Understand Invoice Terms Example for Building Services

Invoice terms example for Building services

hi this is tim yoder with fit small business i've been a cpa for 25 years and today i'm going to teach you about common invoice payment terms so an invoice payment term appears on an invoice and it clearly establishes two things the first is when is that payment due and the second is there any discount for paying the invoice early so five common invoice terms you should know the first is payment in advance now here the customer is expected to pay the invoice prior to the service being provided so a common instance of this could be a construction firm requiring a 50 percent prepayment to help pay for materials prior to the job being started a second common term is due upon receipt and so here the customer is expected to pay the invoice immediately now in reality do upon receipt does not work very well at all the problem being is that companies generally don't pay bills on a daily basis so they receive the invoice they're going to put it into the approval process that could take a few days and then it'll sit there until they actually issue checks and so it's not necessarily realistic to expect a customer to pay a bill upon receipt and so what happens is they're not going to pay a bond receipt and then they're going to start to wonder well when is this bill actually due when am i going to be charged a late fee is it going to be 14 days is it going to be 30 days i don't know so and a problem with the do upon receipt payment term from the issuer standpoint is you don't know when to start collecting a late fee if you don't have a firm payment due date when should you start the late fees so do upon receipt it's just not a very effective payment term and i really advise you to stay away from it other common payment terms so net and then a number means that payment on the invoice is due in that many days so net 30 would be the invoice is due within 30 days and that time period starts from the date of the invoice to the date that the company actually receives the check so you would have 30 days from the date of the invoice to get the to get the check to the company other payment terms so something like 2 net 30 this would mean that the uh customer can take two percent off of the invoice if they pay within 10 days otherwise the entire amount is due within 30 days and you could have any combination of this so you could have a one percent 10 net 30 you could have a one percent twenty net thirty and so but this is the way you would typically format that and finally you could have a line of credit payment so in this case you're allowing the customer to uh to pay the invoice over a period of time by extending them a line of credit you would still send them an invoice when the job is completed uh showing that the charge has been made to their line of credit and then whatever the line of credit terms are would be when they have to pay you and you might collect interest on that line of credit as well so how do you choose the best invoice payment terms to include on your invoices to your customers well the first thing you need to look at is your cash flow consideration so do you have enough cash flow to provide the service that you then bill your customer for so again where we really have problems with this are generally construction companies so if you if the service is going to cost you five hundred thousand dollars in materials then maybe you need to have the customer pay at least a big chunk of that prior to service beginning another cash flow consideration is uh what are the payment terms that your vendors extend to you so if your vendors are constantly requiring you to pay your invoices within 10 days so a net 10 payment term then it might be very hard for you to extend 30 days to your customers or a net 30 right so continually having to pay your bills in 10 days while collecting your receivables in 30 days could create some cash flow problems for your company the second consideration are industry standards and so many industries have standard payment terms that customers in that industry have become accustomed to so i highly recommend you research those and if your industries does have standard terms i would start with those payment terms and then only vary from them when you have good reason to do so okay a third consideration your customer history so not all customers have to be given the same payment terms so some long standing customers that have been very good perhaps they are offered a early payment discount or maybe they're offered a little bit longer payment period so maybe you give most customers net 30 you give this one really good customer net 60s the only thing i would warn against is make sure that you have a written policy in place as to how you determine payment terms and that you stick to that policy and that you have written proof of how you're following that policy with each customer and this is basically to avoid any claims of discrimination or being mistreated by your customers you need to have proof as to why you're providing different customers different payment terms and the final customer consideration are big customers big customers sometimes they demand certain payment terms and so especially if you're a small company and you want to do business with a big customer sometimes they'll set their own payment terms they'll say we'll accept this contract but it's going to be net 60 meaning they have 60 days to pay well maybe you generally only give your customers 30 days to pay well it's going to have to be decided whether is that customer worth giving 60 days to pay instead of 30 days and for me make sure you consider cash flow from a cash flow standpoint can i afford to provide these services to this customer if i don't get money from them for 60 days perhaps you can't in which case no matter how big the customer you simply can't do it you'll you'll run out of cash so make sure you're careful with the big customers we all love big customers it's fantastic but when they demand their own payment terms make sure that it is something you can afford from a cash flow standpoint okay and finally the size of the invoice uh the biggest consideration is here small invoices you don't want to spend all of your time chasing after small invoices so i would give them um early payment discounts perhaps you know the two percent 10 net 30 so that they have incentives to pay quickly so that you don't have a lot you don't have to spend a lot of time chasing down trying to get these customers to pay now the opposite end of that spectrum are your large invoices let's say you have a hundred thousand dollar invoice you may not wish to provide them an early payment discount because you don't want to give them that kind of discount right two percent of a hundred thousand dollars is two thousand dollars so maybe refrain from giving the early payment discounts on your big invoices and the other factor there is that big invoices are are more worth your time in chasing down payment for and you also have a lot more recourse with big invoices so generally a hundred thousand dollar invoice is probably going to be the result of a contract whereas you may not always have such a firm contract with the lower invoices the smaller invoices so you'll have a firm contract oftentimes also with the bigger ones you may have liens against whatever inventory you've sold them or liens against perhaps whatever property you've worked on or repaired so in general small invoices maybe give them an early payment discount to keep from having to spend time following up with them larger invoices maybe maybe don't give them the discount because it's a little more worthwhile going after full payment and you generally have more recourse great so the last thing i want to do today is let's look at a sample invoice from quickbooks online and see what these terms look like in real life so we can see here we have the terms of the invoice clearly stated two percent ten net thirty we know now that means that you can take two percent off of this invoice if you pay it within ten days otherwise it's due in thirty days here we have below at the bottom of the invoice here we have discount two percent six dollars so here quickbooks actually shows the customer what the discount will be if they pay within 10 days now that's an option you can turn on and off sometimes vendors will show that six percent invoice sometimes they won't i'm sorry two percent invoice in this case okay and the other thing so we have net 30 that means a 30-day payment period and we can see that's reflected in the due date so the date of the invoice is april 12th they have until may 12th to get you the check with or the invoice will become overdue now with the payment terms you wouldn't have to necessarily include a due date right by looking at net 30 they know when the due date is you wouldn't have to separately state it so it doesn't hurt to have it on there separately if you want just one or the other i would say when you're billing individuals use the due date because they're not going to be familiar necessarily with payment terms if you're billing a business go ahead and use the payment terms instead of the due date because they should be familiar with what they mean but certainly doesn't hurt anything to include both of them as quickbooks has done here for paul's plumbing great so what's next well if you think you might like quickbooks online for your invoicing you can get started there's a link below this video for a free 30-day trial or 50 off for three months if you want to learn a little bit more about invoicing with quickbooks fit small business has 46 free quickbooks online tutorials they're in both written form and they have videos embedded so whichever you prefer and i do have a link to those 46 free tutorials in the description below i hope today lesson on invoice terms are is useful and this is tim yoder with fit small business