A shorter version of this article first appeared in issue 238 of .net magazine – the world's best-selling magazine for web designers and developers.
Although the freelance sector has stayed remarkably resilient throughout the UK’s ongoing economic woes, even growing around 12 per cent in the last two years, many freelancers are suffering at the hands of clients who have not been quite so prosperous.
According to research by Bacs, freelancers and small businesses are being paid later and later. In 2010 the average late payment was 22.5 days overdue. That figure grew to 25.6 days in 2011 and again to 29 days in 2012.
Combine this with banks’ increasing hesitancy to lend (access to business capital through the banks is currently at its lowest point since 2006) and you have a recipe for financial disaster. A sudden shortfall in cash is currently the number one killer of small businesses. Once you fall into the red, the associated fees, penalties and interest make it that much harder to climb back into the black, so it’s more important than ever that you keep an eye on cashflow and manage it carefully.
It seems obvious, but the best way to manage your cashflow is to get paid quickly, and get paid often. Firing off invoices with a due date on them and crossing your fingers often isn’t enough, but luckily there are a number of things you can do to persuade your clients to pay up on time.
The very first thing is to invoice promptly. If you’re the kind of person who puts aside one day every month to ‘do the books’, four weeks may have passed between finishing your project and the invoice being issued. Add on another four weeks’ payment terms, and suddenly you’re giving your client two months of interest-free credit.
Invoice promptly. If you don’t, you’re giving your client interest-free credit for no reason
If you’re dealing with a regular client, make friends with a member of their accounts team. If you have a point of contact, it makes chasing an invoice that much easier, and an existing relationship means you’re less likely to be forgotten. Call a few days after issuing your invoice to make sure it has been received, and ask them when they expect to make the payment. This will give your client a chance to let you know if they anticipate any delays making the payment (which, unfortunately, isn’t too uncommon these days) and allow you to plan accordingly.
To encourage swift payment, consider offering discounts for clients who pay up promptly: for example, 5 per cent off if the invoice is settled within a week. For large contracts, break the payments into smaller invoices to be submitted at agreed milestones. For projects that will require sizeable outlay on your part (for example, buying software), take a deposit up front. This will not only improve your cashflow but simplify the invoicing process on completion, because you won’t have to recharge the expense to your client.
Breaking out the stick
If the carrot doesn’t work, it’s time to break out the stick. Make sure your contracts include cast-iron late payment penalties, and don’t be afraid to use them. Nothing will hurry a bookkeeper along like the arrival of a second invoice with big red writing on it and additional charges. Late payment charges aren’t just compensation for your inconvenience – think of them as a way of educating your client as to how you do business.
If the worst should happen and it looks as though your client has no intention of paying, it could be time to find a reputable debt recovery service. Many offer a no-win, no-fee set-up, and will only take their payment from money they recover. At this point, what have you got to lose?
And if you’ve somehow managed to complete a piece of work, but don’t have a contract in place with the client (come on, we’ve all done it!), there is legislation you can use to charge interest on outstanding payments. The rules in question are called the Late Payment of Commercial Debts (Interest) Act 1998, and allow you to charge interest at 8 per cent above the Bank of England Base Rate (so 8.5 per cent at the time of writing), starting 30 days after you invoice your client.
Finally, if you find yourself going through a particularly tough spell even when clients are paying on time, firms such as Market Invoice and UC Finance allow freelancers and small businesses to borrow money using their time sheets and invoices as collateral. The firm will take a small, tax-deductible fee when your client eventually settles the invoice.
Five tips to stay on top of cashflow
- Invoice your client the second your work is finished. A day twiddling your thumbs is a day of free credit you’re providing for no reason.
- Don’t be afraid to put your foot down if your client is messing you around. Remember - you earned that money!
- Knock up a cashflow forecast based on your previous year’s income and plan in advance for any periods you expect to have lower income or higher expenses.
- Don’t be afraid to say no to clients who offer onerous payment terms. In fact, do your fellow freelancers a favour and flat-out refuse people who insist on 90-day payment terms.
- Always know how much money you have available to your business - and make sure this figure includes deductions for tax payments. Your accounting software should make this fairly obvious (and if it doesn’t, find a package that does!).
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