Accounting is boring.
And so is the accounting vocabulary. But without it there would be chaos.
Although we love our accountant the way he speaks gives me a headache sometimes…
So if you are troubled with the accounting “Net terms” we are going to explain in plain language what various payment terms mean and how this one simple mistake is delaying your cash flow.
Net “random number” is an invoicing payment term which specifies how much time there is to make a payment.
“Net” refers to the amount due and the numbers refer to the number of days available to make a payment after the date the invoice had been created. The X day period includes the time products spend in transit and also counts weekends and holidays.
TIP: make sure to establish that the 30 days (or any other payment period) start when the invoice is created! Some buyers might assume that transit is not included or they time it from when the invoice is received. That’s why it’s important to send invoices online.
There are many variations such as net 7, net 10, net 15, net 45, net 60, net 90… and there are no rules to use a certain number, you could use 9 or 17 for all you like.
What this actually means is that the seller is giving a short-term credit to the buyer since the work is already completed but the client doesn’t have to pay right away.
So, if you receive an invoice for $10,000 net 90, it means you have 90 days to make money with the $10,000 in your account and at the end of the 90 days you will pay the invoice and hopefully have some left over.
Now imagine if you had only seven days to pay (net 7). You can see why it pays to have that number as high as it can be and why some large companies pay their suppliers in net 90.
It’s not that they don’t have the money to pay. It’s about maximizing profits within the quarter. Every corporation dreams of having payment terms as long as they can be, but only a few are big enough to dictate such terms.
The term Net 30 means that the amount due must be paid within 30 days. This is the most commonly used payment term in the business world and it is used as a default in some countries if no other payment term is specified.
You are certainly not paying Chipotle after 30 days…
Most businesses insist on net 30 because this gives them a 30 day window to enjoy the benefits of your services without having to part with their money which benefits their cash flow.
The term Net 60 means that the customer has to pay for their outstanding invoice within 60 days.
Usually large businesses with more revenue sources can afford to have such long payment terms.
The term Net 90 means that a merchant expects to receive payment in full from a buyer within 90 days.
Only the largest businesses with many revenue sources can afford to have such long payment terms without interest.
Be vary of clients who demand 90 days to pay because it could mean they have cash flow problems and you are putting yourself in risk to not get paid.
And if you plan on offering 90 days as an incentive to get more customers only to factor the invoices you should consider that net-90 invoices are much harder to factor.
The fees are more expensive and it’s harder to find a factoring company willing to take them.
Terms such as 2/15 net 30 refer to an early payment discount.
In this example if the amount due is paid in 15 days, instead of the standard 30, the customer will receive a 2% discount.
For 3/15 net 45 it means the customer will receive a 3% discount if the amount due is paid before 15 days since the invoice date.
Here are some tips to tighten up your payment terms and get paid faster.
Remember how accounting is boring?
Yeah, well many people have no clue what net 30 means and don’t bother to check.
So if you want to get paid faster and not end up on the “I’ll check this later” pile use plain language in your invoicing terms.
Instead of net 30 you should say payment is due within 30 days.
You might be tempted to mark your invoices with Due upon receipt, which means the customer should pay you immediately.
Although it seems logical and most beneficial to your cash flow it won’t fly in the real world.
Depending on your industry and the nature of your clients (individuals/businesses) it may be very difficult to set up shorter payment terms than the usual net 30.
The best tip here is to be so good that the other side wants to work with you so bad that they will ignore their usual procedure and pay you on your terms.
But that’s almost too idealistic… so it would be best to accommodate your net terms on a client basis depending on the relationship you’ve established.
If you live a life where you can’t afford to offer more than net 15 or you simply don’t want to wait so long to receive a payment then be very careful when a seemingly nice opportunity comes your way but not on your terms.
Although you might be tempted to take on a larger client with a longer term make sure to check experiences of other people working with them. Did they get paid on time?
Consider that unexpected things happen and you don’t want to compromise your cash flow because of longer payment terms.
While it’s a good idea to offer credit as an incentive to get a new customer it’s not a good idea to offer longer payment terms to everyone.
Getting a new client is awesome, but not getting paid sucks bad.
If you can’t check a potential customer’s credit score, simply explain that your policy is to set up longer payment terms for repeat customers only.
Find out if the client has a fixed date for paying invoices.
If they pay their invoices on the 30th and you invoice them on the 1st you can forget about your net 14, but if you choose the right time you might get paid in just a few days.
Ideally you would want to invoice 50% of the amount upfront and the rest after the work is done. This not only helps your cash flow but also makes the client more committed to the project since he already has something to lose and lowers the chance of him vanishing in the middle of it.
It’s completely reasonable to set up shorter terms for smaller amounts i.e. around $200.
But it is difficult to fork up $10,000 in a short time span. If you are invoicing larger amounts you could break them down into smaller chunks over the course of the project.
In any case, it is best to talk about payments of larger amounts with the client before the contract is signed.
Using Excel or Word to create your invoices is so unnecessary today.
There are many tools which blow them out of the water completely, and some of them are even free. InvoiceQuick allows you to create quick and easy invoices which look stunning and professional so your business can have the invoices it deserves.
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