The three-month project is over. The client is thrilled with your work. You go back to the office, create the invoice, drop it in the mail, and wait for the check to arrive. And wait, and wait, and wait. Finally, after two months, you call your client who promises to look into it. A week later you call again (you don’t want to be a ‘pest’ and risk future work) and find out the client’s accounting department never received the invoice. “If you’ll send another invoice we’ll give it the utmost priority”. Finally about 6 months after you started the project, you get paid for your efforts.
Is this scenario possible? Definitely! Can this be avoided? Without a doubt! Is this normal? Not for us. Cash flow problems are probably the #1 reason independents return to corporate jobs. If you understand the situation, and follow some simple guidelines, you can avoid cash flow surprises.
Define Payment Terms in Advance
With rare exceptions, your client’s organization is much larger than yours is. Why float your clients?
Here are some tips to get the cash flowing, keep the payment terms straight, and help your clients pay you:
- Specify a project initiation amount. Tie deliverables to invoicing so payments come in while the project is in process. Johanna charges an up-front fee for workshops. Don charges an initiation charge for development projects.
- Offer discounts on pre-payment. One of Johanna's clients chooses to take the pre-payment discount on workshops. Johanna likes getting the money in advance. The client likes getting the discount.
- Charge interest on late payments. We have not had to charge interest yet, but this is an accepted business practice for overdue accounts.
- Specify terms of payment clearly. Your client's standard terms may be from 30 to 60 days. Make sure you know what their standard terms are, and how that differs from your terms. Discuss differences with accounts payable, and agree on payment terms before you start work. We have slightly different terms. Johanna's standard terms are Net 15 for consulting and payable upon receipt for workshops. Don's standard terms are Net 10. The goal is the same—get paid as soon as possible.
- Walk through the payment process with your client's accounts payable department. Maybe your invoice is too large or small for their normal process. Maybe they're not used to paying as the project progresses. If you take the time to walk through the first invoice with your client's accounts payable staff, you'll understand how they work, and they will understand what you want. The future invoice payments should happen repeatably.
- Another way to walk through the payment process is to find the person who actually handles your invoice. That person determines how and when the invoice will be paid. Contact that person. Don tends to blame it on his “boss”. Johanna asks if there are problems with her invoice—do they need any other information? Accounts payable people seem to understand this very well.
- Track the payment. Explain when you will call again, so you don't look like a pain. When you first talk to the contact person, find out when they will know when your invoice gets into the system, when the checks are cut, when they are signed, and so on. “Approving authorities” do take vacations, and it’s better to get paid before they leave, than after they get back.
When Your Client has Trouble Paying You
Sometimes, even if you are proactive about getting paid, your client can't keep to your terms. Don't fire the client immediately. Try these ideas first:
- Verify the accounts payable people know your terms. Sometimes your contact agrees to something the accounts payable people don't know about or staff turnover in the accounts payable office. In our experience, accounts payable people want to work with vendors to come to a reasonable invoice resolution.
- Invoice more frequently. One of Johanna's clients had a difficult time paying invoices of more than $5,000. Invoices over $5,000 required at least three signatures. Invoices under $5,000 only required the standard signatures. She talked to the Accounts Payable staff and they jointly decided she should invoice amounts under $5,000 more often.
- In some cases, you may choose to accept partial payments. Getting one fourth of the invoice for four weeks gets you more money faster than waiting a month for the entire amount. Be careful this doesn’t become a habit with the client.
You deserve to be paid in a timely fashion for your work. Work with your client to make it easy to pay you quickly.
If you follow this advice, cash flow surprises won’t shorten your consulting career.
© 1999 Johanna Rothman and Don Gray. This article was originally published in Contract Professional.