I had another one of "those" conversations with a partner last week. His clients owe him money and won't pay it back. At least not quickly.
Cash flow crunch.
"Other than that, he's a great client."
Wait. Stop. Other than not paying you he's a great client? Huh?
I'm sorry. I thought you said that other than paying you for your work, he's a great client. What can that mean?
[Sometimes our "personal" relationships with our clients are a sort of mental illness. How else can you explain that someone owes you thousands of dollars and you find yourself making excuses for him?
This really honestly is a form of co-dependence. You enable your client to not pay.]
Let's take a deep breath and look at what you know is true even though you're trying really hard to lie to yourself.
Assumption #1: You Want To Be In A Profit-Making Business
Either get over the feeling of guilt about taking money for what you do or close your business and go to work for someone else.
To make a profit, you need to use money wisely.
It is naive to think that business consists of exchanging dollars for hours. Why? Well, some people don't pay at time of service. So, some portion of the money owed to you will never show up. It might be 1% or 2%. It might be .01% but it's not 0.0%.
If you've been in business for a few years, you can calculate how many dollars will never show up. It's a generally reliable percentage. But it's different for every business because we all have different policies about collections.
The tighter your policies, the less you lose.
Think about those last two sentences. I can't predict how much money you'll lose as a result of your policies. But I can assure you that the primary variable is YOUR POLICIES. When you decide to change your policies, you'll lose less money.
There are two principle ways that you give away money whenever someone does not pay in advance. First, there are some losers who never pay for whatever reason. Luckily, these are rare.
Second, there are people who delay and delay and delay. So you lose the use of their money. You might borrow money to pay your bills during this time. You might give them a discount just to get them to pay their bill! So they get to claim "I pay my bills. Nobody ever lost a nickel on me." In the meantime, you're paying interest on the money you borrowed because they didn't pay you.
Assumption #2: You're Not A Bank
If you want to be in the profit-making business, here are some realities you need to deal with today.
1. The banks are not giving credit
2. The credit card companies are not giving credit
3. If you pay down your balance on your credit cards, chances are good that the CC company will reduce your credit!
In other words, credit is tight.
Let's think about our capitalist roots for a moment: Supply and Demand.
If money is hard to come by and your clients want money . . . the most obvious thing you can do is to charge them for it. In other words, if you are going to get into the money-lending business, now is a great time IF you're willing to charge Interest !!!
If you're willing to charge ZERO and loan people thousands of dollars for absolutely no return, then you're not living in the real world. (Unless you're willing to loan money to me for zero interest. If so, please contact my office today and we'll send you the bank routing numbers.)
If you want to make money, you need to put in place some common sense policies like those used by 99.9% of all businesses in the world.
Consider what would happen if you stopped paying . . .
- Your rent
- Your internet bill
- Your phone bill
- Your Tivo subscription
- Your spam filter subscription
- Your electric bill
- Your dentist
- Your suppliers (Ingram, Synnex, etc.)
Now, each of these has a different time table. Some will cut you off on day one. Some won't realize what's going on for three months. But ALL of them will charge you late fees. And all will charge you interest. And all of them will eventually cut you off.
And when you're all straightened out and flush, what will happen?
Some will bring you right back onboard because they have no institutional memory. Some will make you put down a deposit. Some won't take you back at all. Some will flag your account to make sure you get the next round of price increases.
In other words, there are consequences for not paying your bills.
Why are your clients not subject to these consequences? They have to pay their rent on time. And their internet, and their phone bill, and their Tivo, etc.
The only people they don't pay on time is YOU. Why? Because when money's tight, people make strategic payments to reduce late fees and service charges.
Assumption #3: Your Customers Are Good People
I am free to call your customer a loser because I don't know him. But chances are, he's just another businessman taking advantage of the resources available to him.
A few weeks ago one of my oldest clients decided to sign a deal to buy a new server.
Our policies are:
- Hardware and software must be paid up front.
- Hardware and software are ordered from suppliers after we receive payment in full.
- Project labor is invoiced each week as worked. Net 20 days.
- - except flat-fee installs, which are invoiced with the hardware and due in 20 days.
Late payment policies are:
- On the day an invoice goes "late" there is a $25 late fee assessed.
- All unpaid balances incur services charges of 1.5%/month (18%/year).
- Each Monday we review accounts. Any account with $500 or more in unpaid invoices is put on hold and all work suspended.
Well, this client was signing a deal for just under $20,000. So he asked whether we would take 50% up front on the hardware and software.
Well, then, how about hardware now and labor when the job's done?
I spent a few minutes explaining why we have to operate as we do. For example, If I send people out to work now and don't get the labor payment for six weeks, I'll have generated three paychecks before I get the money to pay my employees.
So the answer is no.
"Okay." He said "I'm just trying not to dip into the $2 million line of credit we have at the bank. We need the cash for our busy season."
Totally understood. Cash flow.
No hard feelings. It's just business. He has to ask. I have to say no.
When you're spending money, you need to use other people's money as wisely as you can. If you can borrow a little here or there interest-free, and it helps your cash flow, you should do that.
And your client should do that.
There's nothing going on but business.
Your clients are probably very much like this. They're just trying to do the best they can with the financial resources available to them. YOU are one of those resources.
Did that happen to you or did you choose to do that?
Most partners I talk to find themselves "stuck" because they've just let this happen year after year and they don't see a way out of it.
To paraphrase T.S. Eliot: The way out is the way in.
You got here one step at a time. Retrace your steps.
Assumption #4: You Need More Cash Than You Have
We can all use more cash, right? Especially now.
Cash is the air of business. You don't last long without it.
Service businesses -- especially service businesses that also sell tangible products -- get caught in cash flow crunches very easily.
There are regular, definable flows of money OUT of your business. See the list above re: rent, internet, etc. Add payroll to that and the picture gets real big real fast.
But income is less "guaranteed" than outgo. Even if you have a good base of regular recurring revenue from managed services, there's still project labor and hardware/software sales.
The bills come due when the bills come due. You pay for some things outright. Credit cards come due.
You cannot simply wait for the money to come in!
Stop. What's that I hear? The faint voice of experience saying that you've always just waited for the money to flow in AND it always has. We live in an expanding world of technology. There are always more clients, more hardware, more software, and more fun toys.
As long as the universe keeps expanding, you'll always be able to borrow from your own future to pay for today's bills.
Then the world contracted a bit.
October 2008. Ouch.
The bills flow in as they always have. But where's the new work you were supposed to get?
Now more than ever, you need to squirrel away cash to make sure you have the money on hand when needed. If you're in the I.T. business, so get out of the banking business.
Use other people's money wisely. And be wise about how other people use your money.
Developing Smart Money Policies
Okay. Enough beating you over the head. Let's get on the road to recovery.
First, what are your current policies about money? You can't say you don't have any. You do. If Jane Client calls you today and wants to buy a laptop, what are your policies?
What's your policy on Hardware and software?
What's your policy on Project labor?
What's your policy on Managed Service payments?
What's your policy on late fees?
What's your policy on interest charges?
What's your policy on bounced checks?
and so forth. What do you do? That's your current policy. Write it down.
Second, where do you want to go? What do you want your policies to be?
Once you've written down the "old" policies, draw a big line across the paper and write "Beginning June 1, 2009, the following policies will be in affect."
Then write out where you want to be.
Now, tune it up a bit, print it on letterhead, and send it out to all of your clients.
Add a summary of these policies to the bottom of your quotes and to the bottom of your invoices.
Really, honestly. Just do it.
The difference in your business will be dramatic. You'll get money in hand before you order the hardware. You can pay cash if you want! And a project that should be good news and bring money flowing into your business won't throw you into a panic about how you're going to make payroll when you've got $10,000 worth of new bills to pay.
Get one really good thing out of this recession: Healthy cash flow!
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Note: If you decide that you really don't need to be paid in advance, or charge interest or late fees, and that you're willing to let people pay you back when they get some free spending money . . . PLEASE contact me.
KPEnterprises would like to replace the carpet in the main office. We could use some free money. And we might do some more advertising too. We need money for that.
In fact, if a thousand readers each loaned me $1,000 and let me pay it back when I get around to it, I promise I will.
We could do a major expansion if enough of you will just give me a loan with no strings attached. Don't worry. No one's every lost a nickel on me!
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