Setting the Terms
To determine how to set terms or accept the terms of a creditor, all businesses need to take a look at their own cash flow.
If you are a business applying for credit, when do you see the most cash flow coming in? If it’s near the beginning of the month, you may want to request net 10 days terms, meaning you will pay your creditor’s account in 10 days. If you find your money is near the middle or end of the month, you may want to request net 15 or net 30.
If the only option a creditor gives you doesn’t mesh well with your cash flow, ask if you can have different accounts payable payment terms that do fit within your cash flow.
If you are granting credit to a customer, you also have bills to pay. For new businesses, it’s best to put them on a net 10 payment plan and don’t set their credit limit too high. Once you see they pay on time, you can always change the A/P payment terms and raise the credit limit.
You should also look at when most of your bills are due as well. If you need much cash at the beginning of the month, you’ll want to make sure your customers pay on time; often net 30 may be asking too much and net 15 is your best choice. Plan for late payments and do charge late fees and interest penalties, even if they’re only small amounts. This will make your customers make the effort to pay on time and in full.
Once you see payments coming in, think of what you have due as far as payables and operating expenses. Try not to use all your accounts payables coming in to pay your rent and payroll expenses. Use your accounts receivables to pay off your accounts payables—this is a best practice in receivables and payables.
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