One of the challenges all consultants face is setting up payment strategies for their customers. There is a need to keep revenue flowing while providing a reasonable amount of time for processing invoices. That is not as much a problem when there are multiple customers and they pay regularly. However, it can be crippling to a business when bill payments (or payroll) are delayed due to accounts receivable (AR) issues. A small company or individual consultant can struggle with this. Thus, it is worth our time to examine some options.
Not One Size Fits All
Note that the discussion is on strategies and not a single strategy. I have found this to be one of the first steps in meeting your needs and your customers’ needs. One way to slice up the approaches is based on your trust or experience with customers. This approach provides more grace in payments to your established customers while limiting risk for newer ones. Payments terms can be based on AR age or AR total. Both of these are easy enough to track for even a small company and can be set in contract requirements.
I find that both approaches are helpful in small consulting companies. Some projects generate minimal revenue month over month. That can lead to small receivables sitting on the books for several months. At the other extreme, large revenue items can be critical to cash flow. When they are not received on time, the business can struggle. That latter situation is often a challenge for small consulting companies or individuals due to the feast or famine nature of this business.
Payment Strategies Based on Trust
Trust of customers and their payment processes is most effective when it is based on past experience. Therefore, it is best to start all new customers with a tighter set of rules and then loosen them after they have gone through multiple pay cycles. I recommend a minimum of three complete cycles. One or two is too easy to be an aberration or just them trying to keep new accounts current. Then, as you see consistent invoice and payment cycles, you can adjust your requirements to fit cash flow needs.
Cash Flow Is King
We all want to sign contracts and get those billable hours flowing. However, we need to see the payments for those hours flowing as well. When planning payment strategies, you need to be aware of your business’s monthly budget/payables and related payment terms. There is often a delay of 30 days or more from invoice to first payment, which can cause challenges if you do not have reliable cash reserves. Take note of your bank’s deposit hold terms as well. Receiving a payment is not the same as those funds being available. That may seem minor. However, we can see fewer and larger deposits for some customers that trigger the hold rules. I have often seen this pop up when a customer delays a few payments and then catches up in one big check.
Splitting Invoices And Pre-Payments
Many companies are hesitant to be aggressive with payment strategies when they start. Therefore, they set and accept customer-friendly terms but can lead to struggles as the business gets off the ground. Nevertheless, it is easier to reduce restrictions and policies than add them. Therefore, the best time to take a hard-line stance is when you start a customer relationship.
Multiple invoices and early invoicing can help with this. Some companies invoice immediately on receiving a signed contract. That can cut down the time to payment by weeks or more. Likewise, it is more acceptable to pre-invoice some portion of the project or request a fee to start work. This strategy reduces risk and ensures you have some cash flow from the time the project begins. It may not solve all the problems, but it is an excellent first step.