Due date, a key aspect of receivables collection

The due date, or payment term, is an essential criterion in any official document or legal instrument. It becomes even more important, even critical, when that document deals with money you need to collect.

An invoice is one of the key documents that can include a due date, especially since it creates a legal obligation for the customer to pay the seller for delivered products or provided services. Even so, a due date cannot be open-ended, because that can lead to complex disputes later on or affect the seller's cash flow.

What is the due date?

The due date refers to the date, whether it is stated on the invoice or not, by which the debtor must pay the invoice. Any delay beyond the due date leads to late payment penalties, depending on what was previously agreed in the contract.

How important is the due date in receivables management?

Businesses can survive without making a profit, but not without cash flow. For a business to succeed, it needs effective receivables management and strong financial management, especially when it comes to cash flow. Cash flow management also means monitoring, controlling, making decisions about, and using the company's finances intelligently. Despite how important financial management is, many entrepreneurs still lose sight of cash flow.

After you launch a business, the hardest part is sales. Once you close the sale, managing receivables becomes difficult, specifically collecting what customers owe on time. Collection depends heavily on the due date you set.

The due date is set on an invoice for several reasons. First, not every customer can pay right away, so companies give them the option to pay later. Although the payment term depends on the invoice amount and the company's line of business, most invoices have a due date of no more than 30 days.

If you have a good business relationship with your customers or set special terms for selling products or providing services, you can:

• Keep your customer base and even attract new customers;
• Negotiate longer payment terms for higher-value invoices;
• Offer customers discounts if they pay before the due date.

That is why you need to set a final payment date and state it clearly on the invoice.

What are the benefits of including a due date on an invoice?

The benefits of including a due date on an invoice are:

• It obliges the customer to pay on time;
• The seller can use the expected collection date when planning future projects;
• It gives the company the right to send repeated reminders to customers about paying their invoices;
• It becomes useful support in the event of disputes;
• It helps maintain healthy relationships with customers;
• It helps create accurate financial records and better planning;
• All of the above helps build a positive image for the company and its brand.

How does leaving out or missing the due date affect cash flow?

Companies depend on a healthy balance between collections and outgoing payments to maintain healthy cash flow. Still, that balance is not guaranteed, especially because running a business requires regular payments, such as wages, raw materials, supplies, taxes, and more. Receivables that are not collected on time create an imbalance in cash flow.

Studies show that payments that go past the due date affect:

• liquidity;
• business growth;
• hiring new employees;
• as well as the ability to innovate for 74% of companies in Romania.

What is more, the pandemic has made the problem even more severe, with repercussions for the survival of the business.

What can you do about it?

To solve cash flow fluctuations, companies need to manage collections by setting the due date. When invoice payments are late, cash flow turns negative, and companies need to find sources of financing to keep operating. One solution is factoring. It not only helps cover immediate operating costs, but also keeps the business running so you can continue to perform and grow for the long term. Factoring means selling the invoice to a factor, a non-bank financial institution, which gives you access to cash within 24 hours of acceptance. For example, for a 2,000 € invoice with a 30-day due date, Instant Factoring offers you 1,800 €.

If you do not include a due date on the invoices you issue, customers will delay payment even more or may not pay at all. That is why you should always state the due date and set payment terms from the start.

The invoice due date is often missed, or payment comes extremely slowly, especially for small companies with modest annual turnover growth. Even overdue payments have to be tracked, which creates an additional administrative burden for the company.

Failing to respect the due date on invoices creates a domino effect, which leads to late payments. These then affect operations and other key areas, destabilizing the smooth running of the business.

In addition, cash flow is extremely important, especially in tough months when cash is low or when a crisis hits. Late payments can quickly drive a business toward insolvency and even bankruptcy. Covering debts caused by the domino effect consumes resources:

• your own resources, if available, delaying investments or other development projects;
• external financing sources (factoring, bank loans, and more).

Conclusions

The due date is a major part of receivables management. In the end, it influences cash flow, the pace of the company's progress, and the brand's image. That is why you need to set the due date and payment terms clearly from the start for the products you deliver and/or the services you provide.

If you're dealing with slow receivables collection or customers who frequently miss the due date, turn to Instant Factoring now. Our specialists help you quickly turn the invoices you issue to customers into the cash you need to improve your company's financial position.