There's another overarching term that needs put in here:
Cash Flow: the balancing of AP and AR so that you can stay afloat.
Say your startup needs $10k a week to meet payroll. You have $20k in the bank and Accounts Receivable of $100k. "On paper" you have $120k. Cash flow wise you have 2 weeks of money left on hand.
This situation is in constant tension as:
- Large companies stall regularly on paying or require terms like "Net60", aka you complete the work, then send them an invoice, then they can take 60 days to pay that.
- Public companies have to report their financials and will often manipulate their AP schedules to help "massage" their numbers. I was once told bluntly: "our CFO said we aren't paying any more invoices this quarter"
- The reason large companies do this is they are also trying to balance their cash flow (just at a larger scale).
The two general things to do to help with this situation:
1. Keep invoicing tight, bill as often and in as small as increments as possible. Better to ask for $20k every 2 weeks than $40k at the end of the month.
2. Offer discount terms where they pay less if they pay earlier.
