Strategy and marketing

Business tips: cash is king

Over the years I have created and built up a few businesses. People often ask me what are the must do’s, and I often speak to universities and business groups about these ideas. This article is the first of hopefully many, and perhaps the most important of them all: cash is king.

First, a couple of questions for all you web business owners out there. Do you give 30-day payment terms to your clients? If so, have you thought about the logic of what you are doing?

A little history

The net-30 day term concept came from the days where invoices were sent by post, arriving at the clients post room then moved internally to the finance department.

Once there they would be sent up to the department who initiated the work and signed off by the project leader then to be sent down to finance again.

Here, the poor invoice languished in one of many in-trays, until entered into the purchase ledger by rows of hapless clerks with quill pens.

They would then be scheduled for the ubiquitous ‘check run’ where the head of finance would go though the ledger, sign the cheque, then send it up to the Finance Director to countersign.

This boring, but extremely valuable, slip of paper was put in an envelope and sent down to the post room where it was posted, second class (remember we are talking about accounts departments here), where the supplier receives it in its own post room two days later.

The post room then sends said cheque down to the finance department where it is entered into the sales ledger, collated into the daily takings through the bank paying in book.

Another hapless soul takes the cheques to the bank.

The bank then processes the cheque and three days later, bingo! The money is finally credited to the suppliers account. Tremendous.

I can see this process taking 30 days, but in this fast, electronic age does it take that long?

No, the stages are basically the same, but the use of purchase order numbers, electronic billing, BACS/CHAPS/SWIFT and same day bill payments really streamlines the process. So why do we still offer 30?60 day terms?

Cash is king

If you have been in business long enough you will know providing credit is risky, eroding the company’s cash position and of course, offering trade credit to less-than-creditworthy clients results in bad debt.

I have seen loads of great firms go out of business due to poor cash management.

Accountants love profit and loss statements. I think they are good for forecasting or budgets, but useless in the day-to-day running of the business.

A well constructed and accurate cash flow forecast is a thing of great beauty; the Mona Lisa of the business owners tools.

Many people out there use credit reference agencies and long detailed credit application forms asking for references etc. In my opinion, these are a waste of time. It is much more effective to have short credit terms and use.

Advance and stage payments

We are design firm and we sell our creativity and technical know-how that basically equates to time. At the end of every month we pay salaries and overheads throughout the month/quarter. Cool.

So, we take on a new client, send them our contract that contains our standard terms of business. Here we specify the terms of payment that always involves an advance payment and further stage payments in advance of the work being completed.

Of course, we don’t start work until we receive an initial payment.

The result

The boot is now on the other foot. The client is the one who is taking the risk by paying us up front and in advance of time spent on their project; we have the cash in the bank to enable us to function efficiently. I have to say I prefer it that way.

In all the clients we have now worked for only three have not been able to agree to the seven day terms.

So, what are you all waiting for?

Erskine Design Published: by Erskine Design

16 Comments

  • Matt Carey’s avatar Matt Carey

    From my experience, no matter what payment terms go on to the invoice, so clients will pay when they are good and ready.

    We are gradually moving from old way (30 days from date of invoice) to stage payments. On the clients we have moved over it is working well and we will be pushing it more.

    However I too often come up against the following scenario:

    We send an invoice dated 1 August with 30 days payment terms. We should be paid on 1 September. That date comes and goes with no payment, so I chase up payment. At which point I am told that the clients terms are 30 days from the end of the month the invoice was submitted. In this example that would be payment on 30 September. So they are sneaking out an extra month. That can throw cashflow into a tailspin when it is unexpected.

    When told 'but our terms are 30 days from the date of the invoice’ I am always met with 'OK, but that is not our payment terms’. I argue until I’m blue in the face to no end effect — they will pay when they bloody like!

  • Matt Carey’s avatar Matt Carey

    I was thinking some more about your post this morning…

    How did you deal with the 3 clients who could not agree to your 7 day payment terms? Did you not work for them, or did you amend the payment terms?

    Thanks again for this post Simon. Over the 6 years of running my own studio I have learnt (the hard way) that cashflow is king.

  • Andrew Armitage’s avatar Andrew Armitage

    Totally agree with you Matt!

    When I stated the business I asked for payment in 7 days. Most people agreed to this but when it came down to it, someone else dealt with the accounts and I was told payments were made at the end of the month and depending on when the invoice was received would depend on when we got paid.

    Fed up of always chasing, I extended to 14 days and eventually 30. I now do less chasing payments but feel that a 7 day basis is a distant dream.

    Personally I find it arrogant that people take it upon themselves to pay on their own terms and not on those of the supplier. If we were BT that wouldn’t happen.

    Not only that, but getting paid late means that sometimes I can’t even stick to supplier deadlines so we’re all victims of late payers.

    Perhaps I should try the 7 day thing again.

  • Simonski’s avatar Simonski

    Thanks for your posts.

    The key is in the contract: if they sign to say that they will pay on your terms, that’s it, you have it in writing.

    30 days always ends up being 60 days. In practice, even in people miss the seven days, it still comes in well within 30. All suppliers can pay on short terms provided the accounts people know. We have done this with Government departments and Local Authorities, you just need to be firm.

    The instances where they have categorically stated that they can’t do the seven, I have moved it, and changed the contract to suit. Maximum terms we have given is 21 days and I expect to open on-line banking and seeing the cash in there on day 21.

    Finally, apart from specifying at the contract stage, what our terms are, I case them (nicely) every Friday. The first invoice can be quite painful, but once they get into the swing of it, they are cool.

    Hope this helps!

  • Matt Carey’s avatar Matt Carey

    Simon: you are spot on about the contract. That is an area where we need to improve. I’ll hold my hands up on that one, and have been far too casual with. We have often just taken an email agreement as a 'contract’ and been very lucky that clients have not fleeced us.

    Having just been fleeced by a 'client’ that is all set to change!

  • Dean Marsden’s avatar Dean Marsden

    Thank you for this post. As someone who has ambitions to start self employment, but is scared to do so because of late payments, this is invaluable advice.

    The company I currently work for are so slack with payments, sometimes only completing invoices after 90days! This has put me off going solo until I have enough cash to cover this.

    If I were to implement a 7 or 14 day payment, how should I tackle the issue of sending reminders? I like the idea of sending one every friday, but how many should I need to send before I call the men in suits?

    What about the issue of adding interest to late payments?

    A friend of mine makes sure he issues purchase order with the brief payment terms on this form. Is this the best way?

    Thank you, Dean

  • Simon Campbell’s avatar Simon Campbell

    The best way is to call the client when you email the invoice (always mail a pdf, don’t bother to post a hard copy) and then a week later, confirm he has received it. They will be embarrassed if they haven’t paid it!

    Purchase order numbers are great as it the clients official way of confirming the contract. Always put these on the invoice.

    Remember though, ask them to sign a contract when they agree the work.

  • Wayne Helman’s avatar Wayne Helman

    After many years of dealing with this issue, I’ve come up with two rules that we abide by. One, manage expectations – on both ends, the client and your own. Don’t get frustrated when clients don’t pay exactly on time, they probably won’t. But go in to the agreement knowing that it will be the case. Basically, manage your cashflow proactively as apposed to reactively.

    Second, money up front is crucial in this industry, but stage the rest of the project so it keeps in line with payment. We segregate our project payments up into 5 stages and invoice after each stage is complete, starting with the signing of the contract to publishing the project. That way, the client feels comfortable that they only pay for what you deliver, and your cashflow is a little easier to swallow.

  • Simon Campbell’s avatar Simon Campbell

    Good points Wayne!

  • Keefieboy’s avatar Keefieboy

    This is very interesting, and good on yer for posting it. Until 2 years ago, I was a freelance web designer in Dubai. there are plenty of people out there (mostly in government) who don’t think they should pay you at all, because of the prestige of having them on your CV. Yeah, right. So I avoided Government work, but did have some pretty big companies as clients. I always got 50% upfront, and the other half 'on completion’. I would usually give them 5 days before calling with a reminder. The brilliant thing with web work, though, is you can undeliver the product if you don’t get paid. I never had to use that threat, but I think the clients understood!

  • Simonski’s avatar Simonski

    Yep, 'undelivery’ is a great final act but naturally, prevention is better than cure… Thanks for post!

  • Antony Ellis’s avatar Antony Ellis

    This article was so helpful thanks ever so much.. just some quick questions Simon ;-)

    In the early days of Erskine when it was a 2 man venture at home, how did you overcome client objections regarding:

    1. Signing a contract with a supplier with whom they have no experience (if you get hit by a bus! you are only a small team etc! or worse your just a one man band)
    2. We have to pay you some money in 7 days – yet you have not delivered the web application/site etc? We want the HTML and CSS code before we pay you!

    They say that contracts should contain the interests of both parties but in experience, contracts are normally issued by the supplier to protect one’s own liability, this in turn doesnt inspire confidence or trust and can leave a negative impression even if the contract is clearly two sided.

    Concerning contracts they seem pointless .. it takes alot of money to enforce the terms of a contract in court. Some large clients could even drive a supplier into bankruptcy in solicitor fees and correspondence alone (before it reaches court).

    Lately im of the opinion, that clear links to payment milestones would be best option and then just issue standard T&C;’s with invoices and make reference in all paperwork?

    Any advice on how this works practically if you are a small home based supplier?

    Thanks for post :-)

  • Simonski’s avatar Simonski

    Thanks for your questions.

    Signing a contract with a supplier with whom they have no experience (if you get hit by a bus! you are only a small team etc! or worse your just a one man band)

    This is a tough one for me to answer as no-one ever questioned it!

    We have to pay you some money in 7 days – yet you have not delivered the web application/site etc? We want the HTML and CSS code before we pay you!

    I think this is a trust issue. We used client recommendations and references to prove that we knew what we were doing and had delivered in the past. We all ways try and obtain quotes from clients which really helps and were fortunate in that Colly had a series of very happy clients from his previous work.

    Contracts really only demonstrate commitment from both sides and also clarity the terms of the relationship; if they have to be enforced you are in the pooh!!! They also cover milestones and payment terms etc.

    We recently had to rely on our standard terms of business to sort out a misunderstanding with a client!

    Our companies do always have had legal expenses insurance. This covers us from contract disputes and other nasties (such as HM Revenue & Customs investigations – these can put you out of business very quickly).

    Hope this helps…

  • Antony Ellis’s avatar Antony Ellis

    Thanks Simon

    “This is a tough one for me to answer as no-one ever questioned it!”

    LOL fair point. This happened to me once when I started my first company at the age of 27, the client was a PLC organisation.

    Great tips about the insurance, I think standard T&C;’s are great.

    Do you always use a contract ? Or just for projects of a certain value/risk?

    Yes this definately helps, thanks for your time.

  • Simon Campbell’s avatar Simon Campbell

    Contracts: We don’t issue them for established clients who commission regular, repeat work, but we do send estimates that are confirmed by the client via email / basecamp.

    It’s not a matter of risk or value, it’s more clarification of the project in writing. It focusses your team on what is to be delivered and the client what to expect. Everyone should then understand the playing field and the rules of the game.

  • Adam from Ursus’s avatar Adam from Ursus

    Hi Simon,

    Do you draft a new contract for each new piece of work? We already draft requirements specifications but I can see how the addition of standard payment terms could formalise the payment process.

    Our standard T&Cs; are pretty clear but I do wonder how many clients read them.

    Another great post thanks.

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