This is especially true for service-based industries, including: creative agencies, consultants, accountants, lawyers, web designers and IT services. For these businesses, the lack of anything tangible being exchanged for cash adds complexity to when and how money comes in.
However, with the right tools and processes in place, you can avoid becoming the financier of your own client work, and get the cash you’ve earned into your bank account faster.
1. Invest in the Right Tools
Compared to all the other hats you must wear as an entrepreneur, the financial manager hat may be the most complicated, unpredictable and important (Perhaps it’s less of a hat, and more of a rally driver’s helmet). For this reason, your business must invest in the right technologies in order to reach and sustain cash flow positive.
To visualize a complete, real-time financial picture of cash on hand and financial obligations, your technology stack should include the following cloud-based technologies:
- Online Accounting Software: Run your financials from anywhere, view cash flow reports, create and send invoices, schedule payments, pay bills, and more.
- Project Management: Utilize a job or project management tool to stay up-to-date on the progress of client work so you can send invoices as soon as work is completed.
- ime Tracking: As a service business, you sell time, so keep track of it. Accurate time sheets make sure you get paid in full for all your efforts.
2. Set Appropriate Due Dates and Penalties
Xero analyzed more than 12 million small business invoices issued globally between Jan. 1, 2009 and Sep. 1, 2012. They found that regardless of whether payment terms were due immediately or in 30 days, on average, invoices were paid two weeks late.
While you may have full faith in your client’s willingness and ability to pay on time, it doesn’t hurt to take some precautions.
Do so by setting your due dates earlier than you need payment by. If you want to get paid in 30 days, make your payment “due in 14 days.” Or if you’d like to get paid in 15 days, set the invoice to be “due upon receipt.”
And as an additional precaution, consider adding overdue fees or finance charges into your contract.
3. Invoice As Soon As Possible
If you completed the work, you deserve the money you’re owed—so why wait around? The faster you can get your invoices out, the sooner you’ll get paid.
Here are a couple invoice scheduling options to consider:
- Retainer Clients: If you charge an ongoing monthly fee, bill for the first month up front and require payment before you start working. This helps motivate the client to get the initial payment completed so your team can get started on their work sooner.
- Project Clients: For project-based businesses, consider sending an invoice for 50% of the work up front, and then invoice the other 50% after the work is delivered. Or for longer projects (i.e. website development), invoice 33% up front, 33% after the first month, and 34% upon completion.
- Hourly Rate Clients: First, estimate how long you anticipate a project will take to complete. If you have time tracking, run a report on how long similar projects have taken in the past. Next, invoice for 50% of the estimated time upfront, and then adjust the second invoice to reflect actual hours delivered.