#Cash flow: Managing payment terms
A new business starting out is likely not to have huge cash reserves. Whether you are bootstrapping or have outside investment, the free cash reserve is probably limited. So landing a contract with a large client early on, cash flow management is an essential thing to consider.
The reality of standard supplier contracts in large companies is, that they typically specify relatively extended payment terms as a standard. 30 days is typically the minimum, many companies have pushed payment terms to 60, 90 or even more days. And that is after the service is delivered and after receipt of the invoice.
So those terms warrant very careful reading and understanding what they mean to your liquidity and ability to pay your staff and suppliers and other commitments on time as you have to pay those within a shorter timeframe.
In addition, the payment schedule needs looking at. More frequent payment/invoicing milestones help cash flow even if the payment terms are long. So that is another lever to consider in the negotiation as well as agreeing shortened payment terms for third party payments to deliver for the client.
Lastly, small businesses need to understand the mechanism how invoices are processed at least at a high level. Are direct invoices acceptable or do you need to invoice against a purchase order (the latter is usually the case)? Have you already been set up as a supplier in the clients ERP system? In what format and through which channel do you need to submit invoices? There are many pitfalls which can delay payment,
We will be publishing more in-depth articles on this topic, from both the SME Supplier and the Corporate (Procurement) perspective on our blog.
The topic has been and continue to be subject to a fair amount of industry discussion what fair behaviour of large corporations towards their suppliers are. Several countries, among them the UK and France have also introduced government guidelines around fair practice payment or even penalties for late payments as in France.
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