Payment Terms for YOUR Cashflow Benefit
The world of running your own business is a minefield even at the best of times. There is always a picky client, a van breakdown or faulty tools that can make it feel like the odds are stacked against you. But these things are all out of your control - you can't help that the turbo in your van has gone, nor can you help that your disc cutter has given up. You just have to take the rough with the smooth.
While there are certain things you can’t control, this only adds to the idea that you should stay in control of what you can - and one of the best things you can get under control is your payment terms.
“Cash Is King” - The Old Adage
We’ve all heard it - cash is king. We hear it so often that we often forget that it’s actually very relevant. When your cashflow is under control, your business is easier to manage. Wages aren’t a constant stress, materials aren’t burning a hole in your wallet and you are able to pay out profits for yourself if the cash is there.
It might surprise you that the most effective tool to improve your cashflow is often the most neglected. Your payment terms dictate when you get paid and subsequently, when you can pay your bills - so if your business is constantly feeling cash-strapped, the most effective thing you can do is adjust your payment terms to suit the needs of your business.
Customer Service vs Business Needs
A business’ primary reason for existence is to provide a product of service to a customer - without this there is no payment and no profit. Therefore customer service is the highest priority for most businesses. Look after your customer and they will look after you. (Supposedly...)
But there is a trade-off between looking after your company and looking after the needs of your business.
If you spend too much time looking after your business, your customer service suffers and you begin to lose customers. If you spend too much time looking after your customer and not your business, your business suffers and risks failing. So balancing the two is important to your success.
The Temptation to Bend Over Backwards For Your Customer
We all do it - we do whatever we can to avoid creating barriers for the client. The most common and harmful practice that happens to landscapers all over the industry is they invoice for full payment on completion, with no payment from the client until this point.
Doing business this way is understandable. It allows landscapers to demonstrate they are trustworthy upfront, while not inconvenience the customer and getting into their good books. It all sounds good, but ultimately this requires a landscaping business not only to be a landscaper, but to also act as a bank, lender and debt collection agency. A landscaping business stumping up £1000's in advance, or becoming reliant on supplier credit terms, desperately harms the business’ ability to grow, or get a clear picture of their finances. As we said, cash is king, so it’s time to start treating it like the royalty it actually is.
Side Note: It’s not ideal to have this debt straddling your business, even when a client is trustworthy and pays in full on completion. But what about when a client doesn’t pay for weeks and your supplier credit comes due? What about when they won’t pay at all? A non-paying customer when you have “borrowed” to finance THEIR project can easily be fatal to any business. It’s so important to protect yourself and your finances and a good customer will understand this.
Establishing Your Credit Terms
By setting more reasonable payment terms, your business’ financial health will skyrocket. Your business carries less debt, non-payment is less of a financial risk, and in general your business will become easier to run.
But what exactly should your credit terms be? What is the right balance between customer service and business needs?
From our experience, what is both reasonable for the customer to expect and reasonable for a business to practice is that the client pays you for materials when they arrive and for longer projects, a payment once a week to keep work ticking. It looks like this:
Project Stages
On Booking - 10% Deposit (Optional)
On Start Date - 50% inc. Optional Deposit
Per Week Payment - Weekly Labour Costs (Optional)
On Completion - 100% Due Immediately
10% On Booking
- This optional payment is for those that prefer to have a deposit before committing a job to the diary. A deposit tends to reduce cancellation rates so can be a good thing. However, there is no general consensus whether this is the right thing to do. Personally, we think it’s fine both ways, it’s the next stage that’s the important one. So you can hold a deposit on booking if you like, but it is fine if you prefer not to.
50% On Start Date
- This is the payment that will make a huge difference and the one you should implement immediately if possible. Once you start the project, it should be the case that the client is obligated to pay 50% of the total estimated cost for the job to cover materials that have arrived on site. After all, the product has arrived and can be seen by the client! This is going to reduce the financial strain on your business while you complete the job, knowing that the cost of the materials has been covered by the client.
- The overall “debt” your business will be carrying is reduced, so if the worst should happen and a client becomes uncooperative, this debt burden is lightened. You will still be in a bit of a pickle with wages due, this start date payment will go a long way.
Weekly Payment
- Another optional payment reduces this debt burden even further. As mentioned above, if the client is covering materials as they arrive on site, then it’s only the labour costs that still fall on your business.
- If you want that extra peace of mind, you can enter into the contract that the client pays a certain amount to cover labour per week. This is especially handy during longer projects where your team still needs paying while the project is ongoing!
- This is another optional payment to give yourself the extra security and lessen your debt liabilities during a project. It all depends on how you want to run your business and your appetite for risk.
On Completion
- Obviously you get paid the full amount on completion. But the important thing is on completion. The longer a customer draws out non-payment, the less you are able to pay yourself and your staff as well as any extras that may have cropped up during the project.
- Believe it or not, if you have written it into the contract, you are actually able to charge daily interest at the Bank of England base rate if the customer is late paying. By writing this into your contract and making your customer aware of the clause - even if you are not planning to enforce it! -, makes it more likely you will get paid much more quickly!
Writing It Into Your Contract
Now, the above theory is all well and good, but without it being written into a contract it is all meaningless. It’s highly recommended to get a signed contract for every single project, but more specifically, the contract should include a very clear payment table so your customer knows what they should expect to pay, when they should expect to pay it and consequences of not paying.
Transform Your Cashflow Overnight
Honestly, polished payment terms are the best thing you can do for your business’ cashflow right now. Establishing a proper payment and/or deposit system is transformative. If you want to have a chat about the best way to implement this, or the best way to approach this with your customers, then feel free to give us a call, we’d be happy to chat.