More than 80 percent of small businesses fail because of poor cash flow management skills. Encouraging early payment of invoices keeps cash flowing in the right direction.
As a small business owner or freelancer, understanding payment terms is crucial for managing your cash flow. Here’s what you need to know.
Invoice Payment Terms
When someone thinks of payment terms, they usually think of the payment information on an invoice. The invoice provides information that tells a customer when a payment is due, how they can make payment, and the different payment methods you accept.
For ease, terms on an invoice use acronyms. Here are several commonly used types of payment terms for payments due after delivery.
Net Payment
When you see the word Net with a number after it, your payment is due within a certain number of days after the invoice date. Net 7 means payment is due within 7 days of the invoice date. Invoices can show any number, but Net 30 is the most common.
Some businesses get creative with these terms and use discounts to encourage early payment. If you see 1 percent 10, Net 30, you can take a 1 percent discount if you pay up to 10 days after the invoice date. If not, the total or net amount is due in 30 days.
Payment by Month
It’s common to see the term EOM, which means payment is due at the end of the month. Another term used is 21 MFI, which means you need to be paying invoices by the 21st of the month following the invoice date.
Contracted Payment Terms
Businesses may have signed contracts with negotiated payment terms. They might allow set or stage payments over time, like a loan. If you’ve agreed to offset the price of your services when paying for goods, you might see the word contra.
Here are some other options found in a contract.
- Agreed upon discounts on large orders are Accumulation Discount
- Invoicing after receiving is Forward dating
- The seller may send money to the buyer as a Rebate
- A discount for partial early payment is a Partial payment discount
As you can see, some of these terms aren’t clear, and it’s best to have the specifics explained in the contract.
Delivery Payment Terms
There are some terms tied explicitly to delivery. Usually, a customer with delivery payment terms must make payment when they receive the goods, but sometimes they need to make a payment before shipping occurs.
Here are some standard delivery payment terms which are pretty self-explanatory.
- Payment in advance, PIA
- Cash on delivery, COD
- Cash next delivery, CND
- Cash before shipment, CBS
- Cash in advance, CIA
- Cash with order, CWO
Obviously, the use of the word cash doesn’t mean you need to have physical currency in your hand. The business owner will have a list of accepted payment methods. If you want to learn about cash on delivery and how things are changing in the logistics world, click here for more info.
Understanding Payment Terms Saves Money
When you take the time to learn about the different payment terms, you can decide which ones are best for your operations. You might even think of ways to use them to improve your cash flow as a seller.
Did you find this article helpful? If you want more tips and ideas on other business topics, scroll through some of our other posts.
