It’s all good and well to have some excellent and reasonable terms set out for your customers to abide by, but it’s just as important (if not more) to enforce them.
In part one I spoke about building strong foundations to ensure good financial health for your business, this part of the blog series addresses the concept of setting your payment terms with those customers who were approved with your initial credit criteria. Check out all the posts in the Stacking the odds in your favour series.
Now that you’ve sorted out which customers you’re going to continue a relationship with (and which ones you will set aside for now), it’s onto business.
A while back, Matt wrote a blog disclosing the two secrets a business needs to take in order to get their invoices paid on time.
- Setting payment terms from the beginning
- Enforcing your payment terms
They both seem fairly simple, however, sometimes it can be the simplest fixes that we take for granted.
Setting payment terms from the beginning
It boils down to creating a two way street where you can give your customers what they want, and they can give you what you want.
This means that not only do you need to outline the payment terms (amount, date, penalties for late payment) but you must ensure that the customer actually understands them.
As Matt mentioned in his blog, it’s also a good idea to have a whole separate payment terms agreement with your customer. Having a separate dedicated agreement places a sense of high importance on this – psychologically speaking, it becomes a whole separate agenda as opposed to just another element to the transaction.
Something we’ve discussed a wee bit here at Debtor Daddy is the concept of having flexibility in your due date. And we think that if you have the means to, it’s a good idea to give your customer options with this. Whilst you might find that sometimes the payment date that suits your customer doesn’t suit you best, you need to consider that if your customers are unable to pay within the period that suits you, they simply won’t. And as a result of which, they will end up racking up late payment fines. Overall, they end up unhappy because they have to pay more and you end up unhappy because you have unhappy customers.
Though you have to be realistic, start out with a guideline date which you would prefer your payments to come in, but give your customer the option to change this – by giving them the option you are also holding them accountable. It places more responsibility in their hands.
Enforcing your payment terms
As spoken about in Starting with the right customer, having a proactive mindset instead of a reactive one goes a long way to ensuring the improved financial health of your business.
Consider that perhaps your customers aren’t paying their bill because they’ve forgotten since the initial invoice; maybe your payment period is too long. So maybe you should be sending out a reminder email 3-4 days before the bill is due.
However, it’s just as important to ensure you follow through on your terms in order to stop customers becoming comfortable with making late bill payments. Most payment periods are around 14 days (a quick check through my recent bills shows thus), so what do you do if day 15 rolls around, you reconcile any payments from the bank, and John Smith of Smithy’s Inflatable Animals still owes a $120 payment? How long do you wait before contacting him, and what sort of tone do you use?
The long and short of it is, John needs to be contacted within 1-3 days, with a stern yet friendly reminder that his payment is due. It is important to include that if he doesn’t pay now, you will be adding penalty interest from X date. If the payment is still not made one week after the due date, send another reminder. By the time the second week (and third reminder) rolls around, you should be adding your penalty interest to the bill and outlining this to John.
Getting on top of this straight away ensures that John knows you’re serious about business. Yes, it can feel a bit uncomfortable, but at the end of the day, you’ve provided him with a product or service, and he has signed an agreement with details around cost: it is within your right to expect payment.
As far as deciding what interest rate to charge, be realistic about how much it will cost you to recover late payments, and balance that with a rate which will prompt people to pay – and make sure this rate is outlined in your payment terms from the beginning.
For examples on how to word your reminders, check out Matt’s blog 2 secrets for getting your invoice paid on time.