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Is it time to tighten up your payment terms?

Rhys Roberts - Monday, November 19, 2012
Do you ever get the feeling it’s taking you far longer to get paid than it should? If you haven’t already done so, it’s worth doing some analysis of your accounts to determine how many days it takes your clients to pay your invoices.

If it turns out that your clients are stretching things out a little (or even a lot), you’re not alone. After analysing more than 12 million small business invoices over three years, the team at Xero report that irrespective of payment terms, the average invoice is paid two weeks late.


Delays in getting paid can have significant cashflow implications, and if things get out of hand, they may jeopardise your ability to run your business effectively or pay yourself for all your hard work.

As with many things in business, part of the solution lies in reviewing your business processes. Go through all your business transactions step-by-step in the order in which they occur, and you might find a number of opportunities to shorten the payment cycle.

Here are ten tips to get you started:

  1. Review the formatting and layout of your invoices to ensure your customers can easily determine how much they need to pay, when the invoice is due and what payment methods are available to them.
  2. For optimal customer convenience, offer as many payment methods as you can. Direct debit, PayPal, credit cards… and even cheques. (Yes, some people and businesses do still use them!)
  3. Take advantage of some of Xero’s tools for facilitating payment straight from your invoice[JT1] . Head here[JT2]  for a handy video showing you how to implement them.
  4. State your payment terms clearly on your quotes, contracts and service agreements.
  5. Early in your business relationship with a new client, find out the name and contact details of the person who pays the invoices – you never know when you might need to contact them later!
  6. Issue your invoices as soon as possible after you’ve delivered your product or service. (If you’ve finished a job on the 4th of the month, waiting til the 30th to invoice for it only extends the time until you get paid).
  7. Based on Xero’s research, consider reducing your payment terms from 30 days to 14 days. If most clients are going to pay you late anyway, the net effect will be what you were aiming for in the first place.
  8. Analyse your sales model to determine whether you could collect some or all of your fees upfront or by direct debit over an extended period.
  9. Make a diary note to call or email habitual late payers a week or so before an invoice is due to offer them a ‘friendly reminder’.
  10. Develop a system for chasing up late payments. At some point, every small business needs to go through this process. It’s a job that many people hate and therefore procrastinate over, but just like ripping off a Band-Aid, the pain is best gotten over quickly. Bear in mind that when it comes to debt collection, he who makes the biggest pest of himself is usually attended to soonest.

If you need any assistance putting systems in place that will minimise the risks of late payment, check out the Xero guide in our Learning Centre, or get in touch with us - we have decades of accounting and bookkeeping experience, and have helped hundreds of small businesses just like yours.


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