Why apply payment periods? Prepayment is much more interesting

What is your payment period? Less than 15 days? Excellent. 30, 60 or 90 days? Then you need to take action now! Because when it comes to paying their suppliers, some companies are simply incorrigible.

And governments are actually the worst offenders in the Netherlands. What would it be like if you never had to worry again about payment periods, credit management and the pre-financing of people and resources? The solution is dead simple: prepayment. 

Credit management and direct debit

Every organization needs to have sufficient cash to guarantee its survival. Even though your turnover and orders are growing at an explosive pace, you’ll still run into problems when the cash dries up. You still have to pay for the salaries, the rent, and raw materials, after all.

That is why good cash flow management is crucial. One way of doing this is with active credit management. It’s just one way of keeping your organization fit and fighting. But why not go one step further? Have your customers pay ahead. Then you don’t have to worry about credit management at all. 

Prepayment is not such a crazy idea

Many people think prepayment is just not done. It’s not customer-friendly, may chase customers away, customers don’t accept this… But the opposite is true. This is typically a case of “We’ve always done it like this, so why do it any other way?”. In reality, it’s not such a crazy idea to have your customers pay ahead. 

Supermarkets do it, insurers too

There are plenty of examples of prepayment in daily life. What would the cashier at the supermarket say if you suddenly said that you’ll be back in 30 days to pay for your purchases?

And what about the payment of your mortgage, rent, and health insurance? In all likelihood, you also pay for them by direct debit. This is absolutely normal, whether you’re talking about a product or service. 

A self-employed trainer at Kenneth Smit recently said that he always invoices his training sessions long before they take place. His reasoning? “Now that my customers prepay their training, the number of cancellations or postponements has dropped significantly. The customer has already paid for the service. I don’t mind when they postpone, because the money’s already in my account.” 

Software companies are increasingly switching to prepayment. The pre-financing of hosting and support is now a thing of the past. 

How to enforce prepayment? 

If you acquire a new customer, you can add prepayment to the contract terms from the outset. Make sure to adapt your terms and conditions, so they clearly and unambiguously explain how it works and what the rules are. 

It’s not very customer-friendly to unilaterally switch to prepayment without informing your customer in a detailed and timely manner. The first business day of the new year is a good opportunity to get started.

You can warn customers about this change in October and/or mention the new approach during a meeting. Then send a reminder in December so your customers can prepare for the change. You can even consider a goodwill gesture, such as not applying indexation for a given period, for a year for example. 

This is also a good opportunity to examine how valuable your customer is. Is the customer value low, meaning you wouldn’t mind if you lost this customer?

Then switch to prepayment immediately. It’s worth your while to develop a smart approach for strategic customers or development customers. Have the guts! Tackle this head on. Get it over and done with it, so you can move on. You’ll sleep much easier.