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Home » Run Your Business

Invoice Payment terms explained

Invoice

Invoice payment terms (sometimes written as terms of payment) are the payment conditions in which businesses conduct business with one another.

Typically, these terms relate to the amount of time you have to pay the invoice before it’s due.

However, invoice payment terms often used are terms which are often unfamiliar, confusing and sometimes ambiguous.

To avoid late payment charges on the money you owe suppliers, or ensure you collect the money that’s owed to you on time, here’s the most common invoice payment terms explained:

Invoice Payment Terms Explained

Net (sometimes written as Nett)

The term net means after all deductions. For example; In the sale of an asset net is simply the selling price less the cost of buying or acquiring it.

Therefore the net price on the invoice is the simply the sale price to you, the customer, less any or discounts.

Here are the most common invoice payment terms and what they mean:

When it comes to payment terms, Net, ususally followed by a Number, refers to the number of days – sometimes it will say Net and just a number and sometimes it will have the word days added e.g.: Net 7 or Net 7 days. This means the invoice is due for payment within seven days.

Other common net payment terms:

Net 7 – invoice due 7 days after the date of invoice
Net 15 – invoice June 15 days after the date of invoice
Net 30 – invoice due 30 days after the date of invoice
Net 60 – invoice due 60 days after the date of invoice

Net Monthly

Net monthly means that the invoice is due for payment at the end of the month following the date of invoice – for example an invoice dated 20 July with payment terms net monthly, will be due for payment by 31 August.

EOM – end of the month – payment due by the last day of the month

COD – cash on delivery means that payment is due at the same time the goods or services are delivered – (ie payment is due on delivery)

CIA – cash in advance

PIA – payment in advance

 

Early Payment Discounts

Sometimes, suppliers offer a discount to encourage early payment and settlement of an the invoice. These are usually of the form of x% discount if paid within x days. (For example 2% discount if paid within 10 days of the date of invoice)

These discounts are sometimes written in the form 2/10, net 30 or more explicitly 2% if paid within 10 days, otherwise net 30. 

Should I take an early payment discount?

Yes! You should always take an early payment discount as long as you have the cashflow yourself to pay it.

Let me show you the cost of not taking it with the following calculation expaination:

Step 1 Multiply the discount by the amount owed on the invoice

Using the above example of 2/10, net 30 and an invoice value of $1,000 before shipping and sales tax.

Multiply the percent discount by the amount owed on the invoice 

$1,000 x 0.02 = $20

(The invoice should never apply to the sales tax, or the shipping and handling, if it does, then the discount is even bigger)

So by offering a 2% discount you or the supplier is losing $20

 

Step 2 Subtract the discount from the amount owed

 

In this case it’s $1000 – 20 = $980

This is the net amount owed with the discount or the amount of revenue you will receive/the supplier will be paid.

Step 3 Annualising the cost of the discount

Again, using the above example, with a 2% discount for 10 days, means that you are paying 20 days early.

You can calculte what the 2% would be worth on an annual basis.

Discount percentage ÷ (full payment days – discount days)

0.02 ÷ 20 = 0.001 per day

Multiply the discount by the number of days in a year (i.e. 365)

0.001 x 365 = 0.365

Then multiply by 100 to convert to a percentage annual rate of interest.

= 36.5%

Step 4 Take the Discount

Now given that you are in effect getting a 36.5% discount, you should take the early payment discount if you can afford to do so.

If you’re a supplier offering discounts, then you consider alternatives to early payment discounts.

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