The Most Used Invoicing Terms, Tips, and Tricks
What are Invoicing Terms?
Most of you are aware of what are invoices but very few know about the terms that businesses should use in their invoices. The invoicing terms are generally known as terms for payment. Such payment terms should be included in all the bills that small businesses usually send to their customers. These payment terms indicate how quickly service providers are expecting the due payment and the conditions for different payment methods clients can use. It is used to give businesses better control over their cash flow and also help them plan future expenses.
Payment Terms on Invoices You Should Know About
Payments terms on invoices let the clients know when they are expected to pay for the invoice they have received and which methods businesses are accepting payments. A range of terms business owners can choose to include in their invoices. In this guide, you will find some helpful invoice payment terms.
Payment In Advance, such payment terms will help your client know you are expecting them to pay the partial payment of the total due in advance before you begin the project work.
Cash In Advance, this term indicates you are expecting payment in advance through cash.
This term means the client needs to make a payment on an immediate basis as soon as the client receives the payment request.
When a payment due date is in seven days from the invoice date generated, accountants mention Net 7.
This indicates that the payment due date is in 21 days from the invoice date mentioned in the document.
If it is mentioned Net 30, then it means the payment is due in 30 days from the invoice date. Most of the businesses follow this term.
2/10 Net 30
This term is a variation of Net 30, which is used to offer an early payment discount. For example, if the payment is due within 30 days, but you as a business owner offer a 2% discount if the customer pays within 10 days, then it is called 10 net 30.
This means the payment is due at the end of the month, in whichever month the invoice is received.
Month Following Invoice means the payment is due on the 15th day of the month, following the invoice date. MFI stands for Month Following Invoice.
Penalties for Unpaid Invoices
As a business owner, you need to make sure that the invoice terms you are using are enforceable. Just like that, you should also include late fees or penalties for unpaid invoices. This will let the clients know they will be charged an extra amount as late payment charges. Charging late payment fees is good for all small business owners because it will help them higher the percentage of paid invoices.
You must be thinking about how much should be the late payment charge? Well, usually business owners charge 1.5% to 3% interest per month as a part of their late payment charges. If you follow invoicing tips and invoicing tricks, it is advisable that you should have late payment charges within your payment terms and are in accordance with your country and state laws.
What Are the Best Tips and Tricks for Invoicing Terms?
The best payment term for invoices is the one that helps you get paid faster and keep your cash flow running. Some of the best practices for invoice payment terms are:
Polite Words for Your Payment Terms
You should be polite when writing your invoice payment terms. It is definite that customers don’t like the idea of mentioning lots of terms and conditions, and it is not just good practice for maintaining a positive relationship with the clients. But in many cases, it actually helps small business owners in getting paid. Little words like please and thank you can make your life much easier than you think.
Set up Specific Deadlines
When you set up crystal clear deadlines for your payment terms it can help your business ‘receive payments faster than you think. You can always mention the specific terms to make payments, for example, you can say your total amount is due in 60 days or in 90 days. Now, it’s up to the customer how they want to make a payment within 60 days or in 90 days. You can also include precise dates also.
Short Term Payment Periods
It is advisable that as a business owner you should mention short term payment periods on your invoices to get paid faster and in a minimum time period. Many business owners use a 30 days policy to make their clients happy but nowadays technology has made this lengthy process much easier for many business owners and clients. By using advanced technologies, clients can make payments instantly, and in a short period of time just after the invoice date mentioned in the document on the other side business owners should open their doors for the latest technologies to get paid quickly and maintain their cash flow. Just start mentioning a shorter time period to make payment in your invoice and evaluate whether these invoice payment terms are helping your business or not.
Flexible Payment Methods
The more options you give clients for making payments, the more they are likely to make payments on time. When your client will see your invoice payment terms for choosing an appropriate method, they might make the payment quickly and in the easiest way possible. So, it is the best way to get paid by mentioning flexible payment terms.
Early-Bird Payment Rewards
It is always recommended to make your clients happy by rewarding their efforts. You should offer them early bird discounts when they make instant payments within the invoice date or before the time period you have mentioned in your payment terms. For example, if a client makes payment within 10 days when their invoice date is due in 30 days, you can offer them a 2% discount under 2/10 Net 30 payment terms and as a sweet gesture.
Invoice Management for Modern Businesses
Invoice management has become a mainstay in most companies, just like every other financial process. Most finance departments of a business cannot cope with the influx of invoices that come in on a daily basis, in different formats.
Companies pieced various invoice processes, and although they had the best intentions, they made life a little harder for everyone. Invoices were the best short-term solution at the time.
Until there aren’t.
Double-handling and data entry is a thing of the past. It’s time to move beyond all those aspects of invoice management that reduces the effectiveness of your business. In the section, we’ll give a detailed explanation.
Before we proceed, a quick clarification.
What is Invoice Management?
Invoice management is the system by which business owners pay and track various suppliers’ invoices. The processes include accepting an invoice from a third-party, validating the invoice, paying the supplier, and adding the process in the business records.
Although it doesn’t sound complicated, it usually involves various individuals and is therefore prone to human errors.
Invoices are usually sent to the point of contact in business – the user. Since they typically aren’t accounts payable clerks or a finance team member of the business, the invoice has to be forwarded on.
If there’s any complication with the invoice( pinpointed by the AP clerk), it is usually returned to the point of contact and back to the supplier. At this point, there’s already a lot of double handling.
Even when the AP clerk sees no issue with the invoice, all the data must be entered into an invoice processing system or a spreadsheet. Validation is required from the CEO or manager, after which payment is made. Then, the data is entered into accounting ledgers.
This is the primary operating procedure for most developing countries. In this guide, you’ll discover there are more accurate and faster ways to manage invoices. This is important, especially when the business starts to grow.
Before we get to that, let’s talk about accounts payable.
Invoices and Accounts Payable (AP)
Invoices are usually treated as part of the account payable process in large businesses. AP ensures that the suppliers are paid, and you’ll be able to receive the goods and services needed by your company.
As we discussed earlier, AP teams work in conjunction with other staff to ensure the company’s needs are satisfied. This includes software, freelancers and consultants, and of course, raw materials. All of the mentioned require invoices to be paid.
Theoretically, the accounts payable team helps to hunt discounts, improve supplier relations, and also explore different business to partner with.
Whereas in reality, AP teams spend most of their time fixing errors made by others in the process and sometimes on data entry.
In the absence of a competent AP team or manager, the finance experts or office managers must do all this work. Trust me; these people have other things to do.
Most growing businesses have this issue. They might have a large number of invoices to process, but they don’t have a specialized team to handle all of them.
Whether you operate a small or big business, there’s a chance you’re suffering from the same issue: old fashioned processes. This is quite a change because invoice management has evolved.
How the Invoice Management Process Has Changed?
Most modern office spaces exclude something that was previously a norm: in and out trays. You don’t have to pass paper from an individual to another anymore. Digitalization is now the new norm, and it allows us to communicate with Slack or emails rather than sending letters.
Invoices have followed suit, although, there’s a chance you may receive the odd invoice in the post, you will most likely receive them as an email attachment. When it comes to online subscriptions and software, you might need to hunt their invoice down on the platform in question.
These processes haven’t necessarily reduced the need for data entry and double handling. Some companies print out their electronic invoices, enter them in a spreadsheet, and file the paper records physically. That’s just excruciating.
Sometimes, the emails are forwarded to the responsible personnel (as mentioned earlier), although manual data entry is still crucial to update financial records.
How Invoice Processing Should Look Like in 2020?
Smart companies look for ways to cut out two things:
- Manual data entry usually takes a lot of time and is error-prone; and double-handling irrelevant communication. Having to send invoices through the mail from place to place can be very annoying.
- Invoice automation is the way out. Instead of sending PDFs around the company for validation, the point-of-contact can easily input the data into a platform or tool once they receive it.
Here’s how that would look:
- Point-of-contact procures an invoice from a supplier via email (sometimes by post)
- The data is entered into an invoice management system. Automated management systems can even read the invoice and extract the data by themselves.
- The manager is notified immediately and will be able to deny or approve payment via the same system.
- The AP clerk or financial management will then be notified to pay the invoice.
- The data is also automatically exported to the company’s records or EPR.
There is no need to worry about internal emails, and there’s just one point of data entry in the whole process.
Some tools even give the supplier a chance to input their invoice data into your software directly. They don’t need to create and attach any PDF file – you will get the raw data. We will look into these shortly.