Sales and cash: how payment terms change who you should sell to

You can see a slow payer in your own ledger and still chase the next order from the same kind of buyer. Each defence sounds reasonable alone, so this post answers five of them in turn. The test is one line. A sale is worth what it leaves in the bank after the waiting. Score a buyer on how long they really take, what the wait costs against your margin, and whether your cash can carry it.

"But it is a famous name"

A famous buyer tells you about their reputation, not about their bills. Some large accounts departments pay on fixed days in the month, release payment only after a goods-received entry, and send disputed bills to the back of a queue. None of that is a reason to refuse. All of it is a reason to ask before you quote.

Put four plain questions to the buyer on a first or second call. Who approves supplier bills, and is that person the one choosing you? Is the due period counted from invoice, delivery or acceptance? Fixed dates or as bills arrive? And is an advance usual on an order like this one? A buyer with tidy accounts answers each in a sentence. One who says "that is decided later" four times may be telling you something. Ask two of their other suppliers how many days they actually take; that beats the figure on a form.

"The margin is good, so the wait is fine"

Margin is measured on the invoice and cash on the day the money arrives. Between the two someone pays for the wait: your bank limit, your own savings, or the supplier who is waiting on you. The cost has a simple shape.

Cost of the wait = invoice value x your yearly borrowing rate x days / 365

Illustrative: 2,40,000 invoice, 14% a year, paid after 90 days
  2,40,000 x 0.14 x 90 / 365  =  about 8,300
Compare with the margin on that job (say 20,000 illustrative):
  the wait takes about two-fifths of it, before any chasing time

Use your own rate, and count the days from when you pay for the material, not from the invoice date. If you buy raw stock first, the wait is longer than the credit term suggests. A ninety-day buyer on a thin job can turn out to be your least profitable customer, however pleasant the order looked.

"If I raise it, they will go elsewhere"

Some will, and the loss may be smaller than it feels. Write two prices side by side on the quotation: one for advance or payment on delivery, and one for payment after a stated number of days, counted from a stated date. The gap between them should cover your cost of waiting. Some buyers will take the earlier date. Those who want the later one have been told what it costs, before signing anything.

If a buyer insists on a long term, ask for something back: a larger order, a longer contract or a part advance. If it is a reference account you truly want, approve the longer wait as a marketing cost. Say so on the file. What a discount for early payment means for your tax and accounts is a question for your own accountant. Our note on setting credit terms covers limits and stop rules after the sale is agreed, and the deal desk note covers who may approve an exception.

"I can always chase later"

Chasing costs hours, and the hours come from the same people who sell. It also drains goodwill, because the seller who closed the order becomes the person ringing about the money. A seller paid only on orders won has little reason to care. Give salespeople a written range of terms they may offer, and send anything beyond it to one named approver. Then nobody agrees to ninety days just to close. Moving the seller's target from value of orders won to value collected gives them a reason to care about the wait.

"Every buyer in this trade pays late"

That may be true of the trade, and untrue of your own invoices. Sort a year of your invoices by days to payment before accepting the claim. The sort can show a different problem: bills going to the wrong person, or arriving without the delivery proof or order number the buyer's accounts team needs. A late payment that is really a rejected document is fixable on your side.

A Sanganer print house sorts its buyers

Imagine, as an invented example, a hand-block print house in Sanganer selling cotton yardage to three kinds of buyer: boutique chains, garment export houses in Jaipur, and walk-in designers. The owner's selling time followed order size, so most of it went to the export houses.

Worried about cash, she first asked every export house for shorter terms. Two refused politely and gave their next order to a rival. One mentioned that her invoices went to the merchandiser and not to accounts, where they sat.

She sorted the year's invoices instead. Designers paid at once, and boutique chains within a fortnight or so. The export houses paid late, and one paid in parts after a dispute about shade. She kept them. Her invoices now go to accounts with the order number and a shade approval attached. Bulk orders carry a part advance, since dye and cloth are bought before printing, and the quotation shows both prices. One export house still pays late. The part advance cost her one small order. Some of her selling time moved to boutiques that paid steadily.

When a slow payer is still the right customer

Three things must hold together: the margin covers the wait with room to spare, your cash can carry it without delaying your own suppliers or wages, and the buyer gives you something hard to find elsewhere, such as a reference, a volume that lowers your unit cost or a market you want to enter. If one is missing, price the wait higher or decline. A buyer who pays in parts or disputes after delivery belongs in a different box: settle the open bills before taking new orders.

Add one column to your enquiry sheet

Add a column for expected days to pay, with the source of the guess, and fill in the real number after each order. Use the hardest buyer you have today as the first row, for example "Jaipur export house, expected 60, paid 95". After a few orders it shows which kinds of buyer to look for. The payment questions belong in your first-call script; qualifying on the first call holds the others, and choosing which buyers to chase is sales work. To set up lead qualification for your own firm, tell us what you need.