What kills a business faster than a herd of stampeding dinosaurs? Not having the cash you’re owed when you need it.
Research shows that 82% of small businesses fail because of poor cash management skills or a lack of understanding of cash flow. This is the number one reason small businesses fail, sitting above fraud or market changes or shifting technology.
And what’s the biggest cause of poor cash flow? Unpaid and overdue invoices.
Late payments and overdue invoices have a massive impact on business. In Britain, 64% of all invoices are paid late, and businesses spend an average of 10% of their day (two full days per month) chasing these late payments.
In South Africa, the numbers are similar, with small businesses spending 1.3 days per month chasing those stragglers, and late payments are the biggest financial challenge for over half of businesses.
In Australia there are currently 3.8 million overdue invoices owed to businesses around the country.
Overdue invoices also represent a loss of productivity and morale. A survey conducted by CoreLogic revealed that being paid on time would reduce stress for small business owners by 60%, as well as help them avoid unnecessary debt and drive business growth.
As a professional service firm, how can you avoid overdue invoices and get your money when you need it? The answer is to look at your pricing and invoicing strategy.
When you’re looking to curb your overdue invoices problem, the first question you should ask yourself is, does my pricing model work for me?
According to Elizabeth Wasserman at Inc, pricing for service businesses tends to fall into three main models:
Ian Altman at Forbes notes another pricing technique called price anchoring, where you start with a high price and then offer each client a discount to create the illusion of value. It seems like a risky technique for a B2B service firm to me.
When choosing your pricing strategy, think about the effort expended in invoicing clients, and your process for collecting on unpaid invoices.
Overdue invoices are just part of doing business … or are they?
Fixed-fee pricing based on value eliminates the issue of invoicing each client individually at the end of the month. Instead, you charge your client a fixed amount each month, that can be automatically collected, therefore avoiding having to chase outstanding invoices.
Most clients on fixed-fee contracts create an automatic payment for their monthly total, so you can just log in to your bank and see the money appear in your account on the same day each month.
Fixed-fee value-based pricing works great for professional services because it:
Most service businesses can see the benefit of fixed-fee pricing, but struggle to make it work with their current service model.
In order to make this work, you’re probably going to have to change how you package your services and what you offer clients. That’s not a small task and you’ll need to take the time to carefully consider your options.
Here are some things to consider when looking at changing your pricing model.
In a post about why accounting firms should move to fixed-pricing, Xero describes how the firm of the future will base their pricing on the value they provide, and not the cost of internal efforts to generate results.
For example, if your accounting services save a client $25,000 a year in saved hours and recovered costs, you can price your services to reflect the value you provide, even if you do all that with only 20 hours work.
They suggest using a Fixed Price Agreement (where you meet with the client to determine the services they need over the year) as a way to pre-qualify clients and establish their perception of value. This is also a good way to get a grip on your client’s goals so you can align them with your companies services, potentially cross-selling or up-selling them in the process.
SaaS stands for Software as a Service. You likely use SaaS products in your business life. Xero is a SaaS product, and so is Practice Ignition (that’s us!). We each charge a small monthly fee in order to use the software. You don’t own the software package the way you do in an old desktop environment, but that also means you’re always using the most up-to-date version and you don’t have to troubleshoot all the problems.
The huge advantage of SaaS companies is that because they have everyone on a subscription model where payments are collected automatically, they’re not wasting time sending and chasing invoices. This enables SaaS companies to invest more in product improvements and in growth.
Think about how you can re-imagine your pricing to fit with this model. What services will you offer as part of a monthly package? Will you tailor a solution to each client based on what they need?
Look at the services you provide for customers and the processes you use to provide those services. There will be numerous way to automate parts of this process to make it more efficient. Look into apps and API integrations to send data and work from one stage to the next.
You’ll also need to get clear on the duties of each person in your company, and make sure you’re accurately delegating each job to the person who will perform it best.
The more services you can perform for a client and package up into their monthly fee, the less likely they’ll switch to a different company. This is because their ‘cost-to-switch’ will increase with each service performed, and the time and hassle needed to untangle their business from your services will make them reconsider any hasty decisions.
With a fixed-fee recurring pricing model, you may find that clients don’t actually need your services each month. Not every company needs tax advice or FB ads designed on a monthly basis.
Even when clients don’t need you, find ways to demonstrate the value you provide month-on-month. Most companies could achieve this through a monthly automated report or dashboard they provide.
When you move to fixed fee billing and use a system like Practice Ignition, you no longer have to chase clients for invoices - you get paid automatically for your work
Practice Ignition makes it easy to manage your service firm when you’re using fixed fees. Recurring fees are collected on your schedule, with one-off project work being collected when you’re done. You can define payment terms however you choose and adjust collection dates to suit your customers.
You can spread recurring billing days across your entire schedule to spread payments across the month. This can improve your cash flow and help you manage your own costs.
Until you move over to a fixed-fee value-based billing system, you may still have to chase clients to get paid for your unpaid invoices. In this section we offer some tips to get the money you’re owed:
Your days are full up working on your next round of client work, and it’s tough to find time for a break for yourself, let alone to chase up overdue invoices. Unfortunately, if you want to get them paid, you have to make time to follow up.
It’s tempting just to fire off an email (there’s a great template on EzyCollect), but more effective to hop on the phone for a quick call. It’s much harder for the person on the other end to “ignore” or “forget about” your call. Take the opportunity to ask them if there’s a problem with your invoice and sort it out then and there so they can pay you what you’re owed.
When you follow up, don’t assume the worst and get angry with your client for deliberately shafting you.
Cloud software like Xero or QuickBooks Online makes the ability to invoice on time easy. You can use the app from your phone to send invoices the moment a job is finished.
What’s more, using an online solution for invoicing will actually save you money. According to Finextra, studies show that the direct, indirect, and hidden costs associated with manual invoice can add up to as much as 9.5% of the total revenue. Even the hassle of installing an online system is worth salvaging 9.5%!You may be used to a business world where clients are given a full month (or sometimes longer) to pay. This isn’t the norm any longer.
More than a third of all businesses are asking for 7-day payment terms. You can offer flexibility if your clients need it.
A 7-day payment schedule means your client doesn’t have time to set your invoice aside and forget about it.
Recent research shows that you’ll get paid on average 10 days faster if you offer payment by credit card or automated clearing house (ie. Paypal). Offering your clients these options could be a way of getting that money in the bank.
Many businesses try to push their clients to paying on time by implementing late payment fees. These are usually a percentage of the total invoice, and are applied after payment is late beyond a certain point. They can be effective, but many business owners feel uncomfortable about using them.
Often, simply messaging your client to let them know you’ll have to apply the late payment if they don’t pay within a certain date will prompt them to pay.
If you feel uncomfortable charging late payment fees, then swap the formula around and offer an incentive for early payment.
The lure of saving money is a powerful motivator, and you may find this technique turns around many of your late-paying clients.
This sounds scarier than it really is. All this means is that you won’t provide the client with final graphics, reports, or other files they require until their invoice has been paid. Allan Branch of LessAccounting recommends using this technique to ensure clients have clear consequences for dilly-dallying on payment.
Here’s a clever little trick. After you send your first invoice to a new client, call them to check they received it. Ask if there’s anything wrong with the invoice or if there’s other details they need.
It takes a little time at the beginning, but your client will appreciate your thoughtfulness, and it sets a precedent that ensures your client can’t come back and claim they didn’t have all the details they needed.
Overdue invoices can kill a company’s cash flow, not to mention the stress they cause to business owners. We’ve outlined many techniques you can use to get your money faster. If you’re feeling bold, a shift to fixed-fee value-based pricing will enable you to cut back on time spent chasing invoices and improve your cash flow in one hit.
If you aim to do one thing to improve your business in 2018, make it an overhaul of your pricing and invoicing models. How do you price your services?
Steff Green is a NZ-based freelance writer and USA Today bestselling author of 20 science fiction and paranormal novels. She lives in an off-grid home on 4-acres of rural paradise with her cantankerous drummer husband, a menagerie of animals, and their medieval sword collection. Find out more about her books on her website, or follow her on Instagram.
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