Character & Soul, Entrepreneurship, Money, Self-Improvement

What Every Entrepreneur Needs To Know: Terms Of Payment – Deborah Tan

"Dear Sir, I'm writing to inform you that our invoice dated ...

“Dear Sir, I’m writing to inform you that our invoice dated …

I bet I made a number of enemies last week.

You see, while at home nursing a bad bout of bronchitis, I decided to take the time to get some financial housecleaning done for the company. While going through our invoices and checking up with my business partners on stuff like outstanding payments, I found out that we were owed quite a fair bit of money.

Some of my friends have told me this is something every freelancer has to put up with. One of my friends – I heard – has been owed money since last year and is now unable to get that money paid out to him because the “budget” has been “used up”. Some friends tell me I’m crazy for sending out Letters Of Demand to some of my clients because I shouldn’t be “ruining relationships” so early in my business.

Well, here’s my stand on the nature of business:

You required a service. You came to me. I delivered it. I think it is fair for me to expect to be paid on time for it.

Simple and straightforward. But, silly me, it seems businesses aren’t run like this at all.

Before I proceed, allow me to present this scenario:

I needed a drink and so I walked into a little cafe. The waitress asked me what I would like and I told her I would like to have a Coke. She said, “We have many different types of Coke here – regular, Coke Light, Coke Zero, Coke with Lime, Vanilla Coke – which Coke do you want?” 

“I want a regular Coke, please,” I replied. Off she went to the bar. Within 5 minutes, she was back with a refreshing glass of Coke. It wasn’t flat, it was icy-cold, the glass was chilled, and she even took the trouble to throw in a slice of lemon for me. She was polite, professional and I had a very enjoyable time drinking this glass of Coke.

When I was done and ready to go, she came up to the table with the bill. I took a look at it and asked, “Thank you for the very nice glass of Coke. My terms of payment are 30 days. Can I send you a cheque 30 days from today?”

As you can see, it is pretty ridiculous and if you were the waitress (or even the restaurant owner), I’m sure you would call the police immediately.

mortgage_debt_collectionBut the world of business functions exactly like the scenario above. “Terms of payment” is something business owners throw at each other on a daily basis. When I send a client an invoice, I have to put on the invoice that my terms of payment are 30 days from the date of invoice. What this means is that if I issued an invoice on 1 November, I should be paid within 30 days from that date. And, if I don’t see my money before 1 December, I have the right to take action against the client.

Why Bother With “Terms Of Payment”?
Well, first of all, business people deal with amounts larger than the price of a glass of Coke. If they are expected to pay every vendor they hire on the spot, it could lead to liquidity problems. Fair enough. So “terms of payment” is instituted so that business people can have some lead-time to prepare the amount of money needed to pay off vendors and service-providers.

What Are The Usual “Terms Of Payment”?
Most businesses adopt a 30-day terms of payment. This means the customer has 30 days to pay up. Before any service provider is engaged by a business, usually both parties would agree on the “terms of payment”. We have a client whose terms of payment are 60 days. Before she engaged us to help with the copywriting of a project, she was very clear with that and we accepted the job on her company’s terms. So, when we issued her the invoice after the job was completed, instead of “30 days”, we stated “60 days” on our invoice.

Also, when an invoice says, “Terms of payment: 30 days from date of invoice” … it doesn’t mean you send our invoice through to Accounts on the 30th day. It means you have this time to put that invoice through to Accounts so that your colleagues in that department can get our money to us by the 30th day.

Whose terms of payment should businesses follow?
When nothing has been said about whose terms of payment should take precedent, the service provider’s terms of payment should then be followed.

A while ago, we emailed a company (let’s call it Company F) about a payment that has been owed to us since July. The manager apologised for the delay but promised she would pay us by end of October. End of October came and still we did not see our cheque. When we emailed her again, she said, “Our terms of payment are 30 days. So when I said ‘end of October’, I meant 30 days from the end of October.”

She was wrong. First, it should not be her terms of payment we should be following. Second, since we already stated that our terms of payment are 30 days from the date of invoice, she should have rightfully paid us by August. In short, Company F owed us money for close to 120 days.

In another instance, we had agreed to take on a job where the terms of payment were 30 days after the magazine hits the newsstand. The license to run this magazine was given, later on, to another company. When we wrote to the editor who commissioned us for the outstanding payment, we were told that the new company’s terms of payment are now 60 days after the magazine hits the newsstand. Should we follow the new company’s rule? The answer is a No. We took on the job and did it based on the first agreement. As such we should be paid according to what was originally agreed upon.

Now you may think that I’m being pedantic and inflexible here. After all, surely I’m not the only business owner who is owed money. But, I prefer to look at this issue from the angle of best practices.

You said your job was urgent, so can we now say our bills are in urgent need of payment?

You said your job was urgent, so can we now say our bills are in urgent need of payment?

1. Why Delay Payment At All?
A service was needed. My company delivered what you needed on time and according to the brief. If service providers are expected to deliver on time, why is it that we cannot expect to be paid on time?

Many salaried employees think they are doing their companies a favour by withholding invoices and delaying payments. I would just like everyone who draws a regular paycheque to know this: While you can expect a fixed sum of money to be deposited into your bank account every month, a business owner’s income is dependent on the cheques he gets in the mail from his clients. Every delay, every invoice not paid ON TIME means he has to dip into his personal savings to pay his bills.

You may think, “Oh, then when the money comes, he can just put it back?” No. Unfortunately, it really doesn’t work this way. A guaranteed salary ensures that I can schedule my payments in a predictable fashion. If money is put into my account on an as-and-when basis, I’m forced to make ends meet. And even when a payment finally comes through, the accumulated dent this has made on my personal savings cannot be repaired because I now have yet more bills to pay.

2. Why Make A Service Provider Beg Or Chase For His Money?
The thing about chasing for payment is that we often feel frustrated and yet we are expected to NOT show it. Many clients would think it rude for a service provider to call and chase because we should be “grateful” that we got their business in the first place.

This happened to me last week. Frustrated that we were repeatedly told that “the cheque is on its way” (when it became obvious that Singpost would not be so inefficient as to take 2 weeks to deliver a mail), I decided to write to the CEO of Company F. Five minutes after the mail was sent, the finance person emailed to say we can pick up our cheque at the office the next day. When my business partners showed up, they were told that I shouldn’t have sent the CEO such a “rude” email.

Why not? Considering that the sum of money involved was less than $500, I think it was ruder of the company to have had taken more than 100 days to give us the cheque. Considering that we had had to put up with so many “the cheque is on its way” even when it became clear that it wasn’t, I think it was ruder of the company to be angry with me for asking for what is rightfully our money. A job was done, an invoice was issued, you ignored us until a Letter Of Demand had to be sent. And yet, we still had to “chase” you for a good two months before we finally saw our money. Who’s the rude one here?

3. Should Small Companies Just Learn To Put Up With It?   
What gets to me most is when people tell me I should grin and bear it.

At the end of the day, we are running a business that provides a professional service. We may not be a listed company, and we may not be a company that employs hundreds of people. But we put in effort and time into each and every job we take on, regardless of the client’s name, job position, or company. That’s because we respect what you do, and in turn we hope you too respect what we do.

A small company may not have the financial might or the legal muscle to take a big corporation to court, but it doesn’t mean we should get paid only when you remember to do so, or when it suits your schedule.

Chasing for payment doesn’t make me an ungrateful business person. As the owner of a business, my duty is to ensure that my company has the liquidity it needs to continue operating. Then, I owe it to the other service providers I work with to ensure they get paid so they would continue to work with me to deliver the good work we do. To my clients, my duty to you is to make sure that whatever work you give me, I do them to the best of my abilities, with the resources you can provide.

Yes, you can take your business elsewhere because you are angry with my insistence on being treated right. But here’s what I would like you to think about: if a business person isn’t willing to fight for her own company, do you think she would care about yours, including whatever work you do with her?

About The Author: Deborah Tan is a founder of Material World. After 10 years of working in magazines Cleo and Cosmopolitan Singapore, she is now a freelance writer/editor who works on this website full-time. She likes liquid eyeliners, bright red lipsticks, tattoos, rock & roll, Mad Men, and Suits. She believes that learning to treat people right is the first step to greatness in business. Follow her on Twitter @DebTanTweets.