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Why an Agreement on Payment Terms Will Help Your Cash Flow

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Why an Agreement on Payment Terms Will Help Your Cash Flow

You’ve heard it before, “Sure, we’ll pay you in seven days.” Too often those words are just empty promises.

You thought you had an agreement, but then the agreement is not fulfilled. It’s not unusual when entering into contracts and agreements with clients and customers that the person you are dealing with when making the agreement is happy to agree to your terms of payment, whether they be 7, 14 or 30 days. You start doing the work with the full expectation that you will have the payment made on a particular date based on when you issue your invoice.

You’ve planned out your cash flow to ensure the smooth running of your business and all is looking great. But then disaster strikes. The person you dealt with when negotiating may not be the person who is processing your invoice for approval. They may not be the person who signs off the approval of your invoice, and it may well be out of their control completely as to the timing of the payment.

Some companies pay their bills once a month, at the end of the month. It won’t matter when you get your invoice in; you’ll be paid at the end of the month or the end of the following month, depending upon what their process is for paying bills.

It may well be that you fall into an awkward situation where the person who has the authority to process the payment through the bank account is on leave at the relevant time, and they haven’t made any alternative arrangements for emergency or urgent payment of bills that are due, working on the basis that they will pay them when they come back.

Of course, that means that when they come back and process the payment, it is outside your payment terms and later than you had expected. The challenge here is always how it impacts your cash flow.

Once you’ve been working with a client for a period of time, you’ll start to know what their payment terms are and their frequency of paying. When the routine is established, you can plan your cash flow into the future.

For example, I have an agreement with one client to pay 30 days. I know that at the end of the month, no matter what, payment will be paid. I never have to worry about it. The money is always paid at the end of the month, and I can rely on that.

Expectations need to be discussed and negotiated and, in some cases, it may be that a better option is to obtain authority to process payments against pre-agreed credit card information. There is always a risk here that there may be insufficient available funds in their credit card such that your payment doesn’t go through.

That may not work for a larger corporate, who will pay their invoices through their accounts payable system in their ordinary course of business. Challenges with people taking annual leave whether the accounts payable person or the person who authorises and approves payments through the bank account, may cause issues as well.

Be aware; people say that they will pay, and they may well have the best of intentions, but some things are out of their control.

So, what can you do to help to make sure that you don’t suffer lack of cash flow when those issues arise?

Create a cash flow buffer. A cash flow butter is a balance in your bank account sufficient to cover at least one months’ expenses. Three to six months’ of expenses is ideal but one months’ worth is a good starting point.

Start looking towards accumulating one months’ worth of expenses in your bank account, so that at any point in time you know you’ve got a month of payments covered. Then, if a client is late paying you’ve got the funds to pay your expenses in the meantime.

If you’re not sure how you’re going with your cash flow, take the Business Barometer quiz and see how well you understand the cash flow in your business.

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