May 16, 2017
One of the biggest challenges of running a service business is managing cash flow. Expenses like payroll, rent, utilities, and software all come out of your bank account every month like clockwork, but clients can sometimes take their sweet time to pay their invoices. Here’s how to make sure your money comes in a little more on the regular.
When I was running my web design agency, we developed and launched a website for a client who sold commercial real estate. A few weeks after we sent the final invoice, the client still hadn’t paid.
I called to ask the client about the payment. He explained that since the original website design included social media buttons and they hadn’t gotten around to creating their social accounts yet, the website was, therefore, incomplete, so they were holding off on paying the invoice.
I explained to the client that the social media buttons were not integral to the website’s functionality and could be added later, and that ultimately it wasn’t our responsibility whether or not they had set up their social accounts. Bottom line: pay up!
When he still didn’t pay up, I locked him out of the content management system so he couldn’t log in until he paid the invoice. Mysteriously, a cheque was cut that afternoon.
That’s an extreme example of a client not paying their invoice on time, but sadly it’s not uncommon for clients to take weeks or months to pay.
A freelance designer emailed me this question recently:
“I have two clients who have now exceeded the 30-day payment notice; one of whom has done this for the past two invoices (despite a few friendly check-ins). For people who consistently pay late, would you recommend a late fee? If so, how much would you charge?”
I’m going to get to the question of how to respond to clients who pay late, but first let’s lay some groundwork:
The best way to avoid waiting to get paid is to never put yourself in that position in the first place.
Project deposits and installments
One thing I didn’t mention in my opening story was that although that client paid late, it didn’t hurt our business because it was only 10% of the total bill.
The client originally paid an upfront deposit and then regular installment payments while we were working on the project. So when the final launch came, waiting 60 days for the final 10% wasn’t too painful.
Here’s how we used to handle selling a new client/project at my old agency:
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50% deposit paid upfront as soon as the project contract was signed. No deposit, we don’t start work.
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40% paid after the design is approved. The website doesn’t launch, or working/print files don’t get released until the 40% is paid.
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10% invoiced after the site is launched/files go to print.
You might feel uneasy asking clients to pay before they’ve seen work, or before the finished product is launched, but you shouldn’t. They pay you, and you provide the service. You aren’t working for your dinner here. If you don't protect your cash flow, no one else will.
Net zero payment terms
Next, stop putting ‘Net 15 days’ or ‘Net 30 days’ on your invoices. I’ve had clients ask for longer payment terms, and I simply tell them that it’s not our policy. It should say “Due upon receipt”. Explain this to all new clients and work it into your terms and conditions that payments are due as soon as they receive your invoice or the work stops. That’s fair warning.
Taking this approach to collecting payment might make you seem like a hard ass, but this is a business! You are providing a valuable service and you need to get paid. Does the client get to buy their groceries and wait 30 days to pay? Or do they need to wait 30 days to receive their paycheque? The world doesn’t work that way and neither should you. You can’t afford to work that way.
If your client doesn’t understand this payment policy, then that should raise some red flags and maybe ending the relationship right there could save you from working with a slimeball.
But what if your client isn’t a slimeball, and they’re just part of a big machine that has a strict policy when it comes to accounts payable? You’re David, and they are Goliath. Should you stand your ground with net zero and risk losing the client or comply?
I recommend two things:
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Make it very clear to your clients that if their payment is late, you will stop working on their project until the invoice is paid. This will light a fire under your client to push invoices through accounting and apply pressure where needed.
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Ask for the name of the person in accounts payable and become their best friend. Call them up and introduce yourself. Ask them what shows they like and then pretend you like Dr. Who as well. Be as personable as possible. If you ever send your client a gift, be sure you send something for the person in accounts payable. Trust me; you’ll get paid on time.
Push for online billing
The whole concept of invoices and cheques is a bit archaic, right? Someone has to mail you a piece of paper with their signature, and you have to walk that paper over to a bank to deposit it? Crazy. Say hi to Fred Flintstone in the process.
Your client should be able to pay their invoice via Paypal, Stripe, Square, or even an e-transfer. If they tell you they are too big a company, ask them how their company caters their business lunches. I doubt they mail them a cheque.
Here at Proposify, we tell businesses who invoice us for various services that if they accept e-transfers, we can pay them faster than if they they need us to write a cheque.
So talk to your client up front and tell them how you prefer to be paid. Often it’s not the case that your client won’t pay online, they just don’t know there’s any other option.
Sell monthly retainers
Almost everything in our lives is organized into months or bi-weekly periods. Payroll comes out every two weeks, rent comes out on the first of the month.
It's often easier for clients to budget your company’s services into their monthly expenses.
If you’re selling a one-off project that will take months to complete you can, and should, work out a monthly payment plan so that it’s paid off as soon as it’s complete. Even better, you could sell your client on an annual retainer that includes maintenance, consulting, and support.
This way you can make more money, even out your cash flow, and your clients get a longer term relationship with your company in a way that’s easier to budget. Win win.
How to deal with a client who pays late
Even if you follow the previous advice and have laid the groundwork for consistent payment, you’re still going to get stragglers. How do you deal with it?
Don’t send an email
They don’t work. Emails are the easiest thing in the world to ignore. “Oh, you sent me an email? Sorry, I must not have received it. I think it went into my junk folder.”
Even with a tool like Sidekick this still happens.Plus, it’s hard to get the tone right over email. You either sound like an apologetic softy or an evil robot.
Pick up the phone
Trust me; it’s more uncomfortable for your client than it is for you. Believe it or not, the best time to talk about payments is when your lollygagging client asks you for new work.
Try this script:
“It’s great working with you, and I’m really happy that you want to hire me for another job, but we need to chat about payment terms for a moment. My payment terms are due upon receipt, and I require them to be paid right away to take on this new project. Are you able to work that?”
It’s polite but to the point, letting them know you have conditions to taking on the work and they can’t just do whatever they want because they’re the client.
It will also make them feel a bit embarrassed about being late so the next time they’ll likely pay you on time. If they don’t want to abide by those rules then maybe they aren’t worth keeping as a client.
Be withholding
Leave a final deliverable until your client has paid the final invoice, like giving the password to the content management system or delivering high-res working files. Whatever it is, don’t give your client the power to withhold payment from you without you having any leverage.
This is how I got the real estate client to pay - I locked him out of the CMS. I didn’t turn his site off because that could get into tricky legal territory and frankly, it’s a real dick move that could cost him business. But he did have to lose something until he paid.
Some final tips
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Mark up whatever you purchase on behalf of your clients by at least 30%. This is standard practice, and it ensures you make money from the things you buy for your client and not needlessly put your company at risk for purchases. If your client doesn’t like the markup, then they can buy the items themselves.
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Collect on the invoice as soon as it becomes overdue. Allowing clients to wait more than 30 days to pay an invoice can seriously affect your cash flow. If you are diligent about collecting you will get paid faster, it’s as simple as that.
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Watch the brilliant Mike Monteiro’s talk “F@$k you, pay me”.
I want to hear from you. What other ways do you protect your cash flow?
