Payment Terms
Conditions under which a seller expects payment, such as Net 15, Net 30, or Net 60, directly affecting cash collection and disbursement timing.
What is Payment Terms?
Payment terms define when payment is due after an invoice is issued. Common terms include Net 15 (payment due in 15 days), Net 30, Net 45, Net 60, and Due on Receipt. Terms may also include early payment discounts such as 2/10 Net 30, meaning a 2% discount if paid within 10 days, otherwise due in 30.
Payment terms directly affect cash flow in two directions. Terms you offer customers determine how quickly revenue converts to cash. Longer customer terms slow collection. Terms suppliers offer you determine how long you retain cash before paying. Longer supplier terms improve your cash position.
The ideal scenario: collect from customers faster than you pay suppliers. A business collecting on Net 15 and paying on Net 45 has a 30-day cash advantage on every transaction. The reverse creates a cash gap that must be funded from reserves or credit. Payment terms interact with collection speed and accounts payable.
Why it matters
Payment terms are one of the most direct levers for cash flow management. Negotiating one supplier from Net 30 to Net 60 can shift significant cash timing without changing revenue or costs.
Example
Customer terms: Net 30 (but pays in 42 days actual). Supplier terms: Net 45. On a $50K transaction, you pay the supplier in 45 days but collect from the customer in 42 days. A 3-day advantage.
How RunwayCal helps
RunwayCal models payment terms per client and vendor, timing cash inflows and outflows based on actual terms rather than averages.
Common mistakes
- 1Assuming customers pay within stated terms rather than tracking actual speed
- 2Not negotiating supplier terms to align with customer collection timing
- 3Ignoring payment terms when forecasting cash position
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Model payment terms in cash forecasts
RunwayCal times cash inflows and outflows based on actual client and vendor payment terms.
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