Why Payment Terms Are Critical to Cash Flow

I have seen plenty of profitable businesses struggle for cash.

They are busy. Sales are growing. There is work in the pipeline, and the accounts may even show a healthy profit. Yet the owner is still watching the bank balance every morning, wondering whether there will be enough money to pay the wages at the end of the week.

That can seem contradictory. If the business is making money, why is there never enough cash?

Very often, the answer lies in the gap between doing the work and getting paid for it.

A sale may appear in your accounts as soon as you raise the invoice, but that does not mean the money is sitting in your bank. Until your customer pays, that sale cannot be used to pay your employees, settle a supplier’s invoice or meet the next VAT payment.

This is why I believe payment terms should never be treated as a minor administrative detail tucked away at the bottom of an invoice. They are a fundamental part of the commercial agreement you make with your customer.

Put simply, your payment terms determine who finances the transaction.

If you buy the materials, pay the wages, cover the overheads and complete the work before your customer pays you, then you are financing the job. In effect, you are lending money to your customer, often without charging any interest and sometimes without making a conscious decision to do so.

Imagine that you win a contract worth £50,000.

It will cost you £35,000 to deliver, including materials, wages and subcontractors. On paper, it looks like a good piece of work. You expect to make a gross profit of £15,000.

But the £15,000 gross profit is only one part of the story.

You might need to pay £15,000 for materials before the project begins. You then pay £10,000 in wages and subcontractor costs while the work is being completed, followed by another £10,000 before the customer settles your invoice.

The project is profitable, but your business still has to find £35,000 to finance it.

If the customer pays 60 days after the invoice is issued (and you cannot issue that invoice until the work is complete), you could have a substantial amount of cash tied up for several months.

Now imagine winning three similar contracts at once.

Your sales figures would look fantastic. Your order book would be stronger than ever. Your accountant might even tell you that the business is performing well. But you could need more than £100,000 of cash to deliver the work before the first customer payment arrives.

That is how growing businesses can run out of cash. They do not necessarily fail because they lack customers or because their work is unprofitable. They fail because they cannot finance the time between paying for the work and being paid for it.

There is another complication: the payment period shown on the invoice is not always the real payment period.

A business might proudly tell me that all its customers are on 30-day terms. But when we look more closely, the work may be completed on the first of the month and not invoiced until the end of the month. The customer then takes 30 days to pay, and perhaps another week or two if the invoice misses a payment run or requires internal approval.

What appears to be a 30-day payment term can easily become a 60- or 70-day wait from the date the work was completed.

During that time, the business continues paying wages, suppliers, rent, software subscriptions, vehicle costs, VAT and all its other commitments. The customer has received the benefit of the work, but the business is still waiting for the cash. This is why I encourage business owners to look beyond turnover and profit when assessing a contract.

Before accepting the work, ask:

• How much will we have to spend before we can invoice?
• When are we allowed to raise the invoice?
• When will the customer actually pay?
• Can we ask for a deposit or payment for materials upfront?
• Could the work be divided into stages with payments attached to each milestone?
• How much cash will be tied up while we wait?
• Can the business comfortably finance that gap?

A contract offering a healthy margin can still create serious problems if the payment terms are poor. Equally, a slightly smaller contract with a deposit and regular stage payments may be considerably better for the business.

Payment terms are therefore about much more than deciding whether an invoice should be paid within seven, 30 or 60 days. They affect how much working capital you need, how quickly you can grow and how exposed you are if a customer pays late, or does not pay at all.

In the rest of this article, I am going to look at the true cost of offering credit, explain why growth often makes the problem worse and set out some practical steps you can take to improve your payment terms.

Because making the sale is only the beginning.

The sale does not produce cash when the customer accepts your quote. It does not produce cash when you complete the work, and it does not produce cash when you raise the invoice. It produces cash when the money reaches your bank account.

1. Payment Terms Are a Financing Decision

When a customer asks for 30-, 60- or 90-day payment terms, it can sound like a fairly routine commercial request.

It is not.

They are asking you to provide them with credit. More precisely, they are asking you to complete the work, carry the cost and wait for your money while they benefit from what you have supplied.

In effect, they are asking you to help finance their business.

There is nothing inherently wrong with offering credit. In many industries, payment terms are a normal and necessary part of doing business. The important point is that you should recognise what you are agreeing to and understand what it will cost your business.

Suppose you accept a project worth £40,000 plus VAT.

You expect the job to cost £30,000 to deliver, leaving you with a gross profit of £10,000. Looked at purely from a profit perspective, it appears to be a worthwhile contract.

However, you may have to pay for:

• Materials before work begins
• Employees while the project is underway
• Subcontractors shortly after they complete their work
• Fuel, accommodation and other travel costs
• Plant, machinery or equipment hire
• Insurance, rent and other overheads
• VAT before you have collected the invoice from the customer

Your suppliers might expect payment within 14 or 30 days. Your employees will certainly not be willing to wait 60 days for their wages. Fuel, travel and equipment costs may have to be paid immediately.

Your customer, meanwhile, may not pay you until 60 days after you have completed the job and raised the invoice.

This creates a funding gap.

Let us say that you spend £10,000 on materials before the project begins. During the following month, you incur another £12,000 in wages and subcontractor costs. You then spend a further £8,000 completing and delivering the work.

By the time you raise the invoice, you have committed £30,000 of your own cash.

If the customer pays 60 days later, your business could be financing that £30,000 for two or three months. The precise period will depend on when the costs were incurred, when you were allowed to invoice and whether the customer actually pays on time.

Yes, the job should eventually generate a £10,000 gross profit. But the business must first find the £30,000 required to deliver it.

That money has to come from somewhere.

It might come from cash already sitting in the business. It might come from an overdraft, a loan or invoice finance. Alternatively, it might come from delaying payments to suppliers, which simply transfers the cash-flow pressure to somebody else and may damage important commercial relationships.

Whichever route you take, there is a cost.

Borrowing produces interest and charges. Using your own cash means that the money cannot be used elsewhere. Delaying suppliers risks damaging your credit rating, losing favourable terms or having your account placed on hold.

This is why payment terms should be considered alongside price and profit margin.

A £40,000 project paying a £10,000 gross profit may look attractive. But would it still be attractive if you had to borrow £30,000 at a significant cost to deliver it? What if the customer regularly paid 30 days late? What if they disputed the invoice after the work had been completed?

The stated profit does not change, but the risk and the true financial return certainly do.

The customer may be protecting their cash at your expense

Large customers will often present their standard payment terms as non-negotiable.

They may have stronger buying power and sophisticated systems designed to protect their own working capital. Extending supplier payment times allows them to keep cash in their business for longer.

That may be good financial management from their perspective, but it does not automatically make it good for yours. If a customer moves from 30-day to 60-day terms, they keep their money for an extra month. You carry an extra month of financing.

If they move to 90 days, the burden increases again. The customer has improved their cash flow by weakening yours.

This is why I would never assess a potential contract by looking at the selling price alone. I would want to understand the entire cash cycle:

1. When will we start incurring costs?
2. How much will we have spent before we can invoice?
3. When are we permitted to raise the invoice?
4. When does the payment period officially begin?
5. When does this customer normally pay in practice?
6. How will we finance the gap?
7. What happens if payment is delayed or disputed?

Those questions can completely change the attractiveness of a piece of work.

Payment terms should reflect the job

Not every job should be offered on the same terms.

A small piece of work with very little upfront cost may be manageable on 30-day terms. A large contract requiring substantial materials, labour and subcontractor costs could place the business under enormous pressure if it is treated in the same way.

For larger or cash-intensive projects, it may be more appropriate to request:

• A deposit when the order is placed
• Payment for materials before they are purchased
• Weekly or monthly applications for payment
• Stage payments linked to clear milestones
• Part payment when goods are delivered
• The balance on completion
• Shorter terms for the final invoice

For example, instead of funding the entire £30,000 delivery cost yourself, you might agree a £10,000 deposit followed by two stage payments during the project. The overall contract value and profit remain the same, but the amount of your own cash tied up in the job falls substantially.

That can make the difference between a contract supporting growth and a contract creating a cash-flow crisis.

Ask the second question

Most business owners naturally ask: “Will this job make a profit?”

It is an essential question, but it is not enough.

You also need to ask: “How much cash will we have to commit, and how long will it be before we get it back?”

Profit tells you whether the work should ultimately add value to the business. The second question tells you whether the business can afford to deliver it. A good contract needs to satisfy both tests.

2. The Real Payment Period Is Often Longer Than the Stated Terms

When a business owner tells me that customers pay on 30-day terms, my next question is usually:

“Thirty days from when?”

It might be 30 days from the date the work is completed, but that is rarely what the payment terms actually say.

More commonly, it is 30 days from the invoice date. In some cases, it is 30 days from the end of the month in which the invoice was raised. For larger organisations, the payment clock may not even start until the invoice has been received, matched to a valid purchase order and approved by the correct person.

That is a very different proposition.

The important period from a cash-flow perspective is not simply the number printed on the invoice. It is the total time between your business first committing cash to the job and the customer’s payment arriving in your bank account.

That period is often much longer than people realise.

A 30-day term can easily become 60 days

Imagine that you complete a job on 1 September.

For one reason or another, the invoice is not raised until 15 September. Perhaps the final paperwork has not been returned, the job sheet needs signing, or the person responsible for invoicing only processes completed work once a week.

The invoice is issued on 15 September with 30-day payment terms, making it due on 15 October.

So far, the business has already waited 14 days before the official payment period has even begun.

The customer then explains that its supplier payment run only takes place at the end of each month. Because the invoice was not approved in time for the October payment run, it is eventually paid on 31 October.

The customer may describe this as a 30-day account. In reality, 60 days have passed between completing the work and receiving the money.

If you purchased materials or began paying wages two weeks before the job was completed, your actual funding period could be closer to 75 days.

That is the figure that matters to your cash-flow forecast.

Delays before the invoice is raised

Some payment delays are caused by the customer, but others begin inside the business supplying the work. I regularly see businesses complete work promptly and then wait days, or sometimes weeks, before raising the invoice.

Invoices may be delayed because:

• Timesheets have not been submitted
• Job sheets are incomplete
• Delivery notes are missing
• A manager has not approved the final amount
• Variations have not been agreed
• The business invoices everything at month-end
• Nobody has clear responsibility for raising the invoice

Every day between completing the work and issuing the invoice is another day before you can expect to be paid.

If you consistently wait ten days to invoice customers, shortening that delay could improve cash flow without making a single additional sale. You have already earned the money. You simply need to begin the collection process sooner.

Purchase-order problems

Purchase orders are another common source of delay.

A customer may require a valid purchase-order number on every invoice. If that number has not been obtained before the work begins, the invoice may be rejected, even though the work was properly authorised and completed.

The invoice then has to be corrected and resubmitted.

Worse still, some customers restart the payment period from the date the corrected invoice is received. Your original 30-day wait can therefore begin all over again.

This is why purchase-order requirements should be confirmed before starting the job. You need to know:

• Whether a purchase order is required
• Who is responsible for issuing it
• Whether its value matches the agreed work
• Where the number must appear on the invoice
• What happens if the scope or price changes

A missing purchase order can look like a minor administrative issue. In practice, it can delay payment by several weeks.

Internal approval procedures

The person who asks you to do the work is not necessarily the person who approves your invoice.

Your invoice may need to pass through several stages:

1. The customer’s site contact confirms the work was completed.
2. A department manager approves the cost.
3. The purchase order is matched to the invoice.
4. The finance team checks the supplier details.
5. The invoice is scheduled for a payment run.
6. A director or authorised person approves the payment.

If one person is away, fails to respond or disputes part of the invoice, the whole process can stop.

From your perspective, the invoice has been raised and is awaiting payment. From the customer’s perspective, it may still be waiting for approval and might not yet have entered the payment timetable.

Finding out how the customer’s process works before the first invoice is issued can prevent a great deal of frustration later.

Queries and disputes

Invoice queries also extend the real payment period. Sometimes the query is legitimate. The price may be wrong, supporting paperwork may be missing or the invoice may not reflect an agreed variation.

At other times, a customer may raise a small query about one part of the invoice and use it as a reason to delay the whole payment.

For example, a £20,000 invoice might include a disputed £500 additional charge. Unless you have agreed how disputes will be handled, the customer may withhold the entire £20,000 while the £500 is investigated.

Clear quotations, written approval of variations and accurate supporting documents reduce the chance of this happening. It can also be worth agreeing that the undisputed part of an invoice will be paid on time while any genuine query is resolved separately.

Month-end payment runs

Many businesses do not make payments every day. They process suppliers on a weekly, fortnightly or monthly schedule.

This creates a difference between the invoice’s due date and the date on which the money actually arrives.

An invoice due on Friday may miss that week’s payment run because it needed to be approved by Wednesday. A monthly payment run can create an even longer delay. Missing the cut-off by a single day could mean waiting several more weeks.

That is why it is useful to ask larger customers:

• How frequently do you run supplier payments?
• What is the approval cut-off?
• How long does a new supplier take to set up?
• Who should receive the invoice?
• Who should we contact if approval is delayed?

These are simple questions, but the answers can have a significant effect on your cash-flow planning.

Some customers simply pay late

Finally, there is a difference between agreed terms and actual payment behaviour.

A customer may accept 30-day terms and routinely pay after 45 or 60 days. If nobody follows up, late payment can quickly become the normal pattern.

When I prepare a cash-flow forecast, I would not automatically assume that every 30-day invoice will be paid after exactly 30 days. I would look at what each customer does in practice.

If a customer’s last six invoices were paid after an average of 47 days, forecasting the next payment at 30 days creates false confidence. The forecast should reflect the likely collection date, while the credit-control process continues working towards the contractual due date.

Measure the full journey from work to cash

The stated payment term is only one part of the journey. The complete timeline may include:

• Purchasing materials
• Starting the work
• Paying employees and subcontractors
• Completing the job
• Collecting supporting paperwork
• Raising the invoice
• Obtaining customer approval
• Reaching the contractual due date
• Waiting for the payment run
• Chasing any late payment
• Receiving cleared funds

If you only measure the 30 days shown on the invoice, you can seriously underestimate how long your business is financing the work.

A more useful measure is the time between committing cash to a job and recovering that cash from the customer. At the very least, monitor the number of days between completing the work and receiving payment.

Your invoice may say 30 days. Your bank account may tell a very different story.

3. Growth Makes the Problem Worse

One of the most dangerous assumptions in business is that increasing sales will automatically improve cash flow. Sometimes it does. If customers pay quickly and the business receives their money before it has to pay its own costs, growth can generate cash. But for many businesses, the opposite is true.

Growth consumes cash because the business must pay for more materials, more labour and more subcontractors before it receives payment from its customers. The faster it grows, the more money it needs to finance that gap.

This can create a strange and deeply frustrating situation. The order book is full, turnover is rising and the business is making a profit, but the bank balance is getting worse.

The owner may wonder where all the money has gone.

The answer is that the money has not necessarily disappeared. It is tied up in work in progress and unpaid customer invoices. Unfortunately, you cannot pay this week’s wages with an invoice that might be settled in two months.

A simple example of profitable growth

Imagine a contractor wins an additional £100,000 of work every month.

The direct cost of delivering that work is £75,000, leaving an expected gross profit of £25,000. That is a gross margin of 25%, so the additional work appears commercially worthwhile.

However, the contractor must pay for labour, materials and subcontractors as the work is delivered. Customers pay 60 days after being invoiced.

Let us keep the example deliberately simple and assume that the £75,000 delivery cost is paid during the same month in which the work is completed.

In month one:

• Additional sales: £100,000
• Direct costs paid: £75,000
• Customer receipts: £0
• Additional cash required: £75,000

In month two:

• Additional sales: £100,000
• Direct costs paid: £75,000
• Customer receipts: £0
• Cumulative cash required: £150,000

By the end of the second month, the contractor has generated £200,000 of additional sales and expects to make £50,000 of gross profit.

That sounds like excellent growth.

But none of the customer money has arrived yet, and the business has had to find £150,000 to deliver the work. The first substantial payment may begin to arrive during month three. Even then, the contractor must continue funding the next round of work while collecting payment for earlier jobs.

The business is profitable, but it can still run into a cash crisis.

What the accounts show and what the bank shows

This is where profit and cash tell two very different stories. At the end of month two, the management accounts might show:

• Turnover of £200,000
• Direct costs of £150,000
• Gross profit of £50,000

On paper, the business has performed well.

The bank account, however, may have fallen by £150,000 because the costs have been paid but the customers have not.

Both figures can be correct at the same time.

The £50,000 profit reflects the commercial value created by the work. The £150,000 cash requirement reflects the amount the business has had to finance while waiting to be paid.

This is why looking at the profit and loss account alone can be misleading. It tells you whether the work is profitable, but it does not tell you whether the business has enough cash to deliver it.

The faster you grow, the wider the gap can become

If sales remain at a similar level each month and customers pay reliably, the business may eventually reach a relatively stable funding position. Money from earlier invoices begins arriving while new work is being delivered.

But rapid or accelerating growth keeps moving the target.

Suppose the contractor’s additional monthly sales rise from £100,000 to £150,000 and then to £200,000. The direct costs rise with them.

Before the higher customer receipts arrive, the business must fund:

• More materials
• More employees or overtime
• More subcontractors
• Additional vehicles and equipment
• Higher travel and accommodation costs
• Increased insurance and administration
• Larger VAT liabilities
• Recruitment and training costs

Some of these costs may need to be paid before the additional work even begins.

The business may also need to take on permanent overheads to support the growth. A new manager, estimator, administrator, vehicle or premises creates an immediate cash commitment, while the income expected to justify that investment may take months to arrive.

Growth therefore increases both the volume of work being financed and the infrastructure required to support it.

A small delay can create a large problem

The example assumes that customers pay after 60 days. But what happens if one large invoice is queried or paid late?

Suppose the contractor expects to receive £100,000 at the end of month three, but the invoice misses the customer’s payment run and is delayed by another 30 days.

The contractor still has to fund month three’s £75,000 of direct costs. It may also have payroll, supplier bills, VAT and other overheads falling due.

The anticipated cash inflow has not disappeared, but it has moved into the future. The bills have not moved with it. A business already stretched by growth may have very little room to absorb that delay. One disputed invoice can therefore create a much larger problem than its profit figures suggest.

Growth can hide the warning signs

Strong sales can make a business feel successful (and it may genuinely be successful) but they can also hide an increasingly fragile cash position.

The owner sees a full pipeline and assumes that the next round of sales will solve the problem. More work is accepted, more costs are committed and the funding gap grows again.

This can become a cycle:

1. The business wins more work.
2. It spends cash delivering that work.
3. Customer payments have not yet arrived.
4. The bank balance falls.
5. The business takes on even more work to generate more income.
6. More cash is required before that income can be collected.

Without careful forecasting, growth becomes the proposed solution to a cash shortage that growth itself is helping to create.

I sometimes describe this as trying to escape a cash-flow problem by running faster. It can work for a while, but only if the business has sufficient funding and customers pay as expected. If either of those conditions fails, the problem can catch up very quickly.

Turnover does not finance growth, cash does!

The solution is not to avoid growth. Growth can create jobs, strengthen the business and produce substantial long-term value. The solution is to fund it properly. Before accepting a significant increase in work, I would want to understand:

• The direct cash cost of delivering the additional sales
• When each cost will need to be paid
• When the work can be invoiced
• When customers are likely to pay in practice
• The maximum amount of cash that will be tied up
• The effect of VAT and other tax payments
• What happens if sales grow faster than expected
• What happens if a major customer pays late
• Whether existing banking facilities are sufficient
• Whether deposits or stage payments can reduce the funding requirement

A rolling cash-flow forecast is essential here. It allows the business to see the pressure building before the bank account reaches its limit.

It is much easier to arrange an overdraft, loan or invoice-finance facility while the business is performing well than it is to ask for emergency funding when wages are due in three days.

It may also be possible to redesign the commercial terms. Deposits, upfront material payments and staged invoicing can allow growth to be funded partly by the customer rather than entirely by the supplier.

Profitable growth can still cause business failure

This is the point I want to emphasise.

The contractor in our example is not making a loss. Each £100,000 of additional work is expected to produce £25,000 of gross profit.

The problem is timing.

The contractor has to spend £75,000 before collecting £100,000. With two months of work being financed, that creates a £150,000 cash requirement before allowing for overheads, tax or late payment.

If the business only has £50,000 of available cash and a £25,000 overdraft, it cannot safely finance that level of growth, however profitable the work may be. The decision is therefore not simply whether to accept the contract. The business must decide how the contract will be funded.

That may mean negotiating better payment terms, asking for a deposit, agreeing stage payments, arranging additional finance or controlling the rate at which the work is taken on. Growth is usually presented as the reward for building a successful business. But growth has to be financed before its rewards can be collected.

Turnover may make the business bigger. Profit may make it worthwhile. But cash is what makes the growth possible.

4. Not All Payment Terms Are Equal

It is tempting to compare payment terms by looking only at the number of days stated in the contract.  Seven days must be better than 30 days. Thirty days must be better than 60 days. Payment in advance must be better than all of them. As a broad principle, that is true. The sooner you are paid, the less cash you usually need to commit.

But the number of days is only part of the picture.

The real question is: “When will the cash arrive compared with when we have to pay the costs of delivering the work?”

A 30-day payment term may be perfectly manageable if the customer pays a deposit covering the materials. The same 30-day term could be dangerous if you must finance all the materials, wages and subcontractors yourself.

To understand whether the terms are acceptable, we need to look at the entire payment structure.

Payment in advance

Payment in advance is normally the strongest option for the supplier.

The customer pays before the product is delivered or the service begins. This means the supplier does not have to finance the customer and has much less exposure if the customer later experiences financial difficulty. Payment in advance is particularly appropriate where:

• The product is made or ordered specifically for the customer
• The work requires substantial upfront expenditure
• The customer is new or has not yet established a payment history
• The work is delivered quickly
• The amounts are relatively small
• The service is subscription-based
• Capacity must be reserved exclusively for the customer

For example, imagine that a business sells a specialist piece of equipment for £12,000. It must pay its supplier £8,000 before the equipment can be ordered.

If the customer pays in advance, the supplier can place the order without using £8,000 of its own cash.

If the customer pays 30 days after delivery, the supplier must finance the purchase, wait for the equipment to arrive, deliver it and then wait another month to be paid. The profit may be identical under both arrangements, but the cash-flow consequences are completely different.

Payment in advance will not be suitable in every market. Some customers will be unwilling to pay the full amount before receiving anything. However, that does not mean the only alternative is to finance the entire transaction yourself.

A deposit may provide a sensible compromise.

Deposits

A deposit gives the business cash before the work begins without requiring the customer to pay the full contract value upfront. The deposit might be a fixed amount, a percentage of the contract value or a sum calculated to cover a specific cost.

I often prefer the third approach.

Rather than choosing an arbitrary deposit of 10% or 20%, consider what the business will actually have to spend before reaching the next payment point.

If a £50,000 project requires £15,000 of materials to be purchased before work begins, a £5,000 deposit will help, but the business must still find the remaining £10,000. A deposit of £15,000 may be more commercially sensible because it directly funds the materials needed for the customer’s project.

Deposits can also provide a degree of protection if the customer cancels after you have committed time, purchased bespoke materials or turned away other work. The contract should, of course, make clear how the deposit will be treated and what happens if either party cancels.

The key point is that the deposit should have a purpose. It should reduce the amount of cash the business must risk before the customer makes the next payment.

Stage payments

Stage payments divide a larger contract into smaller payment points. Instead of completing the entire project and raising one invoice at the end, the business invoices as agreed stages are reached.

For example, a £100,000 project might be structured as:

• £20,000 deposit when the contract is signed
• £25,000 when materials are delivered
• £25,000 when the first phase is completed
• £20,000 at practical completion
• £10,000 after final approval

The total selling price remains £100,000, but the business does not have to finance the whole project until the end. Stage payments are particularly useful for:

• Construction and installation projects
• Bespoke manufacturing
• Software development
• Consulting assignments
• Long-term creative projects
• Equipment supply and commissioning
• Any job extending over several weeks or months

The stages should be clear, measurable and within the business’s control as far as possible.

Terms such as “50% when the customer is satisfied” are risky because satisfaction is subjective. A more useful milestone might be “25% when the equipment is delivered to site” or “25% when the first-floor installation is completed.”

It is also important to invoice as soon as each milestone is reached. A stage-payment structure provides little benefit if the business waits until the end of the month to raise the invoice.

Payment on completion

Payment on completion can sound attractive because it avoids a lengthy credit period after the job has finished. However, it still requires the business to finance all the costs incurred up to completion.

For a one-day service job with limited materials, that may be entirely manageable. For a three-month project involving employees, subcontractors and expensive equipment, it could leave a substantial amount of cash tied up.

There is also a practical question: what does “completion” mean? Does it mean:

• The physical work has finished?
• The customer has signed the completion certificate?
• All supporting paperwork has been submitted?
• Minor defects have been corrected?
• The customer’s project manager has approved the work?
• The end customer has approved the entire project?

If completion is not clearly defined, payment can be delayed by minor outstanding items or by an approval process outside your control. Payment on completion is therefore only as strong as the definition of completion and the speed with which the invoice is paid.

“Due on completion” should mean exactly that, not “invoice on completion and wait until the customer’s next monthly payment run.”

Seven-day terms

Seven-day terms can work well for smaller jobs and ongoing services.

They shorten the period between invoicing and collecting the money, while still allowing the customer a reasonable amount of time to process the invoice. They can be particularly useful where:

• Work is carried out frequently
• Employees or subcontractors are paid weekly
• The supplier incurs costs continuously
• Each individual invoice is relatively small
• The relationship does not justify a longer credit period

But a seven-day term is only valuable if the invoice is raised promptly and the customer’s systems can process it.

If the business waits two weeks after completing the work before invoicing, the true collection period is already at least 21 days. If the customer only processes payments once a month, a seven-day due date may be routinely ignored.

The stated term and the customer’s actual payment process need to be compatible.

Thirty-day terms

Thirty-day terms are common, but that does not make them automatically suitable. Whether they are manageable depends on the cost profile of the work.

Consider two businesses that both issue a £10,000 invoice on 30-day terms.

• The first is a consultant who delivers the work personally and has very few direct costs. Waiting 30 days may be inconvenient, but the immediate cash requirement is limited.
• The second is a contractor who has already spent £7,500 on materials, wages and subcontractors. Waiting 30 days means financing most of the contract value out of the business’s own resources.

The payment term is the same, but the cash-flow risk is very different. Thirty-day terms may be manageable when combined with a deposit or stage payments. They can be far more demanding where all costs must be paid before the invoice is raised.

End-of-month terms

End-of-month terms are frequently misunderstood.

The contract may say that payment is due 30 days from the end of the month in which the invoice is raised. Depending on the invoice date, the actual wait can be considerably longer than 30 days.

For example, an invoice raised on 2 January may not become due until 30 days after 31 January. That means the business waits almost 60 days from the invoice date.

An invoice raised on 30 January under the same terms has a much shorter effective wait.

This can create an unfortunate incentive to delay invoicing, but I would be careful about doing so. Holding back an invoice may push it into a later approval or payment cycle and make the overall delay even worse.

The exact wording matters because “30 days from invoice,” “30 days from month-end” and “payment at the end of the following month” are not the same thing.

Never rely on the customer simply describing the account as “30 days.” Ask exactly how the due date is calculated.

Sixty- or ninety-day terms

Sixty- and 90-day terms transfer a substantial part of the financing burden to the supplier.

If the business incurs costs before or during delivery, it may have to carry those costs for several months before receiving payment.

For larger contracts, this can tie up a significant amount of working capital. Imagine a supplier delivers £50,000 of work each month at a direct cost of £37,500.

On 90-day terms, the supplier could build up more than £100,000 of delivery costs before the earliest substantial customer payments begin to arrive. If sales continue growing or customers pay late, the requirement becomes even larger.

Long terms also increase risk. The more time that passes between delivery and payment, the greater the opportunity for:

• The invoice to be queried
• Paperwork to go missing
• Staff at the customer to change
• A dispute to develop
• The customer’s financial position to deteriorate
• Further work to be supplied before earlier invoices are paid

I would not accept 60- or 90-day terms simply because a large customer describes them as standard. The value of the contract, the margin, the customer’s financial strength, the cash required and the cost of financing all need to be considered together.

A large contract is not necessarily a good contract if it leaves the business permanently short of cash.

Retentions

Retentions are particularly important in construction and similar project-based industries.

Under a retention arrangement, the customer withholds part of the agreed price after the work has been completed. The money may be released in stages, for example, partly at practical completion and partly after a defects period has expired.

The purpose is usually to provide security that defects will be corrected and contractual obligations completed.

From the supplier’s perspective, however, a retention means part of the selling price remains unpaid even though most or all of the costs have already been incurred.

Suppose a contractor completes a £100,000 project and the customer retains £5,000.

The contractor may have paid all the labour, materials, subcontractors, travel and equipment costs. It may also have recognised the expected profit. But £5,000 of cash remains with the customer, potentially for many months.

One retention may be manageable. Retentions across ten or twenty projects can create a substantial amount of trapped cash.

They can also be forgotten. Staff change, projects are archived and nobody follows up when the release date arrives.

A business accepting retentions should maintain a clear schedule showing:

• The original contract value
• The amount retained
• Who is holding the money
• The reason for the retention
• The conditions for release
• The expected release date
• Any defects or documentation still outstanding
• The person responsible for collecting it

Retention money should not be treated as readily available cash until there is a realistic prospect of collecting it.

Look at the complete cash profile

The headline payment term does not tell you enough.

A contract on 30-day terms with a deposit and monthly stage payments may create less cash pressure than a contract described as “payment on completion” where the business has to fund six months of work first.

Equally, a customer offering seven-day terms may still be unattractive if invoices require multiple approvals and are regularly disputed. A reliable customer paying after 30 days may be easier to manage than an unreliable customer promising to pay in seven.

When reviewing payment terms, I would map out the complete cash profile:

1. When will the first costs be incurred?
2. How much will be spent before work begins?
3. When will deposits or advance payments be received?
4. At what points can stage invoices be raised?
5. How long will the customer take to approve them?
6. When will the money actually reach the bank?
7. Will any amount be retained after completion?
8. What is the maximum amount of our cash tied up at any point?

That final question is particularly important.

The best payment structure is not necessarily the one with the shortest term printed on the invoice. It is the one that keeps the cash received reasonably aligned with the costs incurred.

A 30-day payment term may be manageable when the customer funds the materials and the work is invoiced in stages. The same 30-day term may be dangerous when the business must pay for everything itself and cannot raise an invoice until the entire project is complete.

Do not judge payment terms by the label. Judge them by the amount of your money they require, and how long that money will be out of your hands.

5. Long Payment Terms Have a Cost

When a customer asks for longer payment terms, the discussion is often treated as if it has nothing to do with price. The customer agrees to pay £50,000 and simply asks for 60 days rather than 30 days to settle the invoice. The selling price has not changed, so it is easy to assume that the financial outcome is the same.

It is not.

A customer asking for longer payment terms is asking for something of financial value.

They are asking to keep their money for longer while using yours. During that period, your business must finance the materials, wages, subcontractors and overheads required to fulfil the order.

If you agree to provide that credit, there is a cost, even if it does not appear as a separate line in the quotation.

Longer terms increase the amount of working capital you need

Working capital is the money required to keep the business operating while it waits to be paid. The longer customers take to pay, the more cash becomes tied up in unpaid invoices.

Imagine a business invoices £100,000 every month and has direct delivery costs equal to 75% of sales.

If customers pay after 30 days, the business may need to finance roughly one month of those costs while waiting for payment.

If customers move to 60-day terms, the business may need to finance an additional month. At the same sales level, that could mean finding another £75,000.

Move to 90-day terms and the funding requirement increases again.

The business has not become less profitable in its accounts, but considerably more cash is needed to support exactly the same level of sales. That money has to come from somewhere. It may come from retained profits, an overdraft, a loan, invoice finance or extended supplier terms. Whichever method is used, there is either a direct cost or an opportunity cost.

Borrowing costs reduce the real return

Suppose a contractor accepts a £100,000 project with direct costs of £75,000. The expected gross profit is £25,000. If the contractor must finance the £75,000 delivery cost for 90 days and the effective annual cost of borrowing is 10%, the financing cost for that period would be approximately £1,850.

That reduces the economic return from the project before allowing for arrangement fees, invoice-finance charges or the management time involved in administering the facility.

The gross profit shown in the accounts may still be £25,000, with the finance cost appearing elsewhere. Commercially, however, the contract has not delivered the same return.

Part of the margin has been used to finance the customer.

The longer the payment period and the lower the original profit margin, the more significant this becomes. If a job only offers a narrow margin, the cost of financing it for several months can turn an apparently acceptable contract into poor business.

Using your own cash is not free

Business owners sometimes tell me that financing cost is irrelevant because they are not borrowing the money. They have enough cash in the bank to fund the work themselves. That avoids interest, but it does not make the credit free.

Cash tied up in one customer cannot be used for anything else. It cannot be used to:

• Recruit another employee
• Purchase equipment
• Take advantage of a supplier discount
• Invest in marketing
• Reduce existing borrowing
• Build a reserve for tax
• Protect the business against an unexpected setback
• Fund a more profitable opportunity

This is the opportunity cost of offering credit. You may not see an interest charge on the bank statement, but the business has still surrendered the use of its money for a period of time. Cash provides flexibility. Long payment terms give some of that flexibility to the customer.

Credit control takes time

The cost of long payment terms is not limited to finance. The longer an invoice remains outstanding, the more administrative attention it is likely to require. Someone may need to:

• Confirm that the invoice was received
• Check that it has been approved
• Resolve purchase-order issues
• Provide delivery notes or timesheets
• Answer queries
• Send reminders
• Make telephone calls
• Update the cash-flow forecast
• Escalate overdue balances
• Reconcile payments
• Consider whether further work should be stopped

That time has a cost.

In a small business, credit control may be handled by the owner. Every hour spent chasing an old invoice is an hour not spent managing the business, winning new work or supporting customers.

As the debtor ledger grows, the business may need additional finance staff or an outsourced credit-control service. Those costs are partly being created by the credit offered to customers.

A contract should therefore be assessed not only by the work required to deliver it, but also by the effort required to collect the money.

Bad-debt exposure increases

Until the money reaches your bank account, there is always a risk that you will not receive it.

A customer that appears financially strong today may face problems in three months’ time. It could lose a major contract, suffer a legal dispute, experience fraud, have its borrowing withdrawn or simply be badly managed.

The longer the period between delivery and payment, the longer your business remains exposed to those risks. The consequences of a bad debt can be much more severe than the lost profit on the job.

Suppose you make a 25% gross margin. If a customer fails to pay a £20,000 invoice, you do not merely lose the £5,000 gross profit. You may also lose the £15,000 spent delivering the work.

At a 25% gross margin, the business would need to generate £80,000 of additional sales at the same margin to replace a £20,000 bad debt.

That is why creditworthiness and payment terms should be considered together. The larger the exposure and the longer the terms, the more important it becomes to check the customer, set an appropriate credit limit and monitor the account.

Dependence on individual customers becomes more dangerous

Long terms are particularly risky when one customer represents a large proportion of the business’s sales. If 5% of monthly revenue is delayed, the business may be able to absorb it. If 40% of revenue comes from one customer and that customer pays 30 days late, the effect can be severe.

The business may find itself dependent on that customer in two different ways:

• Dependent on them for future work
• Dependent on them paying existing invoices so that current bills can be met

That can weaken the supplier’s negotiating position. The owner may be reluctant to challenge late payment, suspend work or refuse another order because the customer is considered too important to lose. Meanwhile, the outstanding balance continues to grow.

A large customer can be valuable, but a large customer receiving lengthy credit can also become one of the business’s largest financial risks.

Supplier relationships come under pressure

When customer payments arrive late, businesses often try to manage the problem by delaying their own suppliers. This may solve an immediate cash shortage, but it does not remove the underlying problem. It simply passes the pressure down the chain.

Repeatedly paying suppliers late can lead to:

• Reduced credit limits
• Shorter supplier payment terms
• Loss of early-payment discounts
• Orders being placed on hold
• Difficulty obtaining materials
• Damage to the business’s reputation
• A requirement to pay in advance

This can create a vicious circle.

Customers take longer to pay, so the business delays its suppliers. Suppliers then reduce the credit available, forcing the business to pay sooner. The gap between cash going out and cash coming in becomes wider still.

Good supplier relationships are commercially valuable. They should not be sacrificed because the business has agreed overly generous terms with its customers.

Tax may become due before the customer pays

A business may also have tax obligations connected with a sale before the related customer payment has been collected.

Depending on its VAT arrangements and the timing of the transaction, VAT may need to be paid to HMRC while the invoice is still outstanding. Payroll taxes become due when employees are paid, regardless of whether the customer has settled the invoice that funded their work.

This can create an uncomfortable position.

The business has completed the work, paid the employees, carried the operating costs and now has a tax payment due, but the customer still has the cash.

The tax liability may be entirely correct. The cash-flow problem comes from the mismatch between when the liability falls due and when the customer pays. This is another reason why the gross amount sitting in the debtor ledger should not be mistaken for money that will eventually be available to spend. Part of it may already be committed to tax.

Credit is part of the price

When a customer asks for a lower price, most businesses recognise that they are being asked to give something away. When the same customer asks to move from 30-day to 90-day terms, the request can receive far less scrutiny. Yet both concessions reduce the commercial value of the contract.

Longer payment terms may increase:

• Financing costs
• Working-capital requirements
• Administrative work
• Bad-debt risk
• Tax pressure
• Dependence on the customer
• The risk of damaging supplier relationships

That does not mean every business should add an obvious “credit charge” to every quotation. The market may not accept it, and there may be good commercial reasons for offering credit. But the value of that credit should be understood. Where appropriate, the cost might be reflected through:

• A higher selling price for extended terms
• A discount for payment in advance
• A deposit covering materials
• Stage payments during delivery
• A shorter credit period
• Interest or recovery charges for late payment
• A lower credit limit
• A requirement for the customer to fund exceptional costs upfront

The right approach will depend on the customer, the size of the contract, the margin and the business’s bargaining position. The important thing is to make a conscious decision.

Calculate the return after financing the customer

When reviewing a contract, I would not stop at the quoted gross margin. I would ask:

1. How much cash will we have to invest in delivering the work?
2. For how long will that cash be tied up?
3. Will we need to borrow any of it?
4. What will that borrowing cost?
5. How much management and credit-control time will be required?
6. What is the risk of late payment or bad debt?
7. What other opportunities will we be unable to fund?
8. Is the final return still attractive after allowing for all of this?

Payment terms are one element of the value exchanged between the customer and supplier. The customer receives the product or service. They may also receive time, time in which they can use the result, generate revenue or collect money from their own customers before paying you.

That time has value.

If your business agrees to provide it, the cost should be understood and, where commercially possible, reflected in the price. Otherwise, you may believe you are selling a product or service when you are also supplying an interest-free loan.

6. Payment Terms Are Useless If They Are Not Enforced

A business can have beautifully written payment terms and still suffer from terrible cash flow. The quotation says payment is due within 30 days. The invoice displays a clear due date. The terms and conditions explain what happens if the customer pays late.

But when day 30 arrives, nobody does anything.

A reminder might be sent a week later. Another email follows at the end of the month. Eventually, someone makes an apologetic telephone call asking whether the customer has had a chance to look at the invoice.

By that point, the written payment term has stopped meaning very much.

The business may say that customers have 30 days to pay, but its behaviour communicates something different:

“Thirty days would be nice, but you can pay whenever it suits you.”

Customers learn from that behaviour. They learn that late payment is accepted, there are no meaningful consequences and suppliers who apply more pressure should be paid first.

Customers decide which suppliers to pay

When a customer has limited cash, it will usually prioritise payments. Employees must be paid. HMRC may need to be paid. Essential suppliers may stop deliveries if their accounts are not settled. Other suppliers may telephone regularly, place accounts on hold or refuse to complete more work.

Then there are the suppliers who say nothing.

If your invoice is overdue but you continue supplying the customer, never raise the issue and never apply your own terms, there is little urgency for the customer to pay you. That does not necessarily mean the customer is dishonest. They may simply be managing their cash according to the signals they receive.

If one supplier is calling about an overdue invoice while another has not made contact, which one is likely to be paid first? Credit control is partly about making sure your invoice does not quietly fall to the bottom of the pile.

Enforcing payment terms does not mean being aggressive

Some business owners are uncomfortable chasing payment because they worry about damaging the customer relationship. I understand that. Nobody wants to sound desperate, confrontational or rude. But there is nothing unreasonable about expecting a customer to comply with terms they agreed to.

The work has been completed. The product or service has been supplied. Your employees and suppliers have been paid. Asking the customer to pay the agreed amount on the agreed date is not poor customer service.

Good credit control can be warm, professional and helpful. A simple message might say:

“I just wanted to check that you have received invoice 1234 for £6,000, due for payment on Friday. Please let me know if you need anything from us to approve it.”

That is not aggressive. It gives the customer an opportunity to raise a genuine problem before the due date. In fact, many customers appreciate a clear and organised approach. It helps their finance team process the invoice correctly and avoids an unpleasant escalation later.

The aim is not to create conflict. It is to make payment on time the normal and expected outcome.

Credit control begins before the work starts

Many payment problems are created long before an invoice becomes overdue. Before accepting the order, confirm:

• The customer’s full legal name
• The correct billing address
• The accounts-payable email address
• Whether a purchase order is required
• Who is authorised to approve the work
• The agreed price and scope
• The payment terms
• The credit limit
• Any documents required with the invoice
• The customer’s payment-run timetable
• Who should be contacted if payment is delayed

This might feel administrative, but every missing piece of information can become a reason for the customer to reject or delay the invoice.

For example, the person requesting the work may say, “Don’t worry about the purchase order, we will sort that later.” Later often means after the work has been completed and the invoice has been rejected by the finance department.

The operational contact may be perfectly happy with the work but unable to release the payment because the correct process was not followed. Resolving these points before committing resources is far easier than trying to reconstruct the paperwork afterwards.

Raise an accurate invoice immediately

Once the work reaches the agreed billing point, raise the invoice promptly. Do not wait until the end of the month unless there is a genuine commercial or administrative reason to do so. The invoice should include everything the customer needs to process it:

• The correct customer name and address
• The invoice date
• A unique invoice number
• A clear description of the work
• The agreed price
• The purchase-order number
• Relevant job or project references
• Supporting timesheets, delivery notes or completion certificates
• The VAT information required
• The exact due date
• Your bank details
• A clear contact for queries

Accuracy matters because an incorrect invoice does not merely create extra work. It can restart the payment clock.

If an invoice is rejected after 25 days and resubmitted with a correction, the customer may treat the revised version as a new invoice. A small mistake could add another month to the wait.

I would also send the invoice to the finance team and, where appropriate, copy in the operational contact who authorised the work. Sending it only to the person who placed the order can leave it sitting in an inbox without ever reaching accounts payable.

Confirm that the invoice has been received

Sending an invoice is not the same as knowing it has entered the customer’s payment process. Emails go into spam folders. Attachments fail. Staff leave. Accounts-payable addresses change. Invoices can also be received but rejected because a purchase order, reference or supporting document is missing. A quick confirmation can prevent weeks of delay.

For a large or important invoice, I would want to know:

• Has the invoice been received?
• Has it been entered into the customer’s system?
• Has it been matched to the correct purchase order?
• Is any supporting information missing?
• Who must approve it?
• Is it scheduled for payment?

You do not need to interrogate the customer. A polite email or telephone call is often enough. The best time to discover a problem is shortly after the invoice has been raised, not the day after it was supposed to be paid.

Follow up before the due date

Good credit control does not begin when an invoice becomes overdue. A friendly reminder a few days before the due date serves several purposes. It confirms that the invoice is still moving through the process, gives the customer time to resolve any final issue and makes it clear that your business is expecting payment on the agreed date.

For example:

“Invoice 1234 for £6,000 falls due on Friday. Could you please confirm that it has been approved and included in your next payment run?”

That one message may reveal that:

• The invoice has not been approved
• The purchase-order value is incorrect
• The approver is away
• The invoice missed the cut-off
• The customer is disputing part of the work
• Payment is already scheduled

Each answer gives you useful information before the invoice becomes overdue. This also improves the accuracy of your cash-flow forecast. “Due on Friday” is an assumption. “Approved and included in Friday’s payment run” is much stronger evidence.

Act as soon as payment is late

If payment does not arrive on the agreed date, follow up promptly. Do not wait until the next statement run or the end of the month. The first contact can remain friendly:

“We have not yet received payment for invoice 1234, which was due yesterday. Could you confirm the current status and expected payment date?”

The wording is calm, but it makes three points clear:

• The invoice is overdue
• You have noticed
• You expect a specific answer

Avoid accepting vague replies such as “It is being processed” or “We will look into it.” Ask for a payment date. If the promised date passes without payment, escalate the matter. Contact the finance manager, the person who commissioned the work or another appropriate decision-maker.

A useful credit-control process should become progressively firmer:

1. Confirm receipt after invoicing.
2. Send a reminder before the due date.
3. Follow up immediately when payment becomes overdue.
4. Obtain a specific promised payment date.
5. Escalate if that promise is broken.
6. Review whether further work should continue.
7. Apply the remedies available under the contract where appropriate.
8. Consider formal recovery action if normal efforts fail.

The exact timetable will depend on the value, customer and circumstances. What matters is that the process is consistent.

A promise to pay is not the same as payment

Customers may make reassuring promises:

• “It will be in Friday’s payment run.”
• “The director has approved it.”
• “Accounts are dealing with it.”
• “You should have it early next week.”

Record those promises and follow up if they are not kept.

A promised payment date is useful because it gives the conversation a clear next step. But it should not be treated as cash until the money reaches the bank.

If a customer repeatedly promises payment and misses the date, that is important information about the risk of continuing to supply them. The business should not keep extending further credit based entirely on assurances that have already proved unreliable.

Be willing to stop further work

This is often the most difficult part of enforcing payment terms. A customer has overdue invoices but offers another attractive piece of work. The business accepts it because it does not want to damage the relationship or lose the revenue.

The outstanding balance then grows.

The customer may now owe for several jobs, while the supplier continues paying the wages and materials required to serve them.

At some point, continuing to work is not preserving the customer relationship. It is increasing the amount at risk. A clear credit policy might state that new work will not begin where:

• An invoice is materially overdue
• A promised payment date has been missed
• The customer has exceeded its credit limit
• A genuine dispute remains unresolved
• The customer refuses to provide an acceptable payment plan

Stopping work should not be used casually, and contractual obligations need to be considered carefully. But the possibility must be real. If customers know that late payment has no effect on continued supply, the credit limit is not really a limit and the payment terms are not really terms.

Deal with disputes quickly

A genuine invoice dispute should not be ignored or treated as ordinary late payment.

Establish:

• Exactly what is being disputed
• Why it is being disputed
• What evidence is required
• Who has authority to resolve it
• When a decision will be made
• Whether the undisputed amount can be paid immediately

A customer should not be allowed to withhold an entire invoice indefinitely because of a minor query about one element.

For example, if £500 of a £20,000 invoice is disputed, ask for the undisputed £19,500 to be paid on time while the remaining issue is investigated. The longer a dispute remains unresolved, the more difficult collection often becomes. Memories fade, staff move on and paperwork becomes harder to locate.

Deal with it while the work and the people involved are still available.

Give someone clear responsibility

Credit control often fails because everybody assumes somebody else is dealing with it. The owner thinks the bookkeeper is chasing the debt. The bookkeeper thinks the project manager is resolving a query. The project manager assumes the customer’s finance department is processing the invoice.

Meanwhile, nobody owns the outcome. One person should have clear responsibility for:

• Reviewing the debtor ledger
• Confirming invoices have been received
• Sending reminders
• Recording customer responses
• Monitoring promised payment dates
• Escalating overdue balances
• Updating the cash-flow forecast
• Recommending when further work should stop

Software can automate reminders and produce aged-debtor reports, but it cannot take responsibility. Someone still needs to review the information, make telephone calls and decide when the risk has become unacceptable.

Consistency changes customer behaviour

Credit control works best when it is routine. If every invoice is accurate, every large balance is confirmed, every due date is monitored and every overdue amount is followed up promptly, customers learn what to expect.

They learn that:

• Your business notices when payment is late
• Promised payment dates are recorded
• Problems are followed through
• Credit limits matter
• Continued supply cannot be taken for granted

Over time, this can improve payment behaviour. The opposite is also true. If you chase one invoice immediately but ignore the next three for a month, the customer receives an inconsistent message. They may wait to see whether you chase before deciding when to pay.

Your terms should be enforced as a normal business process, not only when the bank balance becomes uncomfortable.

The due date must mean something

Payment terms are not merely words printed at the bottom of an invoice. They are part of the agreement between you and your customer. They tell the customer when payment is expected and allow you to plan the cash coming into the business.

But they only work if your actions support them. You do not need to be aggressive. You do need to be organised, prompt and consistent.

Make sure the invoice is right. Confirm it has been received. Deal with any problem before the due date. Follow up immediately if payment is late. Escalate when promises are broken. And be prepared to reconsider further work when the customer is not keeping their side of the agreement.

If your invoice says “payment within 30 days,” your credit-control process should make it clear that day 30 is a deadline, not the day on which the customer can start thinking about paying you.

7. Negotiate Terms Before Accepting the Work

The best time to discuss payment is before you agree to do the work. At that point, the customer wants something from you. They want your product, your expertise, your labour or your capacity. You still have the ability to decide whether the proposed arrangement works for your business.

Once the work has been completed, that leverage has largely disappeared.

You cannot easily introduce a deposit after purchasing the materials. You cannot divide a finished project into stage payments. You cannot shorten the agreed payment period simply because the business is running short of cash.

By then, the customer already has what they wanted. All you have is an invoice and whatever terms were agreed at the start.,That is why payment terms should form part of the original commercial conversation, not be left for the finance department to discover after the order has been accepted.

Do not assume the customer’s standard terms are the final terms

Larger customers will often say that all suppliers must accept their standard payment terms. Those terms may be 60 days, 90 days or calculated from the end of the month. They may also include retentions, deductions or lengthy approval procedures.

The customer may present these arrangements as non-negotiable. Sometimes they genuinely are. Often, however, “standard terms” are simply the customer’s preferred starting position.

Whether you can negotiate will depend on:

• How much the customer needs your product or service
• How many alternative suppliers are available
• How urgently the work is required
• The size and risk of the project
• Whether substantial materials must be purchased
• The strength of your existing relationship
• The customer’s internal authority levels
• Your willingness to decline the work

You may not be able to change the official 60-day payment period, but you might be able to agree that materials are paid upfront. You might secure a deposit, monthly applications for payment or smaller stage invoices.

The aim is not necessarily to win every point. It is to arrive at a payment structure the business can safely finance.

Find out who is actually responsible for payment

The person buying from you may not be involved in paying you. A project manager might approve the quotation, but the invoice may be processed by a central finance team at another location. It could then require approval from a quantity surveyor, department head or director before being added to a payment run.

Before starting, establish:

• The customer’s correct legal entity
• The person authorising the purchase
• The person confirming the work is complete
• The person approving the invoice
• The finance team processing the payment
• The contact responsible for resolving problems
• The address or portal to which the invoice must be submitted

This matters particularly when dealing with a group of companies. The person placing the order may work for one business while expecting another company in the group to pay. If the quotation, purchase order and invoice refer to different legal entities, collection can become unnecessarily difficult.

You need to know exactly who owes the money.

Obtain the purchase order before beginning

If the customer requires a purchase order, obtain it before committing resources. Do not rely on:

• “We will send it later.”
• “Just use my name as the reference.”
• “Accounts know about it.”
• “We always sort the paperwork afterwards.”

The operational contact may genuinely intend to resolve it. But if they lack the authority to place the order, the finance department may refuse to pay until the correct approval has been obtained. By then, you may already have delivered the work.

Check that the purchase order:

• Is issued by the correct legal entity
• Shows the correct supplier details
• Covers the full agreed value
• Matches the scope of work
• Contains the correct VAT treatment
• Allows for any agreed variations
• Includes the reference required on your invoice

If the scope changes, make sure the purchase order is updated or obtain written approval from someone with suitable authority. Additional work carried out on the strength of a casual conversation can be difficult to collect later.

Agree when you are entitled to invoice

The payment period cannot begin until the invoice is raised, so the right to invoice is just as important as the stated payment term. For a project, ask whether you can invoice:

• When the order is placed
• When materials are purchased
• When materials arrive on site
• At weekly or monthly intervals
• When defined milestones are reached
• On practical completion
• Only after formal customer approval
• Only after the entire project is completed

“Thirty-day terms” are far less attractive if you must spend six months delivering the project before you are allowed to raise the invoice. Whenever possible, connect invoicing to objective events.

“Invoice £20,000 when the equipment is delivered” is clearer than “invoice when the customer is satisfied with progress.”

The first can be evidenced. The second is subjective and may allow the customer to delay approval.

For longer projects, regular invoicing can be more important than shortening the payment period. Monthly stage invoices on 30-day terms may create far less pressure than one final invoice payable within seven days of completion.

Establish when the payment period begins

Never accept a description such as “30-day terms” without understanding how the due date is calculated.

It might mean:

• 30 days from the invoice date
• 30 days from receipt of the invoice
• 30 days from approval of the invoice
• 30 days from the end of the invoice month
• Payment at the end of the month following invoicing
• 30 days after the work has been signed off

These can produce very different payment dates.

“Thirty days from approval” is particularly risky if the contract does not specify how quickly approval must be given. A customer could take several weeks to approve the invoice before the 30-day period even begins.

The agreement should make clear:

• What starts the payment clock
• What information must accompany the invoice
• How quickly the customer must review it
• How any query will be raised
• Whether correcting a minor error restarts the entire period

A clear due date is easier to enforce than a payment process built around vague stages.

Understand the customer’s payment runs

An invoice can be approved and legally due but still miss the customer’s payment run.

Ask:

• How often are suppliers paid?
• What is the cut-off date?
• How many days are needed for approval?
• Who authorises the payment run?
• What happens if the due date falls between payment runs?
• Will the invoice be paid by bank transfer, card or another method?

Suppose an invoice is due on 15 October but the customer only pays suppliers at month-end. If that is known and accepted from the outset, the practical term is closer to 45 days, not 30.

That extra period should be included in your cash-flow planning and commercial decision.

Do not base a forecast on the nominal due date when the customer’s process makes payment on that date unlikely.

Negotiate deposits and stage payments

If the business will incur substantial costs before it can invoice, ask the customer to contribute to those costs.

A deposit might cover:

• Bespoke materials
• Specialist equipment
• Initial design work
• Reserved production capacity
• Mobilisation costs
• Travel and accommodation
• Third-party commitments that cannot be cancelled

For a longer project, stage payments can keep cash receipts closer to the pattern of costs.

For example, a £100,000 contract might initially be proposed as one invoice payable 60 days after completion.

A more manageable structure could be:

• £20,000 deposit on appointment
• £25,000 when materials are delivered
• £25,000 at the halfway milestone
• £20,000 at practical completion
• £10,000 final balance

Even if each stage invoice is subject to the customer’s normal payment period, the business begins collecting cash while the project is still underway.

This reduces the maximum amount of money tied up and limits the financial exposure if the customer later encounters difficulties.

Identify retentions and deductions

Retentions should never appear as a surprise after the quotation has been accepted.

Before starting, establish:

• Whether a retention will be deducted
• How much will be retained
• Which invoices it applies to
• When each part will be released
• What conditions must be satisfied
• Who confirms that those conditions have been met
• Whether there is a final date for release
• What documentation will be required

The same applies to other possible deductions, including:

• Discounts
• Rebates
• Main-contractor deductions
• Insurance contributions
• Administration charges
• Contra arrangements
• Penalties or service credits
• Customer claims for defects or delays

The price shown on the purchase order may not be the amount of cash received if the contract permits deductions.

Those deductions affect the true margin and should be understood before the work is accepted.

Agree what happens if payment is late

A contract should not only state when payment is due. It should also explain what happens if it is not paid.

Depending on the nature of the work and the agreement, this might include:

• Interest or recovery costs
• Suspension of further work
• Withdrawal of credit facilities
• Future orders moving to payment in advance
• Cancellation of unused capacity
• Recovery action
• Termination rights for persistent non-payment

The precise wording should be appropriate for the contract and, for significant agreements, professionally reviewed.

The important commercial point is that late payment should have a defined consequence.

If the contract says 30 days but the business will continue supplying indefinitely after day 30, the customer has little reason to treat the date as firm.

You should also decide internally how overdue balances will be handled. A contractual right is of limited value if nobody is willing to use it.

Put the agreement in writing

Verbal agreements are easily misunderstood and difficult to prove. Once the terms have been negotiated, record them in the quotation, contract, order acknowledgement or another appropriate written document.

The customer should be able to see:

• The price
• The scope
• The deposit
• The stage-payment schedule
• The invoicing points
• The payment period
• The due-date calculation
• Any retention
• Any credit limit
• The consequences of late payment

Make sure your documents agree with one another. If your quotation says 30 days but the customer’s purchase order says 60 days, that conflict should be resolved before the work starts. Do not assume your terms will automatically take priority.

Similarly, ticking a box to accept a customer’s supplier terms without reading them can unintentionally override the conditions included in your quotation.

Assess margin, terms and customer risk together

I would never assess a contract using margin alone. The commercial decision has at least three connected elements:

1. Margin: How much profit should the work generate?
2. Payment terms: How much cash must we commit, and for how long?
3. Customer risk: How confident are we that the customer will pay in full and on time?

A high-margin contract with a reliable customer, a deposit and regular stage payments may be very attractive. A contract offering the same margin may be far less attractive if it requires the business to finance all the work for 90 days after completion.

A lower-margin job paid in advance might produce a better return on the cash invested than a higher-margin job with long terms and significant collection risk. 

For example, compare two £100,000 projects:

Project A

• Gross profit: £25,000
• All £75,000 of direct costs funded by the supplier
• Invoice raised on completion
• Payment due after 90 days
• Customer has a poor payment history

Project B

• Gross profit: £20,000
• £30,000 deposit received upfront
• Monthly stage payments
• Final payment due within 14 days
• Customer has a strong payment history

Project A has the higher headline margin. Project B may still be the better commercial opportunity because it requires less cash, produces money sooner and carries less risk.

This is why the question should not be: “Is the margin high enough?”

It should be: “Is the return sufficient for the cash commitment and risk involved?”

Be prepared to change the structure, or decline the work

Sometimes the customer will not change its terms.

That does not automatically mean you should reject the opportunity. The job may have an excellent margin, the customer may be financially strong and the business may have enough working capital to support it. But the decision should be deliberate.

If the proposed terms create too much pressure, possible responses include:

• Increasing the price
• Reducing the size of the initial order
• Asking for customer-funded materials
• Dividing the work into phases
• Negotiating stage payments
• Setting a credit limit
• Requiring a personal or corporate guarantee where appropriate
• Arranging finance before starting
• Declining the contract

Walking away can be difficult, particularly when the headline value of the order is exciting.

But winning work that the business cannot afford to deliver is not growth. It is taking on a liability.

Negotiate while the customer still needs your agreement

Payment terms become hardest to change when the work has already been completed and the customer has no reason to reopen the discussion. That is why I would settle the payment structure before ordering materials, allocating employees or booking subcontractors.

Find out who will pay. Obtain the purchase order. Agree when you can invoice. Understand how the due date is calculated. Confirm the approval process. Identify retentions and deductions. Decide what happens if payment is late.

Then assess the price, payment terms and customer risk as one commercial package. You are not simply agreeing to perform a piece of work. You are agreeing to invest your business’s time, capacity and cash in the expectation of a future return.

Make sure the terms justify that investment before you begin.

8. Improve Your Payment Terms, and Identify Which Customers Are Truly Valuable

Improving cash flow does not always require more sales, a larger overdraft or a difficult conversation with the bank. Sometimes the quickest improvement comes from changing how and when customers pay.

A deposit received before work begins, an invoice raised a week earlier or a customer paying after 14 days rather than 45 days can release cash without the business selling anything extra. The starting point is to stop treating every customer and every job in exactly the same way.

Payment terms should reflect:

• The amount of cash required to deliver the work
• The length of the project
• The customer’s creditworthiness
• Their previous payment behaviour
• The profit available
• The size of the outstanding balance
• The consequences if they do not pay

A long-established customer with a strong payment record may justify more generous terms. A new customer asking you to purchase expensive materials should not automatically receive the same credit.

Here are some practical ways to improve the position.

Take deposits before work begins

Deposits reduce the amount of your own money committed to the job. They are particularly useful when:

• Materials must be ordered specifically for the customer
• Production or labour capacity must be reserved
• The work will take several weeks or months
• The customer is new
• The order cannot easily be resold
• You will incur costs if the customer cancels

The deposit should relate to the cash exposure. If a £40,000 contract requires £12,000 of materials before work can begin, a £2,000 deposit offers limited protection. Asking for the material cost upfront may be more appropriate.

A deposit also tests the customer’s commitment. If a customer is unwilling or unable to pay an agreed deposit, that may tell you something important before you invest further time and money.

Ask customers to fund materials upfront

Material costs can create some of the largest cash-flow pressures in project-based businesses.

A contractor may have to pay a supplier within 30 days but wait 60 days after completing the work to be paid by the customer. If the project itself takes two months, the contractor could be carrying the material cost for a considerable period.

One solution is to invoice for materials before ordering them.

This can be presented positively:

“Because these materials are being purchased specifically for your project, they are payable when the order is confirmed. The labour and installation costs will then be invoiced as the work progresses.”

The customer is not being asked to pay the entire contract upfront. They are being asked to finance the materials purchased for their benefit. If full upfront payment is not possible, consider a deposit that covers at least the non-refundable or bespoke items.

Use milestone or stage payments

Large jobs should not automatically produce one large invoice at the end. Stage payments allow the cash received to follow the progress of the work more closely. A project might be invoiced:

• On appointment
• When materials are ordered
• On delivery to site
• At defined completion milestones
• Monthly based on work performed
• At practical completion
• After final handover

The stages should be clearly defined and documented before work begins.

Try to avoid milestones that depend entirely on the customer’s subjective approval. “Invoice when phase one installation is complete” is stronger than “invoice when the customer is satisfied with phase one.”

The aim is to prevent the business from carrying the entire project cost until the final day.

Invoice as soon as you are entitled to

Many businesses improve their cash position simply by invoicing faster.

If a job is completed on the third of the month but the invoice is not raised until month-end, almost four weeks have been added to the collection period before the agreed terms even begin.

There is rarely any benefit in doing that.

Create a process that allows invoices to be raised promptly:

• Employees submit timesheets immediately
• Job sheets are completed and signed
• Delivery notes are returned
• Variations are approved in writing
• Project managers confirm milestones
• Finance receives the information without delay

Where possible, invoice on the day the work is completed or the agreed milestone is reached.

An invoice raised today has a chance of being paid. Work sitting unbilled in an internal system does not.

Use shorter terms for new or higher-risk customers

Credit should be earned, not assumed.

A new customer has not yet demonstrated that they will pay correctly and on time. It may therefore be sensible to require:

• Payment in advance
• A meaningful deposit
• Seven- or 14-day terms
• A low initial credit limit
• Payment of the first few orders before more work is accepted

Terms can be reviewed once the customer has established a reliable history.

The same principle applies when an existing customer’s risk increases. If they begin paying later, disputing more invoices or exceeding their credit limit, continuing to offer the same terms may not be sensible.

Payment terms do not have to remain unchanged forever.

Use Direct Debit for recurring payments

Direct Debit can work particularly well for regular, predictable charges such as:

• Monthly retainers
• Service plans
• Maintenance agreements
• Subscriptions
• Regular support
• Fixed recurring fees

It removes the need for the customer to manually arrange every payment and makes the collection date more predictable.

That does not eliminate all risk. Payments can fail or be cancelled, and disputed amounts still need to be handled correctly. But for suitable recurring services, Direct Debit can reduce administration and improve consistency.

Set the collection date clearly and give the customer the required notice. The aim is to make payment part of the normal service process rather than a separate monthly negotiation.

Check creditworthiness before granting credit

Before lending money, a bank considers whether the borrower is likely to repay it. A supplier offering 30-, 60- or 90-day terms should apply the same basic principle. The depth of the check should reflect the potential exposure. It may include:

• Verifying the legal entity
• Reviewing filed accounts and financial information
• Obtaining a commercial credit report
• Checking for signs of financial distress
• Requesting trade references
• Reviewing the customer’s payment history
• Confirming how long the business has traded
• Understanding its ownership and group structure

A credit check is not a guarantee of payment. It is a way of making a more informed decision.

The important figure is not only the value of one invoice. It is the maximum amount that could be outstanding by the time a problem becomes visible. If you invoice a customer £20,000 every month on 60-day terms, several invoices may be outstanding before the first one becomes overdue. Your real exposure could be much larger than £20,000.

Set and enforce credit limits

A credit limit sets the maximum amount you are prepared to risk with a customer at one time.

It should reflect:

• The customer’s financial strength
• Their payment record
• The margin on the work
• Your own available cash
• The value and frequency of orders
• The amount you could afford to lose

The limit must include unbilled work and committed costs, not just overdue invoices.

Suppose a customer has:

• £30,000 of outstanding invoices
• £15,000 of completed but unbilled work
• £20,000 of work currently in progress

Your practical exposure may already be £65,000, even if only a small part appears overdue on the debtor report. If the agreed limit is £50,000, the business should not automatically accept another order. Someone should review the position and decide whether payment, a deposit or revised terms are required.

A credit limit that never affects commercial decisions is merely a number in the accounting system.

Stop further work when the exposure becomes unacceptable

Continuing to supply an overdue customer can turn a manageable problem into a serious one. This is especially tempting when the customer promises that a large payment is on the way or offers another profitable job.

But the new job usually requires more labour, materials and cash. If the promised payment does not arrive, the total exposure grows again. The decision to stop should be made carefully, taking account of contractual obligations and the wider relationship. But the business needs a clear point at which further credit will not be extended.

That point might be reached when:

• The credit limit is exceeded
• An invoice becomes materially overdue
• A promised payment date is missed
• The customer refuses to resolve a dispute
• Reliable financial information is unavailable
• The customer’s credit position deteriorates

Stopping work does not always mean ending the relationship. It may mean pausing until the account is brought up to date or moving future work to payment in advance.

Monitor how long customers actually take to pay

Stated payment terms tell you what should happen. Payment data tells you what actually happens.

Monitor:

• Average debtor days
• The average time between invoice and payment
• The value of overdue invoices
• The age of outstanding balances
• Broken payment promises
• Disputed invoices
• Customers exceeding credit limits
• Trends in individual customer behaviour

The overall average is useful, but it can hide important differences.

One customer may pay after 14 days while another routinely pays after 75. Looking only at the combined average could conceal the customer creating the greatest pressure.

I would review the largest and oldest balances individually. A small overdue invoice is annoying. A very large invoice approaching its due date may represent a much more significant risk even though it is not yet late.

Watch for changes as well. A customer who has always paid within 30 days but gradually moves to 40, then 50 and then 60 days may be experiencing financial difficulty. Slow deterioration is easy to miss if nobody is tracking the pattern.

Give one person responsibility for credit control

Credit control needs an owner. That person should know:

• Which invoices are due
• Which balances are overdue
• What customers have promised
• Which invoices are disputed
• Who has exceeded their limit
• When further work should be reviewed
• What receipts are expected in the cash-flow forecast

Software can send reminders and produce reports, but somebody must interpret the information and act on it. Responsibility does not necessarily mean doing everything alone. A project manager may need to resolve a work query, and the business owner may need to speak to an important customer.

However, one person should coordinate the process and make sure nothing is forgotten.

Forecast the date customers are likely to pay

An invoice due on 30 October should not automatically appear as a cash receipt on 30 October. If the customer normally pays two weeks late, or only makes payments at month-end, the forecast should reflect the expected date.

That does not mean accepting late payment. Credit control should continue working towards the contractual due date. It means distinguishing between two different views:

• When the customer should pay
• When the customer is currently expected to pay

The debtor ledger manages the first. The cash-flow forecast must reflect the second.

If you forecast every receipt on its due date despite knowing that customers routinely pay late, the forecast will overstate the cash available. This may lead the business to commit to costs it cannot meet.

A realistic forecast may be uncomfortable, but it gives you time to act.

A large customer is not automatically a good customer

Once you begin measuring payment behaviour and cash exposure, you may discover that some of your “best” customers are not as valuable as they appear. A customer who buys a lot can look important because they contribute substantial revenue. But revenue is only the starting point.

The true value of the relationship also depends on:

• The gross margin earned
• The amount of management time required
• The cost of delivering the work
• The customer’s payment behaviour
• The level of credit risk
• The cash tied up
• The frequency of disputes
• The administrative burden
• The opportunity cost of serving them

Consider two customers.

Customer A

• Annual revenue: £250,000
• Gross margin: 20%
• Gross profit: £50,000
• Pays after an average of 75 days
• Frequently queries invoices
• Requires extensive supporting paperwork
• Regularly exceeds the agreed credit limit

Customer B

• Annual revenue: £150,000
• Gross margin: 30%
• Gross profit: £45,000
• Pays after an average of 14 days
• Uses a simple ordering process
• Rarely disputes an invoice
• Requires little credit-control time

Customer A produces £100,000 more revenue and £5,000 more gross profit. At first glance, Customer A appears to be the more valuable account.

But that conclusion changes when we consider the cash and effort required.

Customer A ties up substantially more working capital, creates more administration, carries greater bad-debt exposure and consumes more management time. If the business borrows money to finance the account, the interest and fees may eliminate the additional £5,000 of gross profit. Customer B may therefore provide the better return, despite generating far less revenue.

Some customers consume cash as they grow

A slowly paying customer can become more dangerous as the relationship expands. Suppose a customer grows from £10,000 to £30,000 of monthly purchases while continuing to pay after 75 days.

The increase looks positive in the sales report. But the amount of cash tied up may rise rapidly because the business must finance several months of higher activity.

If the customer is also receiving a low price because of their volume, the supplier may be earning a thinner margin while taking a larger financial risk.

The business owner can become trapped by the size of the account. Losing it would hurt turnover, but keeping it places increasing pressure on cash.

This is why customer concentration and credit exposure should be monitored as part of growth.

Calculate customer value after the hidden costs

I would review important customers using a broader commercial picture.

Start with the gross profit, then consider:

• Finance costs attributable to the cash tied up
• Extra administration and reporting
• Credit-control time
• Discounts and rebates
• Rework and service issues
• The cost of handling disputes
• Bad-debt risk
• Management attention
• Capacity that could have been used elsewhere

This does not need to become a perfect accounting exercise. The purpose is to challenge the assumption that the largest customer must also be the best customer.

A customer can be profitable in the accounts and still be poor commercially.

Improve the customer, not just the payment term

Discovering that a customer is demanding does not mean the relationship must end.

It may be possible to improve it.

You could:

• Renegotiate the price
• Introduce a deposit
• Shorten the payment period
• Move to stage payments
• Collect regular fees by Direct Debit
• Reduce the credit limit
• Simplify the service
• Charge separately for additional work
• Tighten the process for approving variations
• Stop work when invoices become overdue

The right change depends on what is making the customer unattractive. If the margin is too low, improve the price. If the administration is excessive, simplify or charge for it. If too much cash is tied up, change the payment structure.

Do not assume that slow payment is an unavoidable feature of the relationship.

Measure the quality of revenue

Turnover tells you how much you have sold.

It does not tell you how profitable the work was, how difficult it was to deliver or how long you waited for the money.

Good revenue produces an appropriate margin, converts into cash reliably and does not expose the business to unreasonable risk. That is the kind of growth worth pursuing.

So improve your payment process: take deposits, invoice quickly, use stage payments, check creditworthiness, set limits and follow up consistently. Then use the information produced by that process to assess the customers themselves.

The objective is not simply to sell more.

It is to build a business with profitable customers who pay within terms, require a reasonable level of support and do not consume more cash than the relationship is worth. Revenue may tell you how big a customer is.

Cash, margin and risk tell you how good they are.

Final word: Control the Time Between Work and Cash

Payment terms are not small print. They determine who finances the transaction.

If you pay your employees, suppliers, subcontractors and taxes before your customer pays you, your business is financing the customer. The longer you wait, the more cash you must provide, and the faster you grow, the greater that requirement becomes.

That is why I would never assess a contract by asking only: “Will this job make a profit?”

I would also ask: “How much cash will we have to commit, and how long will it be before we get it back?”

A profitable contract can still create a cash-flow problem if you must fund all the costs and wait several months to be paid. Equally, a job with a slightly lower margin may be more valuable if the customer pays a deposit and makes regular stage payments.

The good news is that payment terms can often be improved.

Invoice promptly. Ask for deposits. Get material costs paid upfront. Use stage payments. Check creditworthiness. Set sensible credit limits. Follow up before invoices become overdue—and stop extending further credit when customers do not keep their promises.

Most importantly, assess the price, payment terms and customer risk together. A contract should not only be profitable; it must also be financeable. A sale is not complete when the quotation is accepted, the work is finished or the invoice is raised.

From a cash-flow perspective, it is complete when the money reaches the bank.