Cash Flow| Self-Employed| Freelancer| Finance| Small Business| Entrepreneur

Are you frustrated with not getting paid on time? Because…let’s be honest- people are laggers and when people lag on paying you- that can SERIOUSLY upset the cash flow in your business. If you’re nodding along right now, then it means it’s time to start looking at your client billing process.

In this episode of The Andi Smiles Show, we’re talking what systems and policies you need to have in place to get your client billing organized AND to ensure that you’re getting paid on time, every time.

Watch the video below to get the whole shebang or check out the recap under the video.

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Why We Need to Get Organized With Our Client Billing (2:40)

I can sum this up in one sentence which is: Unorganized client billing screws with our cash flow. When we don’t have our billing organized it will stop up our cash flow and cause MAJOR problems in our business!

But let’s back up for a moment and talk about WHAT cash flow is. Cash flow is the runty sidekick to profit- which is kind of sad because cash flow is actually doing a lot of the work to keep your business running!

Cash flow is the money that moves through your business at any given time. There are two parts of cash flow- inflow, which is all the money you earn aka revenue, and outflow, which is all the money you spend aka expenses.

An important thing to know about cash flow is cash flow is REAL money. It’s not hypothetical when-you-get-paid-money.  Cash flow is actual cash that you have in the bank and have access to. So cash flow is NOT a credit card or an invoice that you have due.

There are two states that you can be in with cash flow. You can be in a positive cash flow which means more money is coming in than going out or you can be in a negative cash flow which means more money is going out than coming in.

Keep in mind that money that goes out of your business isn’t just expenses- money goes out to pay you, pay your taxes, pay your debts, and put into savings. Which is why you can be profitable and have a negative cash flow. You can be profitable and still not have enough money to cover everything because your profit is being allocated to all sorts of other costs.

It should be becoming clear why it’s important that we organize our client billing- because WHEN we get paid directly impacts our cash flow. You can bill somebody this month but if they don’t pay you for three months that’s going to cause a negative cash flow.

Payment Policies

Let’s talk about the types of payment policies you should have in your business in order to have positive cash flow. You will most likely not need all of these, it depends on your business, so choose the policies that apply to the type of business you have.

Also, the payment policies you implement should be in writing on your contracts and communicated with your clients. These are not internal policies, rather these are outward facing policies that you are using to set expectations with your clients.

Deposits (9:15)

Deposits are best for projects that take more than a month to complete and ensure that you don’t do work without getting paid. If you have a project that’ll take you three months to complete and you’re not getting paid until the end, you’re going to have a REALLY hard time with the cash flow in your business.

Deposits also help invest your clients because if they put down a nonrefundable deposit they’re reserving your time and will be less likely to bail out on you.

Deposits can range from 20-50% of the total estimate and the amount depends on a few things. First, think about the length of the project. If it’s a month your deposits will be less than if it’s six months. Also, consider the risk involved with the client. Do you think this client has a high likelihood to bail out on you? Finally, consider the industry you’re in. Do people tend to drop their project halfway through? The higher the risk, the higher the deposit.

Billing Schedule (12:10)

A billing schedule is how often you bill your clients for the work that you do. Billing schedules are especially important for people who take on longer projects and need to build their clients incrementally.

Set up a billing schedule for every service package that you offer. For example, you could bill on a monthly schedule, by percentage completed (30% deposit, 30% in 6 weeks, and 40% at completion), or by an incremental flat dollar amount.

The goal of a billing schedule is to spread out your cash flow over the life of the project. Think of it like spreading delicious delicious almond butter on toast- you want to get a little bit of that awesomeness with every bite instead of a giant glob one time.

So, instead of getting a big cash infusion in your business up front and going into a feast or famine cycle, consider what your business needs to maintain healthy cash flow. And that’s how you get and choose a billing schedule that aligns with that.

Payment Methods (14:52)

How are people allowed to pay you? And this applies to everybody who works with clients. Payment methods are key and how you get paid will impact your…you guessed it…CASH FLOW!

I recommend you pick 2-3 payment methods and STOP there. Don’t get carried away trying to accept every single payment method- when you have 100 payment methods it’s harder for you and your clients to keep track of.

Consider how long you’re willing to wait before you have access to this money and the entire process a person will go through to pay you. For example, with a check, they have to write the check, put it in an envelope and address it, get a stamp, and then mail it. There’s a lot of steps that could go wrong (because where the hell are the stamps?!).

Also, consider the fees you may incur and if your business can sustain those fees. It really comes down to understanding what your business needs more- fewer expenses in terms of processing fees or immediate cash flow.

Billing Terms (16:40)

Billing terms are how long your client has between when you send them an invoice and when that invoice is due. You’ll often hear about terms as “NET X”- so Net 15 means 15 days to pay the invoice, Net 30 means 30 days to pay the invoice, and so on.

With your billing terms,  again consider when you need access to the money. Unless you’re working with corporate clients, who take a long time to cut checks, I recommend that you do Net 7, Net 15, or Net 30. Because even 30 days is a long time to wait to get paid!

And remember- people pay invoices late a lot! So always set your terms with assuming a 1-2 week cushion for the laggers in the group.

Late Payment Policy (18:38)

This is the most important part of your payment policy structure. What happens if people don’t pay you on time? What is the consequence?

I recommend you have a late payment fee that you charge people as soon as their invoice is overdue. And here’s the most important thing about a late payment fee- You are not charging a late payment to make money. This is a way to hold your clients accountable for paying you on time.

After you decide what your late payment policy is,  put that in your contract and make sure that the client initials that part of your contract so they aren’t surprised (or angry) if they get hit with a late fee.

Billing Workflow

Phase 1: Time Tracking (21:28)

When I first started my business my time tracking method was looking at a clock, doing some work, finishing, forgetting to look at the clock, looking at the clock an hour later, and then trying to backtrack how much I worked. NOT GOOD!

Capture how long you’re working for somebody at the time, both how long you’re working for them and WHAT you’re doing. Every single time you track your time make a note of exactly what you did. And the reason is that the more transparent you are with your clients on your invoices, the fewer questions they’ll have, and the faster they’ll pay you!

The most analog way to track time is to have a notebook next to your desk and write down your time and activity. The next solution is a spreadsheet where you capture this information. Lastly, you could use a time tracking app like TSheets or Toggl which are more robust and have a mobile app so you can track your time on the go.

Finally, be sure you have some way of checking off time you have billed for and time that still needs to be billed. It’s a bummer to send out an invoice and then realize you forgot to bill for your time last Friday!

Phase 2: Invoicing (26:08)

This is the actual process of setting up your invoice for your client. I recommend invoicing on a regular schedule- it could be at the end of the project, every Friday, or at the end of the day. The timing is up to you. What’s important is having a regular, consistent schedule because if you don’t do it regularly you won’t do it at all. And if we don’t invoice, we don’t get paid we don’t get paid and then our cash flow gets SO SAD.

Here’s how to optimize your invoice for getting paid quickly. Include information on:

  • What you’re billing for (this is the activity you logged during time tracking)
  • Invoice terms (this should be consistent with your contract)
  • The due date of the invoice (even if you give them terms include an ACTUAL due date)
  • Late payment policy
  • Payment methods and instructions (don’t make them dig out your contract for this information- people are lazy and will just email you instead)
  • Links and addresses for paying you (yes- even if your address is listed in the header, also list it in the payment methods section)

If you aren’t using a digital invoicing system, I highly recommend you move into one. It will cut down on the number of steps you have to take to receive an invoice and it will be easier for your clients to manage your invoices.

Phase 3: Receiving Payments (31:09)

Receiving payments is applying the payments you receive to your invoices and marking them as closed. There are two parts to this. First, check to see that the payment amount is correct. Sometimes people do random things with numbers and send all sort strange payments that don’t actually cover the invoice.

If the payment is correct, mark the invoice as paid in full and closed. If you’re using a digital invoicing system the system will automate this for you. But, if you’re using a spreadsheet, have some way that you can notate that the invoice is paid.

Phase 4: Follow Up (33:10)

This is what happens if people don’t pay you- you follow up! And just like you have a regular schedule for invoicing, you also have a regular schedule for following up. Which means that every week or every other week, check your invoices for what’s overdue.

Here’s what happens next if someone’s invoice is unpaid and overdue. First, apply your late fee because your late fee doesn’t really mean anything unless you actually utilize it right. Remember, we’re doing this to hold people accountable.

Sometimes when I’m checking my overdue invoices, if I notice an invoice is due in a couple of days I’ll email the person a friendly reminder saying, “Hi! Your invoice hasn’t been paid yet and it’s going to be overdue in two days, which is when the late fee will go into effect.”

People love that and think that you’re the nicest person in the world for warning them about the late fee and will pay the invoices right away. So- you either send a friendly reminder that your invoice is due, or, you send an updated invoice notifying your client that the invoice is now overdue and that a late fee has been added.

And now you know exactly what systems to implement so you get organized around your client billing, and more importantly, so you get PAID on time and get that cash a-flowing!

If you want to get chatty with me about all thing self-employed finance, sign up to get notified when The Andi Smiles Show goes live every Wednesday at 12pm PST!

 

 

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