However, this can rapidly backfire as you promise the world, and are left unable to deliver on those promises. In other words, you fall prey to the other saying, “don’t bite off more than you can chew”. How would you avoid falling into this trap?

Timely Payments

Last week’s question was one pertinent to anyone who relies on clients for their paycheck – how do you ensure timely payments from your clients? This post got many responses, most of which were variations on two themes. The first response was the stick, the second, the carrot.

Enforcement

The first response involved a baseball bat, some nasty people, and angry letters from lawyers. That is, bully the clients who pay late (after all, they deserve it for treating me badly) until they pay, using whatever means that won’t land you in jail.

This method is like a stick – train a dog to be afraid of getting hit, and it will behave. The problem is that some clients will only respond to the stick, some will pull into their shells and avoid you, and others will leave you for more friendly vendors, and may still not pay you.

Bribery

The second response involved bribing your customers to pay on time by offering a discount for timely payments. One common method is referred to as 2-10-Net 30, which roughly translates to a 2% discount if paid within 10 days, with the full amount due in 30 days. Precise numbers can vary, but this method is aimed to encourage penny-pinching clients to pay earlier rather than later.

There are two issues here. First, 2% is not likely to provide a sufficient incentive to many clients to even care. As a result, this system rewards clients who would anyhow pay early (not that that’s a bad thing) but not really encourage anyone to join their ranks. Second, experience has shown that this system is marginally effective in any case, indicating that this may only work for certain types of clients.

Summary

As with all things in life, it’s about moderation. You need to be nice to your customers, but if they hold out on you too long when it comes to paying, maybe you don’t want them as customers anyhow. Try to avoid the enforcement method, as it is more likely to generate bad-will than be truly effective, and can compromise your ability to get referrals from clients you had harrassed.

One method that is worth trying, at least, is to simply ask your customers to pay early. Explain to them why you need the money earlier rather than later, explain that you understand it’s their right to hold out for 30 days, or whatever your official terms are, and in many cases, you’ll find a check in the next day’s mail.

Related posts:

1. Question: Are Your Customers Always Right?
2. Question: How do you calculate salary?
3. Tips to Getting Paid Promptly

There are, in fact, two issues here. The first is how to operate without cash, a function of being paid only after the work is complete. In a service-based business, this is often the nature of the work. While margins should be adjusted to allow for this, with the deposit and each installment covering the costs associated with the next stage of development, and the final payment being completely profit, this rarely happens in the real world. However, that is not the focus of this article.

Instead, I will focus on how to get your customers to pay you in a timely manner, something which I have been able to do with almost every one of my clients. While there have been exceptions, in most cases, my clients have paid me within 10 business days of receiving the invoice, and often at the same time as the invoice is sent over.

First, you need to ask your clients to pay promptly.

It amazes me that some business owners don’t realize this. If you don’t tell your clients when you would like to get paid, they will assume that they can wait until the very last day to pay the bill. Should you want the money earlier, then you need to ask your clients to pay the bill earlier if they are able.

However, this will only work if your clients themselves have the cash flow to be able to pay your invoice on demand. The larger the invoice, the less likely a mere request is to get them to cough up sooner rather than later.

Offer a benefit for prompt payments.

If the client is truly strapped for cash, then offering a small discount (one or two percent) on the amount of the invoice can encourage them to pay sooner. While the savings might not be large, if they are having a cash flow issue, then this can assist them in a small way. Since it’s a discount on the invoice, and not a penalty for late payment, you don’t have to deal with interest calculations and associated headaches.

Arrange payment plans.

Something I offer every client who asks is whether they would like to set up a payment plan. On my part, this involves minimal effort, since my accounting software can calculate for me the outstanding balance, as I apply each partial payment. It involves a little more work for the client, since they have to remember to pay me more often, but often making this offer will ensure that I’ll get the full amount in a predictable time frame.

A client who has a $10,000 bill might split it into 10 equal payments, one each month until it’s paid. I don’t get any extra money, but I also know each month that a $1,000 is going to arrive from that client, and I can plan around it.

Refusal to look at this option can often be the difference between getting paid a bill in its entirety and not getting paid at all. Without offering this, some clients may believe that they have to pay the entire bill at once, and will hold off on paying installments until they can pay the entire bill, which may never happen. By being able to pay an installment, it minimizes your exposure with each installment, and increases the likelihood that the installments will, in fact, arrive.

Stop providing service.

If a customer is continually late with payments, then inform them that they need to pay in advance to get further service. Stop allowing them to run a balance if they cause problems to your cash flow by not abiding by the terms of the agreement. Excuses from the client about why the money hasn’t arrived should be taken with a grain of salt – their problems are not your problems, a lesson I learned the hard way earlier this year.

At the end of the day, it comes down to asking to be paid when you need the money, and working with your customers to ensure that both your needs are being met. Yes, there are cases where this won’t get you any closer, but for the times that it gets you paid faster, isn’t it worth asking?

Related posts:

1. Collecting Accounts Receivable
2. Managing Accounts Receivable
3. Question: Fake it Until You Break It?

In order to give yourself the best possible chance of being able to collect, you need to ensure that you have a clearly worded contract, in which it is outlined what you are to deliver to the client, the amount to be paid by the client, and how and when that money is due. In case of dispute, such a document will play a crucial role in determining whether or not you can collect your money.

Assuming you have such a document, and the client is not making the proper payments, you should attempt to open communication by asking the client, politely, why the payments have not been made.

It may be an honest error (in one case, the client had assumed an invoice I sent him had been copied to his bookkeeper, when in fact it hadn’t been). In that case, the question regarding payment can be quickly resolved.

It might be an issue of timing – the client was deferring payment for cash flow reasons, and had forgotten to inform me that the payment would be late.

It could be related to cash flow and ability to pay – the client might not have the funds to pay the invoice, and is embarrassed to discuss it. In that case, by opening conversation, you can work out an alternate payment schedule to ensure you get paid.

Last, it could be that the client has no intention of paying. If this is the case, regardless of the reason, you need to look to other options other than merely talking to the client. (You also need to get rid of the client – read my article Firing Customers for more information on that topic.)

First, you can choose to write off the money owed as a loss. While this doesn’t regain any of your money, it does keep you from having to pay taxes on that money, which at least keeps you ahead of any future expenses on that particular account.

Second, you can hand over the funds to a collections agency. The cost here is usually a percentage of the money recouped by the agency, often as high as 50% of the money paid. Going this route is often not worthwhile to small businesses, as it generates very negative views of your business in the eyes of potential clients.

Third, you can sue the client. Here in Ontario, if it’s a relatively small amount (as of this writing, the maximum is $25,000), then you can sue them in Small Claims Court, and you don’t need a lawyer. In this case, you may be given the option of seizing the assets of the client to pay for the amount owed. However, the amount of effort involved is significant, although the direct cost is not, since the client may be ordered to pay the court expenses if you win the case.

Whatever option you choose, and each case needs to be handled on its own, you need to remember to always act professionally, and to assume that every document and e-mail that you handle may end up one day in court. If you treat the client with respect, and give them alternatives to defaulting on payment, you may find it easier to get your invoices paid.

Related posts:

1. Managing Accounts Receivable
2. Tips to Getting Paid Promptly
3. Pay the Debt or Save Away

Cash is king

Of major concern to a significant number of business owners is how to manage their accounts receivable, or, in other words, how to ensure that their clients pay promptly before the accounts payable are due. Before delving into some answers to this question, I’m going to start with a couple examples.

1. Teresa is the owner of a consulting firm that provides custom advice to its clients. She has 9 consultants working for her on various specialty projects. Since Teresa is paying her employees for a standard work-week, she can handle about 400 hours of work per week, less any administrative overhead. If she pays each employee $1000 per week, then she needs $10,000 of revenue coming in each week after her other expenses.
2. James is a sole-proprietor who manufactures clothing. He spends about $5,000 per week in supplies, which he converts into clothes to be sold to various distributors. James has determined that he makes a profit of about $5,000 per week, not including his labor.

In both cases, the issue is that there is a lien on the business owner to satisfy certain fiscal obligations, whether salary or suppliers invoices. Assuming that both Teresa and James planned wisely, they have a small surplus of funds which they use to help with cash flow. However, if either is not careful, they can end up without money in the bank and the debtors calling.

1. Teresa might win a lucrative contract for an additional 40 hours of work per week for 6 months. While this sounds like it’s time to hire another employee, Teresa must remember that the new client is not going to pay until after the work is done (or at least not fully pay until then), meaning that the salary for the new employee is not actually covered by the work they’re doing.
2. James might try to double his volume, but with his distributors paying their invoices 30 days after delivery, James must find a way to balance his suppliers against the delay in the cash flow.

What should be noted, of course, is that in both cases, the problem with cash flow is based on the fact that you owe money today, and are owed money tomorrow. While at the end of the week you’ll have enough money to pay all the bills, what are you going to do today?

Manage Cash Flow Constantly

There are, fortunately, a few options:

• If you plan ahead, then you might be able to build a sufficiently large reserve of funds to allow you to expand at a certain rate. For example, either business owner could set aside 5% of their earnings each week toward expansion, once they’ve paid all their dues. To avoid the temptation to spend it on anything else, place it in a separate account, or, to make it somewhat profitable, put it in a short-term investment such as a 6-month GIC or a Money Market Fund.
• You can get a short-term loan to get you over the initial delay. This will have a cost, but allows you to expand. This may be the best option for someone like James, who has a known debt (the $5,000 in additional supplies) and known accounts receivable ($10,000 from his distributors). Teresa could try this route, but she may have more difficulties with this since a new employee will require a salary for a longer period, and the time until the revenue comes in to pay for the salary is less certain.
• The additional work can be contracted out to a temporary worker. This is specific to service-oriented businesses, in which a temporary employee can come do the work, and issue an invoice when the work is done. While Teresa may end up needing to front money she hasn’t yet received, the length of time she runs at negative cash flow is reduced. Additionally, if Teresa is careful, she can hire someone for a lower fee than her regular employees demand, thus increasing her profit margin in the process.

What both Teresa and James need to be constantly aware of is not only how much revenue is earned over time, but as of this moment, how much is owed, both coming into the business and going out. A well-run business will always try to increase the former while reducing the latter. This knowledge can assist in determining how and when you are able to expand your business to bring it to the next level.

Related posts:

1. Collecting Accounts Receivable
2. Importance of Happy Employees
3. The Expansion Dilemma