Every time I speak to a group of businesses and to business advisers or organisations, I’m reminded that while I’m here for the small businesses, and I’m passionate about them and their importance to the economy, their communities and wider society, it’s increasingly important that businesses of all sizes understand how the other firms they work with operate and why, and sometimes that understanding is far from clear.
One such discussion this week was around the understanding of what people mean when they tell you their payment terms. Take 30 days. If a customer’s procurement department tells you that you will be paid in 30 days check and check again when you can expect the money to arrive in your account and what you need to do to make it payable, so that you know when you too will be able to use it to pay your bills, wages, suppliers. There are several things it could mean.
You might assume it to mean 30 days maximum after the date you put on the invoice. We tell firms that ask us that it means 30 days maximum from the date the customer receives the invoice in their organisation. Many firms interpret that (even though we think it’s very clear) to mean 30 days from the end of the month in which the invoice is received, which could be around 60 days. Others may have various approvals processes and assume it means 30 days from the date the Accounts Payable department gets it on their desk. Unless you are really clear about what your customer means by 30 days (or 60, or 90) it’s next to impossible for you to manage your cashflow. If two customers tell you they pay in 30 days, you need to understand exactly what each means or you can’t make an informed decision about who to work with.
I was hugely heartened by the story one small business owner told me this week. When he started supplying any new customer, he made it clear that they would have to pay within 10 days of receiving his invoices. Over the years he was able to hold customers to that because everything was in writing and if they slipped up, he could show them the piece of paper they had signed, and things were put back on track. However recently one customer was taken over by a bigger firm and that bigger firm refused to honour the 10 days payment terms. They said ‘we offer 30 days payment terms’. The small business owner agreed to the change but told me that his first invoice to the new customer was actually paid in 5 days.
Two things stood out from that story: you can set your own payment terms as a small supplier and make sure that your customers understand they will be held to those terms, and just because you have agreed to accept payment terms of 30 days that doesn’t mean that a good customer who understands how your business operates, can’t pull out the stop and be a better, quicker payer.
Reluctant as I am to mention the C word until mid-December, I was reminded by my Casework Manager yesterday that Christmas is about 60 days away. She says that every year she sees firms shutting down their payments over the Christmas period into the New Year. It’s also very hectic for some sectors in the lead up to Christmas and often suppliers delay submitting invoices until they have downtime, sometimes on Christmas day. If you’re invoicing late and there’s a shutdown delaying payments, you could be in trouble paying HMRC in January! Don’t give your customers any excuse to pay you late. Find out now what the payments schedule is.