Recurring nightmare?

"Businesses don't fail because they are unprofitable. They fail because they get crushed on the accounts receivable side." Brian Hamilton, CEO Sageworks, a financial research firm in Raleigh, NC

A 2005 survey of American Express small business customers found that 49% had cash flow concerns, with accounts receivable as the primary concern and 9% of that group worried that their cash flow troubles were sufficiently serious to impede their ability to compete for new business.

A 2007 survey of 2000 Freelance consultants found that 77% have had trouble getting paid at some point in their careers as independent workers. Of the 77%, late payments have been endured by 85% at least once; 42% have not been paid for their work at least once; and 34% have received less than the invoiced amount at least once. The survey also found that Freelance consultants spend 4 hours/month on average pursuing late or unpaid receivables.

Since Freelance consultants are excluded from the Fair Labor Standards Act (FLSA), which would require the Department of Labor to assist us by investigating claims of involuntary unpaid labor (slavery!) and would authorize the Commissioner of Labor to bring criminal proceedings to recover wages owed, we are more than a little vulnerable to this growing phenomenon.

Our options are weak. Hiring an attorney is costly and does not guarantee payment of monies owed. Small Claims Court is time-consuming and winning a judgment does not guarantee payment. Writing a thorough contract, which specifically details services requested, pricing, invoice due dates and late fees doesn't help much either if a client lacks the ability to pay, or simply refuses to pay within a reasonable time (big corporations are notorious for this).

Your small business client may be caught between a rock and a hard place: they can't pay you until someone pays them. Big corporations have the power to dictate payment terms favorable to their own cash flow objectives. Over the past several years, including the so-called "booming economy" years, many big corporations brazenly increased the turn-around time on accounts payable to their small vendors, because they could.

So what's a solopreneur who's trying to maintain adequate cash flow to do? Take every precaution and watch for signs of problem clients. Before taking on a new client, ask around and find out if anyone you know has done business with the company. Contact the Better Business Bureau and find out if a complaint has been filed and its resolution.

Milestones and money

Establish project milestones and attach an invoice to each one. First, discuss the project with the client and get agreement on its scope and timetable. Second, require that a deposit of 10-25 % of the project fee must be paid before work begins. Third, invoice for another 20-25% payment at each agreed-upon milestone.

The goal is to avoid the trap of waiting for a large sum of money at the project's completion, when the client possesses the complete deliverable. Hint: if the client is unable to make the initial deposit on time, expect trouble!

Develop deadbeat radar

Pay attention to the client's motivation for hiring you. Is he/she looking for quality work, or the cheapest price? Such clients pay the least money, are prone to causing headaches and may not pay what they owe, on time or otherwise. They are best avoided.

Beware also the client who is in a big rush, frazzled and frenetic. This person will appear suddenly and may likewise be overly concerned with price. Once the deliverable is in hand, your invoices may be ignored, as he/she is always "too busy" to deal with annoying things like paying you. Insist on receiving as much payment up front as possible (try 50% down, including a premium for speedy delivery).You may never see the rest of the money, or you will have to chase and wait.

Finally, beware the OCD type who is controlling and fussy. If you must go there, be excruciatingly explicit about the project scope, deadlines, expectations, project milestones, etc. Put everything in writing and make sure the client signs off and agrees to all milestone payments. This client will be tough to satisfy and will pick you apart, demand revisions and may withhold payment, claiming that you haven't delivered satisfactorily.

Put into writing how many revisions are included in the project base price and a surcharge for additional revisions. Consider adding 25-30% to your usual quote to make up for the time you'll spend responding to incessant emails, phone calls, criticism and demands.

Recurring nightmare?

If collecting receivables is a persistent problem for you, then it is likely that you are not qualifying clients properly or your product is considered deficient. Clearly define your deliverable. Set expectations for your services and make sure that you understand what the client wants and the client understands what you will deliver. A verbal agreement should precede a written proposal/contract that specifies the work you will do, the timetable and payment due dates and should be signed by both parties.

Thanks for reading,

Kim

Kim L. Clark is a business coach and adviser to for-profit and not-for-profit organization leaders who seek to identify and achieve business goals. She is the founder and principal of the consulting firm Polished Professionals Boston and she teaches business plan writing to aspiring entrepreneurs. Learn how Kim's expertise can benefit your business when you visit http://polishedprofessionalsboston.com

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