How well are you playing the game?
Cash flow management is a game with strategy behind it. Sometimes, trying to work out where a payment is buried inside complicated client organisation structures can be as hard as working out who is aligned to whom in Games of Thrones.
While most of your clients are probably excellent payers, even a very small percentage of clients being tardy in their payments can lead to cash flow battles’ royale for professional service firms.
As such, it’s crucial to adjust your cash flow game for the sluggish ones, by applying a unique strategy to match their payment persona.
For example, while some seem to have a well-worn playbook like “The cheque’s in the mail”, others are merely disorganised or reliant on manual systems and don’t mean any harm.
Typical tardy payer personas of clients of professional service firms include:
- The Shambolic – are they disorganised and always forgetting to pass on your invoice to accounts for payment?
- The Restructurer – are they forever merging or demerging, so you never know what’s where?
- The Holiday-maker – are key staff always on holidays, leaving your payments hanging?
- The Mis-communicator – is there miscommunication and blame between siloed departments?
- The Bank customer – are they purposely using you as a bank?
To get around this intended or unintended consequence for your business, play the cash flow strategy game by matching negotiating technique with persona to help you get paid faster. Here’s five tips …
Tip #1: Bill sooner
- Don’t wait till the end of the month to raise an invoice if the work has been completed mid-month
- Don’t wait for client sign-off if they have been sitting on a draft for months. Build into your engagement contract clauses to:
- bill for work in progress after fixed periods (for example fortnightly)
- allow you to bill earlier if delays happen at the client end that are beyond your control
Tip #2: Shorten your payment terms
- While standard payment terms are 30 days, there is no harm in asking for 14 days where you know a client to be a slow payer:
- If your terms are 14 days, then leave your terms as-is, so the client knows you are doing them a favour by letting them breach your payment policies – and hopefully as a sign of good faith will at least meet you halfway
- Some industries go one step further and only pay 30 days from the end of the month that you invoice them. So, if you bill a client on the 1st of the month, you are effectively waiting two months for payment:
- Strategically, billing them just one day before, on the 30th, can save 30 days of waiting
Tip #3: Set up a series of milestone payments
- Milestone payments for new clients can help cash flow enormously. For example, 25% upon commencement of a project gives you some working capital while you are doing the work. A reasonable staged payment agreement would be:
- 25% – upon project kick-off
- 50% – midway through project where there is a fixed time-frame
- 25% – upon sign-off of project deliverables
Tip #4: Discount for early payment
- Offer a discount to pay before the due date. If it’s a sizeable bill, a five per cent discount can be valuable for your client, and even more valuable for you to bank the money sooner.
Tip #5: Consider letting go
- While it’s a big decision to let a client go, it’s sometimes more about the opportunity cost of keeping them if they are a serial offender. You could be instead investing your time and energy into locking down a new client who won’t use you as a bank. Some clients are simply not worth it: if none of the above tips work, consider making the hard decision to let them go.