Optimize Your Payment Terms

Effective cash flow management requires two combined actions: on the one hand, reducing client payment deadlines; on the other hand, reviewing supplier payment deadlines.

1. Reduce Client Payment Deadlines

A reduction (even a small one) in payment deadlines can yield significant results.

Example:

What will the reduction in financial means obtained from banks be if you get your clients to pay a little faster?
Example:
The company Albert has regular activity throughout the year. Its turnover including taxes reaches XOF 598,000,000, and its payment terms are 85 days (or 60 days end of the month on the 10th). What happens if the client payment deadlines are reduced to 80 and 75 days?

Evolution of the customer credit balance:

If there is no change (85-day deadline): 598,000,000 x 85/360 = 141,194,000
If the deadlines are reduced to 80 days: 598,000,000 x 80/360 = 132,889,000 (- 8,305,000), i.e., - 5.9%
If the deadlines are reduced to 75 days: 598,000,000 x 75/360 = 124,583,000 (- 16,611,000), i.e., - 11.8%.

Thus, through an assertive action aimed at reducing accounts receivable, the company Albert will reduce its demand for bank credit by 5.9% (from 141,194,000 to 132,889,000) or by 11.8%.

2. Renegotiate Your Supplier Payment Deadlines

In the same way, but in reverse, a review of the payment terms with your suppliers can sometimes extend the payment deadlines, within the limits provided by the law. Do not forget to play the competition!

3. Avoid Payment Delays

Beyond contractual payment deadlines, it is also important to address payment delays.
Why does a client not pay on time? Several reasons could be behind a payment delay:

  • The client is experiencing financial difficulties;
  • The client is negligent;
  • The invoice has been lost (postal problem, client organization problem...).

However, sometimes this could be the responsibility of your company:

  • The customer is not satisfied with the delivered product (late delivery compared to the deadline indicated at the order, non-compliant product, defective product, poor quality...) and there is a dispute. You should analyze the reasons for any potential product returns.
  • The client was not reminded.

Appropriate responses should be provided for these different situations:

  • In case of financial difficulties of the client, do your best to recover the receivable by invoking the reservation of ownership clause (included in the general sales conditions);
  • In case of negligence, insist on prompt payment and in case of difficulties, issue a formal notice followed eventually by a payment order procedure (see Reducing the Risk of Non-Payment - see next sheet);
  • In case of a lost invoice, send a duplicate invoice;
  • Facing a dispute, try to negotiate and resolve the issue (attempt to meet the client's demands as soon as possible to retain them).