How to Setup and Agree Payment Terms with Your Customers in Four Steps

Cashflow is essential to being able to operate any business. Cash gives you the ability to pay your staff and Sub Contractors, pay for materials and equipment and also pay yourself. In this article we will explore how to set up a payment process that works for you as well as your Customer.

Successfully setting up a system that works for your business involves having a process that can be clearly shown to your Client, with a brief explanation for each step as to why now is the right time for the Client to pay the business that amount of money.

By creating trust early on in the sales process and demonstrating that your business is the right choice for the Customer will make this step much easier. With any interaction with a Customer it is important to manage expectations. In the context of setting up a payment plan this means clearly communicating to the Customer when and how much is due and at what stage of the project. A Customer should never feel surprised that they’ve received an invoice or with the value that’s due.

Deciding on what percentage will be charged at each stage can be difficult to decide on. We’ve outlined one way that might work for you:

  1. Deposit – 25%
  2. Pre-Procurement – 55%
  3. Pre-Delivery – 12.5%
  4. Completion & Handover – 7.5%

Throughout the blog we’ll be exploring what you should use each stage of the funds for, how you could show this on your P&L, what you shouldn’t do with it and what should be done before the next request for payment is sent.

1. Deposits

Depending on the urgency or the immediate desire for the works to be completed, this can either be one of the easiest or one of the hardest payments to secure. If you’ve followed your sales process successfully, guided your Client to the option that is right for them and demonstrated why your Company is the right choice then the settlement of the deposit invoice comes down to timing. Timing is key for both parties. During your questions you would have established when the Client would like the project delivered by. If the agreed delivery date is imminent and time is tight then securing the funds and signing on the line should just be a formality. If the date for delivery is sometime away, requesting the deposit is the ideal way to lock the dates in the diary, ensuring that the Company has adequate time and resource to design, plan and execute the project.

Ideally the deposit payment for the cinema should be accrued to the period of time that the initial work is carried out or split across several months. By doing this your P&L will look much more consistent and theoretically should help to manage your cash over longer periods of time. Next you’ll need to decide what work is included in this payment. This could be design of the room, project planning, further consultation with the Client and any other members of the project team. Other areas of work included could also include first fix of cabling, supply of cabling and any other material associated with first fix that is your responsibility to supply.

At this stage (unless time is tight, and then you might want to consider lumping the Deposit and Pre-Procurement payments together) funds should not be used for procurement of equipment. Firstly, the supplier might be keen to have it delivered out to you sooner than you need, secondly, it is unlikely that the payment you’ve received so far will cover the cost of the equipment.

2. Pre-Procurement

It’s a great idea to having some form of sign off at the first stage to demonstrate that you’ve done what was agreed with the Client initially and remind them of the finished product that you’re going to deliver.

The Pre-Procurement payment does exactly what it says. Its money that comes in in advance of ordering any bigger ticket items. Think projectors, speakers, screens and room furnishings. It is likely that you’ll have already had conversations with your suppliers regarding this kit prior to this point to help you put your procurement schedule together. This schedule would also help you decide whether or not Deposit and Pre-Procurement should be invoiced as one at the start of the project. You’ll want to explain to your Client what this money is going to be used for, and where the equipment will be stored once ordered. This could either be in your storage facility, left with the supplier or even delivered to a nominated place by the Client. Either their home or another secure storage area. Cross check with your designer (even if that’s you!) that there is nothing that hasn’t been accounted for in the design that needs to be ordered. Sometimes its lots of small things that can add up that strip out the profit from an otherwise well executed job! If you notice that there is, build this into your systems and processes so the next project you quote doesn’t suffer from the same issue.

Paying Suppliers up front could secure you a better price or deal. If possible, switch to paying directly rather than through monthly accounts. As far as your P&L goes, the payment should be accrued to the month that the payment was made for the equipment – avoiding showing massive profits one month and crashing the next!

3. Pre-Delivery

At this stage you’ll have agreed with your Client where and when the equipment will be delivered to, have completed first and second fix, and communicated with the Client regarding expectations of what you’ll be delivering and by when. It is important not to over promise, but to be confident in what you’re delivering and by when. If you can exceed the Client’s expectations – go for it! It’s a great way of potentially building a relationship whereby they’ll be happy to refer you to friends and family for outstanding service. This Pre-Delivery Payment and Final Balance Payment should be viewed as the actual net profit of the job. The previous 80% should have covered all of your cost of sales, including Labour.

As for how to show it on your P&L it can be booked at the month it comes in. there shouldn’t be any more costs associated with the project of any significance that need to be considered.

At this stage it’s all down to you and your team to quickly and efficiently install the cinema or media room to the highest possible standard you can. This stage isn’t just about the installation, it’s about getting ready for the hand over. Thoroughly testing the system and second guessing anything extra that you can do that would suit the Client’s requirements. Your aiming for a perfect 10/10 handover. It’s not just about finishing the room, its about planning how you want the handover meeting to go. Figuring out what you can do to go the extra mile to really impress the Client and ensure that getting the last 7.5% of the balance is as easy as possible.

4. Final Balance

The final balance payment comes once the project is complete and handed over to the Client. You’ll want to make the handover meeting as smooth and as much fun as possible for the Client. Leaving them with the cinema for an amount of time in order to get some feedback on any tweaks they may want made is also a great way to stay in touch with them. Payment for the balance should be due on completion, and if there are any snags this stage can become painful. Especially if the snags aren’t quickly resolved. It is not uncommon for Clients to just not want to pay if this stage drags on for too long. It’s critical to close down any issues quickly and swiftly to ensure that you’re comfortable issuing out your final invoice and also following up for payment once its due, if it’s not been paid.

As per the previous stage, the Final Balance should be net profit, so can be booked to the month it was invoiced on the P&L, as there shouldn’t be any other costs, so no need to accrue the payment over months.

Summary

Each stage shows that clearly setting out expectations, doing what you said you would and what was agreed helps keep the project running smoothly and the cash coming in on time. Ultimately building trust and having a great relationship with the Client helps get you paid on time too, as they’ll genuinely want to help you do the best job you can, as it benefits them.

Problems can occur when communication hasn’t been clear, specifics and details not properly set out and also stuff just not getting done. Looking after your Clients all the way through the journey is really important, even though the project might be won, marketing to them is still relevant, although the context changes. They’ll want to see something different from you. Probably more care and thought toward them and their project rather than helping them to make a choice. It is still important to show them that you were, and still are the right Company to choose.