Definition: To invoice customers for payment
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.