part of the application process, making the company the largest acquirer of small business bank accounts in the US.

Citing this case, Findex innovation program manager Andrew Lai said that “one day down the track, rather than being tied to a traditional bank, your finances could well be managed through seamless integrations with Google or Facebook accounts.”

What does it all mean?

Despite the hype of automated processes, the key element of business will always remain the people, according to Mary O’Driscoll.

“People still like dealing with people. The key will be making the back end work while ensuring the customer has a strong personal touchpoint,” O’Driscoll said.

While the future will see systems develop in a way that will enable them to process information and tasks in a more efficient manner than ever, at the end of the day, the best businesses will still need to focus on how they engage with their customer one-on-one.