What is Time To Payment?

Time to payment is the duration between when a business invoices a customer and when the customer makes the payment for the goods or services provided. It’s reported as an average number of days to demonstrate the efficiency of a company’s accounts receivable process.

Time to payment is particularly important in B2B payments, where high-value contracts with multiple stakeholders and levels of approval lead to longer payment cycles. In your typical B2C transaction, the payment happens at the point of sale, so there’s no reason to track it.

But, for B2B companies, tracking this metric is how you evaluate and optimize your invoicing and accounts receivable collections processes. The faster you can get paid, the more predictable your cash flow is and the lower your chances of delinquency.

Synonyms

• Average Payment Period
• Days to Collect Payment
• Days Sales Outstanding (DSO)

Why Time To Payment Matters

Now we know shortening your time to payment is one of the key ways you can optimize your cash flow. But why does this matter so much? And why should you monitor this metric closely?

Let’s break it down into three key reasons:

Improved financial health

The faster you receive payments, the stronger your financial position becomes. This is because a shorter time to payment means you have cash on hand to cover expenses, invest in growth opportunities, and reduce any outstanding debt. When you have the cash you’ve earned on hand to cover expenses, you’re less dependent on credit.

Not to mention, the increase in predictability gives you the power to plan for future expenses, investments, and growth strategies. And late payments can easily turn into bad debt, which not only means you’ve lost money from delinquent customers, but you’ve also negated all the efforts that went into acquiring those customers.

Increased efficiency

When time to payment is low, you’re reducing the amount of time between entering into a contract and beginning a service or delivering goods. If customers take too long to pay you, you’re wasting more time on accounts receivable management and collections, and projects don’t get started as quickly. Both of these affect your company’s productivity and profitability.

It’s also much easier to account for payments when time to payment is low. Inflated numbers from delayed payments can make it difficult to accurately track your company’s financial performance. And revenue recognition is a lot more difficult when you’re earning the payment in a different period from when you’re receiving it (this is common in businesses with high time to payment).

Stronger relationships with customers and suppliers

On-time payments establish trust between you and the people you do business with. For you and your customers, reliable payment practices can lead to better terms, discounts, and a more resilient supply chain. Delayed payments strain these relationships and, in cases where you need to pass on that payment to a third party, can even disrupt supply chains and increase costs.

When customers do pay on time, you can offer them better deals, cut them slack when they need it, and form a more mutually beneficial relationship with them overall. Customers you’re close with will wind up being your biggest advocates, and good relationships with them improve your reputation in the market as a trustworthy and high-quality vendor.

Factors That Impact Payment Timing

It’s not always customers who are to blame for long payment cycles. There are plenty of instances where the business is at fault, or, at the very least, could have done something to prevent it.

Here are some factors that impact payment timing:

Payment terms

One of the most obvious reasons why businesses struggle with delayed payments is because their customers are given too much time to pay. This can happen for a number of reasons, including the business not having a well-defined payment policy or being hesitant to push back on customers when they request longer payment terms.

Lengthy contract and approval workflows

If you’ve already closed a customer but your contracting process takes forever, the amount of time between contract signing and payment can be more than a month. Things like unnecessary layers of approvals, outdated software, and back-and-forth negotiations on terms delay the start of invoicing.

Forgetfulness

Your customers are worried about several other aspects of running their own businesses. If you aren’t prudent with your invoicing or don’t have a system in place to remind them of upcoming due dates automatically, they might not remember.

Invoice accuracy and timeliness

If there are mistakes on an invoice, your customer has no choice but to send it back to you to revise it. Chances are, that translates to an extra few days until they pay. If your billing team is constantly fixing billing errors, it’ll have a tangible effect on your average time to payment.

The same goes for sending an invoice days later than you said you would, sending it to the wrong person (who might miss it altogether), or failing to include all the necessary details for payment processing.

Your relationship with the customer

The easiest way to guarantee fast payments is to have a good relationship with your customers. It’s not always easy, but it can make a huge difference in terms of payment turnaround time.

Think about it this way: If your close friend requests you money for dinner, are you going to pay them back immediately? What if it’s someone you don’t know very well? Your business relationship with customers works the same way.

Strategies to Reduce Time To Payment

If you want to speed up the time between when your invoices are sent and paid, you need to strategically plan and implement processes that will help you identify and remedy problems before they arise.

Here are a few of our best strategies to consider:

1. Automate invoice reminders.

You can do this with an automated billing system (or if you’re a SaaS business, a subscription management platform). Instead of manually reaching out to customers when they’re X days overdue, the system will automatically trigger an email or notification once they’ve missed a payment beyond a certain threshold.

2. Streamline the quote-to-cash process with CPQ.

When you have a new customer in the pipeline, the first thing they’ll ask for is a quote for the products/services you’re delivering them. Once they approve of the quote, you’ll start the contracting process, reach a final agreement, invoice them, and (hopefully) get paid.

This entire process is known as the quote-to-cash cycle, and time to payment is highly dependent on how efficient and streamlined this process is.

CPQ (configure, price, quote) is a sales enablement tool that can significantly speed it up. It gives you a simple interface to build, customize, and deliver quotes. And if you use a system like DealHub, it also has contract management and billing features,  meaning you can run the whole end-to-end process from one centralized platform.

You can also create automated approval workflows within the platform, so every deal goes directly to the right person for review and sign-off before moving on to the next step. And you can easily track the status of each deal, so you have real-time data on every customer in your pipeline.

3. Offer multiple payment options.

Common reasons for delinquent payments are insufficient funds at the time of payment and your inability to support their preferred payment method. To mitigate this issue, consider offering different payment options to your customers.

• Credit and debit cards
• Bank transfers
• Payment apps like PayPal and Venmo

You might even want to offer payment plans, depending on how expensive your offer is and the kind of customer you’re targeting.

4. Create favorable payment terms for your business.

Of course, the easiest way to get what you’re looking for out of time to payment is to write that into your contract.

Here are a few common payment terms companies give their clients/customers:

• Net 30: Invoices need to be paid within 30 days of receipt.
• Net 60: Invoices need to be paid within 60 days of receipt.
• Monthly billing: Clients are billed on a monthly basis for ongoing services/products. Billing happens at the beginning of the period.

5. Incentivize early payment.

Most companies use special payment terms to incentivize early payment. By offering a small discount (e.g., 2%) for paying within a certain timeframe, you can motivate customers to pay sooner rather than later. You could also offer loyalty perks, like exclusive deals or early access.

A common example of this is the 2/10 net 30, which means that if the customer pays within 10 days, they can take a 2% discount but must pay in full regardless within 30 days.

You could also tack on a penalty for missed payments beyond a certain date. Generally, this is a late payment fee or an interest rate on the outstanding balance.

6. Implement a collections process.

Your billing process should outline clear steps for collections, in case a customer fails to pay on time.

Dunning notices are a common first step. If the customer still doesn’t respond, you can decide how many reminders you want to send before escalating it to a third party or writing it off as a bad debt expense.

Either way, you need a workflow set up in your billing software to execute these steps automatically. And you need a standardized process your AR team can follow to capture that revenue.

Optimizing Time To Payment: Practical Examples

To help you fully grasp the concept of time to payment, let’s look at how different types of companies would adapt their internal payment and collections processes to shorten it.

SaaS companies

Software vendors make money from subscription sales, meaning they’re uniquely challenged with recurring billing. Believe it or not, this actually makes things easier — all they have to do is implement subscription management software.

At the turn of every billing cycle (usually monthly or yearly), the system will automatically charge the card on file, making time to payment nearly instant. If the card declines, it’ll cut the user’s access to the SaaS platform until they renew their subscription. As soon as they try to access the platform, they’ll realize they need to make the payment to continue.

To further optimize time to payment, subscription management tools can send customers renewal reminders and integrate with your app’s customer portal, giving them several chances to update their payment information and payment preferences before their access is cut off.

Consulting firms

For consultants, payments are usually tied to project milestones — a certain percentage of the fee is due upon completion of each phase.

To speed up payment, consultants incentivize early payment by offering discounts for paying in full before the invoice’s due date. They can also set up automated reminders for upcoming payments and provide easy online payment options through secure portals.

As a consultant, you might also offer retainer or subscription-based services to establish a steady stream of income. Then, you’d set up recurring billing cadences in your invoicing tool and run it automatically.

Manufacturers

If you’re a B2B manufacturer, your main issues regarding time to payment will come from the risks of non-payment and excess lead time between distribution channels. To prevent this, it’s essential to have a thorough credit check process in place for new customers.

You could also:

• Establish trade credit terms with your customers, allowing them to pay in installments over a set period
• Offer an X% discount for early or on-time payments to incentivize timely payment
• Implement electronic invoicing and secure online payment options to streamline the payment process
• Integrate your CPQ with your customers’ procurement systems for a smoother ordering and invoicing process
• Negotiate contracts with suppliers for better credit terms, to circumvent the negative effects of a longer payment cycle.

Healthcare providers

Time to payment is an essential part of healthcare revenue cycle management, which is the overarching process that manages patient care from registration to payment. Since it’s complicated, healthcare companies need to use specialized medical billing systems that can efficiently manage their revenue cycle.

Besides using medical billing systems that integrate with insurance companies, there are several strategies healthcare providers can adopt to get paid faster. Some of them include:

• Verify patient insurance and eligibility beforehand to avoid delays or rejections in the payment process
• Submit clean claims, which means ensuring all required information is accurately filled out and formatting is correct
• Implement a payment policy that outlines expectations for upfront payments, co-pays, and unpaid balances
• Offer flexible payment options, such as payment plans or online bill pay, to accommodate patients’ financial situations
• Use electronic health records and practice management systems to streamline billing processes and track payments.

To minimize days sales outstanding, you also need to make your billing team as accessible as possible. Since lots of patients will have questions about their bills and dispute charges, time to payment largely depends on how quickly you can solve those issues.

Using Automated Billing to Improve Time To Payment

Automated billing can make your business more profitable by eliminating billing errors and dramatically reducing the amount of admin work your team has to go through. With an automated billing system, you can:

• Send out electronic statements and invoices to eliminate time-consuming paper billing processes
• Set up recurring payments for customers with ongoing subscriptions or retainer-based contracts
• Create custom payment plans and schedules for project milestones and deliverables
• Integrate with payment gateways for secure, efficient online payments
• Track payment statuses and send reminders to customers with outstanding balances

Billing automation also streamlines the revenue recognition process by automatically syncing with your accounting system, recording payments as they come in, and recognizing them as they’re earned (that is, the product is delivered or the service is carried out). There’s no risk of errors like there is when you’re manually entering payment data.

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