Are your customer payment terms competitive?
Payment terms vary by industry and often by customer. Some more aggressive customers will take longer to pay than you allow. Your challenge is to grant payment terms that are consistent with your industry, your pricing and your need for cash flow.
Being granted payment terms is a privilege. Not all customers see business that way but it is a fact. Just consider whether you would be willing to grant the same terms to a start-up company or one flirting with bankruptcy that you allow for strong established companies.
Some customers will insist on longer terms than you would like to grant. You have to weigh the availability of competitive supply, your pricing and your desire to maintain the relationship. There is no simple answer as to whether you provide longer terms, but you may want to monitor the customer’s financial situation more closely if your credit exposure is higher than makes you comfortable. If they won’t share financial data with you, investigate their credit through rating agencies or ask permission to obtain financial information from their banker. Are there industry trade organizations that share information confidentially about customer payment patterns? If this doesn’t provide comfort, stay close to the customer and have your team visit their sites regularly. Monitor the condition of their facility and level of stock.
Payment terms are not just the number of days you allow for payment; terms include the dollar limit of exposure. You can limit your exposure by capping the amount of credit available while still granting standard days to pay. If the customer is given 30 days to pay and buys $100,000 every 30 days, you can consider capping your credit limit at $50,000 if that is the amount of exposure that is reasonable.
Just like pricing, the extension of credit must be balanced with the competitive environment. Weigh your decisions carefully and be prepared to be flexible if that is what conditions require.
B2B CFO® has over 200 experienced chief financial officers who stand ready to help businesses improve their cash management processes.