For over a year I've seen an increasing trend in my business for very large companies to delay their invoice payments much longer than in the past.
While my terms have always been net 15 or net 30 days for the settlement of an invoice, my average settlement time of late is about two months long, sometimes longer.
Some of my clients are explicit in stating that they will settle accounts in 60 days, not 30. They put this language in their contract for services or ask for my signature on a form acknowledging this policy.
And I recently responded to a Request For Proposals which specified that payments under the potential contract would be net 90 days. I had to consent to those terms before being allowed to submit a proposal.
Watch the Fine Print Regarding Invoice Payments
Even agreements which call for settlement in 30 days may include fine print that exempts the company from meeting this deadline. One client, for instance, defines "30 days" as settlement in the month following the one in which the invoice was submitted. Thus, an invoice on March 3 will not be paid until some time in April. And I've noticed that they tend to make their payments at the very end of the month.
Thus, even though they ostensibly have a 30-day policy, that invoice submitted on March 3 may not be paid until April 30, making the turn-around nearly eight weeks long.
I began seeing this trend in the first quarter of 2014. At first it was a client here or there. But through the remainder of the year and into this year, I've seen invoice settlements being stretched out further and further.
An Intentional Policy
Interestingly, this is not a trend that I see with customers who own smaller businesses. It's with large professional firms and major corporations. They are apparently enhancing their own cash flow by imposing delayed payments on small vendors.
These bigger companies seem to believe that small vendors are unlikely to be "pushy" about unsettled invoices for fear of losing the account. I've even had an executive at a very large company (one I don't do business with, incidentally) acknowledge that this is precisely his company's thinking.
Cash Flow Implications for Encore Entrepreneurs
The rise of this practice creates several problems for small startups who invoice after the delivery of products or services. First, of course, it is quite disruptive to their cash flow. It's not unusual for me to run up thousands of dollars in travel expenses in support of certain clients. Going 60-90 days between the time that I incur those expenses and the time that I'm reimbursed for them puts an obvious burden on my company finances.
Second, it is becoming increasingly difficult for me to know when a company is genuinely overdue in paying their invoice. When weeks go by with no payment, I'm not sure whether the invoice was simply never received or processed. Or whether they are stringing out the settlement longer than usual.
Just last week I contacted a customer over an unpaid bill from December. They replied that they had failed to enter the invoice and asked me to resubmit. Two years ago I would have been contacting them by late January to see why the bill had not been settled.
The bottom line is that encore entrepreneurs — or anyone launching a startup, for that matter — needs to be carefully attuned to cash flow. Don't let your cash reserves get perilously low. Even though accounts receivable show that your company can anticipate considerable near-term revenue, in today's market you don't always know when those funds will materialize.