The biggest risk to any business is poor cashflow. And one of the biggest risks to cashflow in the service business world is not getting paid on time. While letting the air out of their tyres or throwing a brick through their window might be attractive, it’s not very productive.
Nor is going on to social media to complain about them. The answer lies in how you set things up well before the time comes when they need to pay you.
And that starts with a well-formed contract. We won’t go into detail about everything you need in a good contract, but will highlight the payment elements.
A great contract always has these three elements.
1. Payment terms: You need to specify your payment terms. And always get 50% up front. And don’t start work until you receive it.
2. Specify payment Milestones: You should always try to collect payment as you go, so that you are minimising the risk of non-payment at the end of the gig. You only have leverage while you have not sent the work the clients wants.
Also be clear about what happens if the payment milestones are not met and you are not paid i.e. you stop work until they are.
3. Specify Penalties for late payment: I advise my students to think “That bastard has stolen MY MONEY!!! when they are writing the penalties!
Here are some positively lurid news about two of the stupid things people do in this area.
A survey conducted in 2015 in the UK of thousands of large and small businesses showed that around $5.0 Bn of supply of services or products had not been invoiced. At all. And the main reason given? “We’ve been so busy, we forgot.” That’s fucking insane when you think about it. And that number didn’t include small freelance businesses!
The second insane thing that people do is that they don’t have an accounting software system to issue and track their invoices. So, they do it all by hand and send the invoice in the mail.
About one-fifth of small businesses in the U.S. aren’t using any form of bookkeeping software or online apps to manage their business, according to a new survey.
The “Success Through Accounting Study” from B2B network provider Viewpost, showed that 18 percent of small businesses don’t use accounting software, while only one in five (which is 21 percent) have integrated their accounting software with an invoicing and payments product.
If that weren’t bad enough, it gets worse. Another survey just last year in the UK found that:
- Small UK business are chasing £14.9bn in late payments, almost a £1 Bn increase compared to 6 months earlier.
- 58% of SMEs are currently owed up to £10,000, with 27% owed over £20,000.
- 50% of respondents said that the mountain of money they are owed has preventedthem from investing in their business.
- 72% spend three days a month chasing money they’re owed.
So, as you can see, getting paid on time is a really big deal.
Here’s 6 tips that can help. I know most people go for 5, 7 or 10 tips… but I’m not most people!
TIP #1: I mentioned getting money up front and getting progress payments.
This is how you minimise your risk.
TIP #2: Tell them when you expect to get paid
The number of invoices I’ve seen from small businesses with no due date is shocking. As a general rule of thumb, people won’t pay until they have to pay. If you don’t tell them when to pay, they’ll just wait until you bug them. Every invoice you send out should have a due date printed in large font.
The more specific you can be the better. Instead of having your invoice say something vague like “Payment 30 days from receipt,” write “August 12, 2019.” The extra clarity makes it perfectly clear and makes it more likely to be added to a calendar.
TIP #3: Make it easy for people to pay
Thanks to modern technology, you no longer have to wait for your customers to get the invoice in the mail, fill out the check, and send it back. Instead, you can drop a link in your emailed invoice, and your customers can pay online. They won’t, though, unless you give them the option.
By adding a payment link in your digital invoice, you can entice customers into making their payments easy and early. Many of the invoicing software options out there offer this functionality. For instance, Xero connects with PayPal and QuickBooks Payments offers its own processing.
TIP #4: Remind people that they need to pay
You’ve told them when to pay, you’ve told them how to pay, now tell them again. As the payment deadline approaches, send a reminder email to let them know that the deadline is coming up. Schedule the email when you send the invoice, so you’ll never miss a reminder. It works really well.
Just like you would with your first invoice, make sure you set a clear deadline and give the customer an easy route to payment.
TIP #5: Have a penalty in place
You pay your credit card invoice on time every month because you love meeting arbitrary deadlines, and it seems like a nice thing to do, right? No. Of course not. You pay on time because if you don’t they charge you $50 and send you another annoying letter and threaten your credit.
Don’t worry about seeming mean, your business depends on the cash you get paid. If someone thinks they’ll just let the date slide, make sure they know that it’s going to cost them.
TIP #6: Pick up the phone
We love email, and a lot of great tools exist to help your business get paid digitally, but sometimes, a voice can help. When things are coming down to the wire, or if you’re not getting a response online, give your client a call.
And sometimes there’s a genuine reason for the client not being able to pay right at this minute. Kill them with kindness, suggest payment options, show you understand their current situation, and you’re willing to work around it with them. But never just walk away from the debt because it’s “too much hassle”.
As a final straw, you can call the person who signed the initial agreement, subtly reminding them that they’re the one on the line for late payment fees.
Generally speaking, people want to pay when they’re supposed to pay. You’ll come across very few customers who are actively trying to short-change your business. But people get caught up in the day-to-day of their own worlds and they overlook the things that are important to you.
Set expectations, remind them, and make it easy for them to pay you, and you’ll see a huge improvement in your cash flow consistency.