How do you and your business conduct business with new clients and regular clients? Do you have hand shake agreements? A few casual notes on what you will deliver, and how they will pay? Bad news people- casual terms and conditions will come back to bite you. Someone will complain about what you deliver, someone will delay payments, or refuse to pay. You will accrue debtors, and you will have nothing to fall back on.
What you need are rock solid terms of trade. You need, in writing, exactly what you’re going to deliver and what time frame you will deliver your goods and services. You also need binding payment terms for your client. Do they pay you a deposit? Do you expect to be paid before work is delivered, or do you provide your services with the understanding they will pay upon delivery?
It may depend on your industry as to what payment terms you offer.
Let’s look at longer payment terms and why you might employ them.
If you’re in an industry where pages of terms of trade are the norm, then you should be providing the same. It puts your business up on the same level as everyone else. Plus, your customers may be expecting these longer terms, since they have received them elsewhere.
A customer can feel more protected by longer terms, and could be encouraged to place a larger order with you.
And you may have a customer which requests longer terms and conditions.
If potential new customer wants longer terms of trade with you, this is an opportunity for you to create them if you have not already, or to refine them and revise them.
However, before you create these terms of trade for your new client, you need to check on a few things.
What are the terms of trade that YOU have with your suppliers? You need to ensure that the Terms you put in place for your customers will not put you and your business into a difficult situation.
If the terms of payment are 30 days or less, there will come a time when you will be waiting
payment before you can pay your debts. This creates cash flow issues, and that is not good.
Look at ALL of your expenses for the next 60 days, with the assumption that your debtors will pay on time. Can you meet all of your financial obligations without getting your money from your debtors?
Do you have debtor’s insurance?
Check on your agreement with your insurer, you may need to ask their permission to extend payment terms to your customers.
If you are found to have traded with a customer outside of your agreed terms, or limits, and you need to make a claim against them, it can be voided.
It is not uncommon for debtors to send a letter to their suppliers stating that they will no longer be paying at 30 days, but rather will shift to 60 days, or even 90 days payment, at an advised date.
As soon as you receive a letter like this, check your signed credit application, contract or service agreement. If it states your terms are 30 days, and the debtor has agreed to this, then you send a letter back explaining that you are unable to offer extended terms, and that until you receive a written confirmation from them that they will adhere to your terms, you will regretfully put their account on hold. Most parties will usually comply with a response agreeing to your terms.
Following on from this, it is also a good idea to keep a close eye on this debtor’s orders going forward to make sure they’re not adding extra terms which you have not agreed to. Return the order to them and ask them to amend it. If you supply on that order without checking, then you are agreeing to their modified payment terms.
Short terms of payment are good right? Get paid quicker? However, you need to be able to manage the turnover and the debt. If a lot of clients pass over the short payment due dates, then you have a lot of work chasing them all.
I am currently working with a business with over 5000 active customers, of which most of them have weekly deliveries. This business’s standard terms of trade are 7 days from invoice, some have 14 days, and a few even have 30 days.
This business has just 1 person responsible for collecting the accounts. Even on a fortnightly rotation, allowing for just one customer contact per fortnight, you’re looking at 500 or more contacts a day to keep on top of any outstanding debts. Because of this, there are a lot of overdue accounts, and they’re piling up, really impacting on their cash flow.
What we have done is look at the customer base – there were a significant number of Government and Corporate clients who are paying at 30 days, so we have amended their terms accordingly. They are low risk, and are paying 30 days anyway. Firstly, the clients don’t have weekly statements or have to worry about someone ringing them weekly. And secondly it reduces the overdue debtor lists for this one person. This has saved time, and reduced their stress load significantly. She now focuses on the higher risk customers who are truly overdue on their payments and are outside the terms of trade.
If you want some help with your Terms of Trade, or help with debtors who are a bit slow when it comes to paying you, according to the terms you both agreed upon, then give BDM Credit Management a call. I can help you set up processes for your team, or I can become your virtual Accounts Receivable department. My number is 1300 164 192.