Having the right payment provisions will help your company hold on to the profits it earns. One of the smartest things you can do is try to bill before delivery. There are three ways you can issue an invoice before you ship the final product:
1. Milestone billing is fairly common where heavy, up-front investment is required for a new product or job. In this case, the completion of a certain event or milestone (such as placing a subcontract, passing a critical design review, completing a set of tests or receiving a large amount of material) is given a billing value. This authorizes you to issue an invoice when the event occurs--often long before completion of a deliverable item.
2. Progress billing is fairly common in the defense and aerospace industries and allows you to invoice costs, as incurred, on a routine, bimonthly or monthly basis. This way, your customer finances your inventory, thereby reducing your need for working capital. In effect, your costs are recovered before you deliver anything, even though your customer has a lien against the inventory.
3. Sub-line-item billing is fairly common in the construction industry as it recognizes the times when an entire item can't be completed but main elements of it are. Examples of sub-items are foundation, plumbing, framing and roofing. The advantage here is that as each major supplement is completed, an invoice can be issued, thus strengthening your cash flow.
Define when you'll be paid by setting payment dates. Why take an order if you don't make an effort to assure payment? Bear in mind that extending credit to customers has a real cost to you, and be sure your contract (and price) provides for that cost. Sales to poor credit risks should be COD. Discounts can be offered but tied to the shipment date, customer acceptance date, your invoice date or a calendar date. Once the payment date is established in your contract (purchase order, etc.), you have a legally enforceable document.
Enforcing penalties for late payment helps you get timely payment. What happens today if a customer pays you 30 days late? Do you collect interest or are you just happy to get paid? If your terms and conditions require a penalty for late payment, you improve your chances for timely payment--and, based upon the terms of your contract, you have recourse for legal action should you need it.