What are payment terms?

Payment terms specify when the client's payment is due relative to the invoice date, commonly expressed as Net-15, Net-30, or Net-45 (payment due 15, 30, or 45 days after the invoice). Terms significantly impact cash flow: every 15 days of extended terms increases working capital requirements by roughly half a month's revenue. For professional service firms, standard terms range from Net-15 to Net-45, with some enterprise clients demanding Net-60 or longer.

Key characteristics

• Common terms: Net-15, Net-30, Net-45, Net-60

• Shorter terms improve cash flow but may face client pushback

• Enterprise clients often demand extended terms

• Should be negotiated as part of contract discussions

• Early payment discounts (2/10 Net-30) can accelerate collection

• Terms should be enforced through follow-up and consequences

Why it matters for professional service firms

Payment terms are negotiable and directly impact cash flow. A firm with $300K monthly revenue moving from Net-45 to Net-30 reduces average AR by $150K, immediately improving cash position. Yet many firms accept whatever terms clients propose without negotiation. Payment terms should be a standard contract discussion: start with your preferred terms, understand that enterprise clients may require longer terms, but push back on excessive requests. Firms that actively manage payment terms report 15-25% lower AR balances than those accepting client defaults.

Real-world example

Chris's technology consulting firm had evolved to Net-45 terms for most clients because 'that's what everyone asked for.' Analysis showed this created $340K in AR, which would be $170K lower under Net-30 terms. New policy: standard terms are Net-30, large enterprises may request Net-45 with CFO approval, Net-60+ requires executive sponsor approval and justification. Implementation: new clients received Net-30 terms; existing clients were gradually transitioned at contract renewals. After 18 months, average terms improved to Net-33, reducing AR by $120K. The working capital improvement funded a new hire without requiring additional financing.