Entrepid

If you’re jumping in mid-stream, Part 1 (with the complete list) can be found here.

Get Up-front Deposits

This is the ultimate in getting paid faster.  Attorneys have been doing it for years with retainers.  Custom manufacturers that have to buy raw materials for their customers’ jobs also do it.  So can you.

The key to getting clients and customers to pay in advance is having a good story.  By “story” I don’t mean something made-up, but a convincing reason why you need to by paid in advance - one that the customer can easily understand and agree with.

“We have to buy a large amount of raw material for your order and we aren’t able to float that for you.”

“Our schedule is tight and we’re scheduling out weeks in advance.  We can only afford to put customers into the schedule who are serious about paying their bills.”

“Our CFO says that new customers have to put down a deposit in advance.  After we develop a relationship we can discuss terms with you.”

There are many more you can think up. 

9) Develop a Relationship With Your Client’s A/P Person

In spite of all our technological tools and innovations, business is still about people relating to other people. 

And, in spite of any rules and procedures in place, employees use a lot of discretion in how they go about doing their jobs.  Antagonize your client’s A/P person and you can find yourself with “lost” invoices, incorrect payments due to “typos” and checks that get “lost in the mail.”

Conversely, become friendly with the A/P person and you can jump to the front of the line. 

This doesn’t have to mean holiday cards and tins of popcorn.  Learning their name, being pleasant on the phone, and not being a pain in the neck will go a long way.

10) Call In a Couple of Days To See That They Got Your Invoice

Or, alternatively, if you’re sending invoices by email, ask for a delivery confirmation.

There aren’t many things more disheartening than expecting to be paid on a big invoice, waiting until 30 days are up before calling, then finding out your invoice never made it into the system.  A five minute phone call can head off problems before they become serious.

11) Call In Advance of the Due Date

This goes hand-in-hand with #10.  A few days before your scheduled payment date, give the A/P person a call just to make sure your payment is going to be on time.

A lot of companies will delay payments to vendors just to test out how far they can push things.  By calling in advance, you send the message that you expect to be paid on time.

If you’re jumping in mid-stream, Part 1 (with the complete list) can be found here.

5) Invoice Quicker

The lag time between when a service is performed, or a product is delivered, and when the invoice is sent out is the hidden Days-in-A/R.  Your customers don’t begin the payment countdown clock until they get your invoice.

If you deliver a product or perform a one-time service, invoice the same day.

If you perform a series of services that are billed separately, invoice at least weekly.

If you perform services on a monthly basis, arrange with the client to bill on the 15th and the last day of the month.  Or even better, negotiate to bill on the 15th of the month for that whole month.

The sooner you invoice, the sooner you get paid.  It’s that simple.

6) Send Invoices Electronically

Sending invoices electronically solves several issues related to delayed payments.

• It saves a couple of days in transit.
• The invoice goes directly to the appropriate person at you client’s office - the paper invoice doesn’t have through your client’s internal mail delivery process.
• It won’t get "lost" on the way.  It’s amazing how many invoices get lost in the mail.
• It sends the message that you’re serious about being paid on time.

Sending invoices electronically isn’t difficult.  Rather than printing out a paper invoice, print to a PDF document and attach to an email.  If you’re a Quick Books user, it will do this for you.

7) Invoice More Often

This is especially targeted to service businesses, including those who do Time and Materials billing.

There’s no law that says you have to invoice monthly, but that seems to be the standard operating procedure for just about every service business performing on-going services for clients.  You don’t have to keep doing it that way.  You can invoice weekly or semi-monthly and most of your clients will go along.

With current clients, politely inform them you’re changing how you invoice.  You might get a few grumbles, but little outright hostility.  If a client says they’ll stop working with you if they receive invoices more often than monthly, keep them on a monthly cycle.  For the rest, invoice more often.

It’s easier to handle this with new clients.  Just inform them of your invoicing policy and make sure YOU comply.

If you’re jumping in midstream, the series begins in Part 1 with the complete list. Part 2 can be found here.

3) Set the standard up front and be firm

It’s human nature to try to get away with whatever we can. Those of you who are raising, or have raised, young children know this from experience. You’re being naïve if you think everyone leaves the child behind when they get older.

If you want your customers to pay you on-time, every time, you have to deliver a consistent message: “We’ve kept up our end of the bargain and so should you.”

And when I say consistent, I mean 100%. Like the child attempting to wear down the parent with a never-ending series of Can I’s, your customers will constantly test you to see if you’re serious. Let them slide 5 or 10 days this time and next time it will be 10 or 15 days. Before you know it, the customer with 30-day terms is paying you in 60 days. Do this with enough customers and your Accounts Receivable get out of hand.

I’m convinced that lack of firmness on A/R terms comes from a place of weakness. We’re afraid that somehow what we provide to our customers isn’t quite good enough. And if we push them on payment, they’ll go somewhere else. While this may be the case in a small minority of situations, I doubt that your customers decided to do business with you because they thought they wouldn’t have to pay you on time. Operate under the assumption that they buy from you because of price, or customer service, or quality, or anything other than you’re an easy mark. Your wallet, and your blood pressure, will thank you.

4) Use late charges and enforce them

Remember that I said in Item #1 that Accounts Receivable is your money. You’re just letting the customer hold it for awhile. If they hold it for longer than you’ve agreed to, it’s only appropriate that they pay you for the privilege.

Assessing late charges accomplishes two goals. It not only incentivizes your customers to pay you on time, but it also compensates you in case they don’t. You should make sure of the legalities in your jurisdiction, but I recommend at least 1.5% per month, or part of a month, that payments are late.

This is another case where sticking to your guns is important. Make your policy that a payment has to be received, not mailed, by the due date. And, in case a check doesn’t clear act as if you never received it in the first place.

As promised in Part 1, the series continues with an in-depth look at each of the 15 Things You Can Do To Get Paid Faster. In this post, we’ll look at the first two items on the list.

1) Make a commitment

You didn’t get into business to do drudgery like manage your accounts receivable. You want to do the fun, cool things and watch the checks roll in. But the sad fact is that a lot of your customers are not going to send payment when they’re supposed to. You have to give them a reason, and often that reason is you’re on top of things and they know it. This really is a case of the squeaky wheel getting the grease. Or, more appropriately, the squeaky palm getting greased.

Once you provide your service or ship your product the revenue is now your money, and you’re just letting the customer hold it for a little while. Every day they are late, or heaven forbid, they don’t pay at all, takes money out of your pocket.

Think of it this way, if your company has a net income before tax of 10% of sales, just 5% of accounts receivable becoming uncollectible cuts your profit in half. Effective management of your A/R not only gets the money into your checkbook faster, but cuts down on the number of accounts that turn into bad debt.

If there is one common theme among companies I see with collection problems it’s that the owner didn’t make a commitment up front to manage A/R and got into cash flow trouble because of it. Better to avoid trouble in advance then try to extricate yourself later.

2) Provide value in the relationship

If you have accounts receivable, you probably have accounts payable as well. Think about the vendors you always pay on time, even if you have to sacrifice something else. Then think about the vendors you put aside for another day. What’s different about them?

The vendors you pay on time, every time, are the ones you can’t do without. It’s that key supplier without whose product you don’t have sales. It’s the utility or telephone company – if they cut you off you’re out of business.

Or what about your most important “supplier” of all: your employees? Try not paying them on time and see what happens.

A discussion on methods of providing value to customers is the subject for another day. For now, just know that being that critical supplier to your customers makes your job of collecting accounts receivable so much easier.

I’ll be writing a series of posts on how to speed up your Accounts Receivable collections. For those of you who can’t wait, here’s the full list of 15 with one bonus.

1.) Make a commitment – keeping on top of your collections isn’t fun, but it is necessary.

2.) Provide value in the relationship – be the vendor or service provider the customer can’t live without and won’t want to damage the relationship with.

3.) Set the standard up front and be firm – your customers will respect you if you hold firm to your payment standards. The ones who get paid on time are the ones who insist on getting paid on time.

4.) Use late charges and enforce them – part of setting standards and being firm.

5.) Invoice quicker – invoice as soon as your work is done.

6.) Send invoices electronically – save a couple of days’ mail time.

7.) Invoice more often – no law says you can only invoice at the end of the month.

8.) Get up-front deposits – the ultimate in quick collection.

9.) Develop a working relationship with the client’s A/P person – if they like you and respect you, you will go to the front of the line.

10.) Call in a couple of days to see if they got your invoice – eliminates the “Gee, we didn’t get your invoice. Can you send a copy?”

11.) Call in advance of the due date – to head off problems before the account is overdue.

12.) Accept payment electronically – this not only gets the money into your account quicker, but eliminates “The check is in the mail.”

13.) Send thank-you’s – especially near the start of a new relationship to acknowledge quick payment.

14.) Deposit checks right away – sets the tone for how important prompt payment is to you.

15.) Make collection calls as soon as accounts are late – if you’ve already called to head off problems, there should be no reason for late payment.

Bonus

16.) Cut off chronic late payers – a pattern of late payment indicates possible financial problems with a customer. Don’t be the one left holding the bag when they declare bankruptcy.

Here are the posts discussing these 16 items in more detail:

Part 2, Part 3, Part 4, Part 5, Part 6, Part 7 (and final)

The folks over at FreelanceSwitch have a slick Freelance Hourly Rate Calculator. I say slick, because it’s a nice piece of software, but I think it gets the order of things backwards.

It’s actually pretty common for small businesses (and consultants and freelancers) to attempt a cost-plus approach to setting prices. It’s easy to add up all your costs, put in a profit percentage, and voila!, you have the price you want to charge. Unfortunately, the real world doesn’t always co-operate.

The price you can charge your customers is limited on the upside by “value” and competition.

Value is a slippery concept, but even if your customer doesn’t have a firm number in mind, they do have some notion of what your product, service or time is worth. Whether or not this is enough to cover your costs is of no concern to them.

Think of it this way: if a prospective client approached me to do several months’ worth of backlogged bank reconciliations and I quoted them a rate of $175 an hour, I doubt very much they’d engage me. Bank reconciliations don’t have a “value” of $175 an hour.

Which brings up the second price limitation: competition. The prospective client could certainly find someone else to do bank reconciliations at a much lower hourly rate – maybe $20 or $25 an hour. Even if they’re not as efficient at bank recs as I am, their total cost will still be much lower.

So, your price is limited by both the value of the product or service AND by your competition – you get the lower of the two.

But, maybe your value is very high and you either don’t have much competition or they charge high prices. Why would you want to limit your income to some cost + profit level when you could possibly charge more?

I can see two bad results from using the cost-plus approach. Either you price yourself out of the market and don’t get enough business, or you underprice yourself and leave money on the table. Neither one is a good result.

That doesn’t mean I think the calculator is a bad thing. It’s a useful tool to see if the prices you plan on charging are enough to cover your expenses. If not, you need to rethink your business.

Hat Tip: Lifehack.org

Here’s a tool I use (Leapfrog Spreadsheet) with some of my clients who need to manage for breakeven cash flow on a monthly basis. I call it cash flow leapfrog because it demonstrates the link between revenue when booked and cash when it comes in the door. This tool works best when a company has a relatively level cash disbursement profile and revenue is recognized in irregular chunks. If you want to play along at home, open up the file and follow along.

• For the current month and subsequent months put in your customer name and the amount of committed (or booked) revenue in the appropriate month. This should be only revenue that you are sure of - you have a signed contract, it’s a multi-month project or you have some other assurance that the activity will take place.
• For each item above, put the amount of cash collection in the month you are sure to collect. Sometimes this will be in the next month, sometimes in the second following month. Doing this will highlight customers that are good targets for efforts in speeding up collections.
• In the middle section put those revenue items that you think will take place, but don’t rise to the level of committed. At this time do not put any anticipated cash collections for these items - do that when the projected revenue items move into the committed category.

What’s the purpose of this exercise? At a glance you will be able to see if your revenue for this month and subsequent months is enough to break even. As you look at next month and the month after you will see what you have to do to get there - do what you have to do to move those projected revenues to committed revenues. Also, you will be able to see if your cash collections will be break even at least a month in advance and be able to take appropriate steps to bring in the money.