In the previous article we discussed the switch to monthly billing from milestone billing, using purchase orders, and providing an invoice summary with every invoice. The following steps build on the previous 4 steps to create an unbeatable strategy for getting paid quicker as a consultant. Remember that money held in a client’s bank is collecting interest, so there is an incentive to hold-off paying as long as possible. As well, the money can be (and often is) held as a lever over the consultant by the client.
Getting paid as quickly as possible is the name of the game in consulting and is a major objective of any successful consulting firm.
Step 5. Put Project Managers in charge of invoicing their projects
When a new firm first starts out, the owner(s) do all the all invoicing and things are usually simple and straight forward. But as the firm grows, one of the early hires is usually a book-keeper to manage payroll, pay taxes and expenses, oversee invoicing and to manage accounts receivable (AR). A very common tactical problem experienced by many growing firms, is putting the book-keeper in charge of the firm’s invoicing. This approach is typical because there needs to be a firewall between project managers (PM’s) and the company’s accounting system. But the problem with this model is that book-keepers, who have no knowledge of the project or the client, are left to chase project managers for any possible invoicing, for timesheets, for project expenses, and for status reports. This model is very stressful and time consuming for the book-keeper, who is at arms length from the project and the client, and it can muddy the accountability of project invoicing by adding an intermediate step. This approach is prone to conflict in every firm that uses it. If this is you, you know exactly what I mean.
A much more responsive model is to put the project manager in charge of the invoicing using an intermediate project accounting application like GroupThinq. In this model, the PM, who has direct knowledge about the project status, the client and the work completed, is the person who is tasked with the invoicing for the project. The PM-generated invoices are either sent directly to the client or to the book-keeper to be sent to the client. Either way, the intermediate invoice for GroupThinq is entered into the firms accounting system by the book-keeper soon after they are created by the PM. This model maintains the firewall between the accounting system and the PM and it makes the PM directly accountable for all invoicing through GroupThinq. The PM invoicing model significantly reduces conflict between the PM and the book-keeper, and it shifts financial accountability to the PM and their team. The intermediate step is removed making the process quicker and more accountable.
One of the most important steps any firm can make to get paid quicker, is to shift to the PM-generated invoice model using a project accounting application like GroupThinq. Once you switch, you will immediately streamline the invoicing process and you will get paid quicker. Yes it will require a little extra training, but the returns will be substantial.
Step 6. List the Invoice Terms on Every Invoice
Every invoice should list the terms of payment (30-days is typical in consulting) and the penalty terms (2% for overdue penalties). These two terms should be listed on EVERY invoice and should be highlighted in every proposal to be legally binding. Without these terms, there is no legal binding way to enforce payment and a consequence is that it will take much longer to be paid.
Step 7. Carrot Vs Stick
Some firms provide a discount for all invoices paid before the due date, and then a late penalty for overdue accounts. Invoice discounts can often range from 2%-5% if paid before the due date. This can be a positive motivator for some clients to pay on time. Payment penalties are normal in consulting are usually in the same range though 2% is typical. Once the invoice is overdue, the late penalty is calculated by multiplying the invoice amount by 2%, divided by the terms in days (say 30-days), and then multiplying by the # days overdue from the due date. So for example, a $10k invoice with 30 day terms and 2% late terms, that was 60 days overdue would have a late penalty of $400 ($10000 * 0.02 / 30 * 60 = 400). The use of discounts and penalties are typical in consulting. The penalties are usually charged as a last resort in some firms, but there are many types of consulting (like lawyers or accounting) that use them regularly.
Step 8. Managing Accounts Receivable
Managing receivables is a pain point for every firm. The pain can be compounded if left solely in the hands of the book-keeper to manage. It is usually best practice to have the book-keeper follow up on an overdue receivable as soon as they become overdue. For instance, if the terms are 30-days, then on day 31, an overdue notice should be sent automatically by the book-keeper (assuming you have one in-house). But as the receivable reaches 45 or 60 days, it should be the PM (or in some cases the owner) who follows up with the client on payment status. At a certain point, work should cease on the project until bills are paid.
GroupThinq’s Accounts Receivable (AR) report, makes overdue invoices visible to all owners, accounting staff and supervisors so they can keep a close eye on receivables. With GroupThinq, there is no need to generate an AR report from your accounting system since its available in GroupThinq. GroupThinq also tracks the average days overdue for every client so you will know which client’s are ‘problem payers’ and which client’s pay their bills on time. The ‘average days to pay’ is available right in GroupThinq’s AR report so you can pursue slow payers with greater intensity. Remember to involve the PM at an early stage of collections, they will have a much better chance at collecting than an arms-length book-keeper.
Step 9. Send Overdue Statements
When invoices slip into overdue accounts, it is important to be vigilant in collecting. The probability of actually getting paid decreases significantly over time. Overdue accounts that exceed 90 days have a low probability of collection in many industries. Your only leverage is to halt work and hold any deliverables or start collections with an external agency. This is a position that no consultant wants to be in.
One way to get paid faster is to send an overdue statement with the accruing penalty every week or two to all overdue accounts. An overdue statement is a list of unpaid invoices, the due date, the number of days overdue and the overdue charges. Overdue charges are one way that clients will take notice of overdue accounts quickly. They may not pay the overdue charges (that is not necessarily the point), but they will be more prompt in paying the overdue invoice.
GroupThinq will be launching an overdue statement report this fall 2020.
The Cat and Mouse Game of Getting Paid
Getting paid quickly can mean the difference between a flourishing or a tanking consulting practice. It is something that every firm needs to be vigilant about and if you follow the 9-steps outlined in this 2-part column (see Part 1), you will quickly be on your way to more rapid payments as a consultant.