But along with policies about how money should be collected, you need some procedures about how you'll actually collect it. This week's installment is an intro to money collection policies.
- Overview -
Again, many people start their small businesses with no real policies about money. We assume that everyone's honest, everyone is willing to pay for what they get, and everyone understands that we're just a small company trying to get by. And, 99% of the time, that's true. But that 1% can be a huge pain the butt!
To begin with, you need to establish the terms you will offer clients. Terms and payment policies are directly related, but are not the same thing. You might have terms of "Net 30" from Ingram or Synnex. That means that the total payment is due within 30 days of when you placed the order.
You can have different terms for managed services, hourly labor, and hardware/software/materials. For us, anything we resell (hardware/software/materials) is "Due Upon Receipt" and we have to receive the money before we order the product. In this way, we're 100% sure that we will never owe money to a supplier for a product and then have to wait to get paid.
We require that managed services be paid on the first day of the month and is considered late on the 5th . . . just like the rent. As I've mentioned before, our actual policy is that managed services are prepaid monthly by credit card or three months in advance if the client pays by check.
[Side note on credit cards: This is the 21st Century. You just have to take credit cards. They allow you to get paid in advance . . . just as you pay in advance for many of your own bills. Yes you have to pay some small percentage every month. Just do it. If you need to lower your rate, contact My Man Richard to get set up with a lower rate. But even if you pay 3%, it's always better to have the money guaranteed on the first day of the month than to have to deal with collections.]
As for hourly labor, we have terms of "Net 20 Days." That's pretty generous (in my opinion), but still puts each payment after the next payroll cycle since we pay twice a month. Keep these connected in your mind: Clients are paying you for labor that was delivered on Day 0. You paid your employees for that on Day 15. The client can pay you as late as Day 20.
You need a little cash on hand to make this "float" happen. That's reasonable. But having the client ignore you and not pay for 30, 60, or 90 days is not reasonable. Keep that in mind.
We also charge Late Fees and Interest. You will charge late fees for any payments received after the 5th of the month, or for whatever the term is on other invoices. We recommend a simple $25 fee. Not too big. Just enough to get their attention.
As for interest charges, we charge 18% per anum or 1.5% per month. Quickbooks is real good at calculating this. We apply interest charges every Monday right before we do billing for the previous week. Note: Your state may limit the interest you can charge without a service agreement in place.
Some people just refuse to pay late fees and interest charges. For some reason, they think the I.T. company is different from the bank, the landlord, the copy repairman, the heating and AC company, the janitor, the carpet cleaners, and everyone else they deal with. If you're different on this front, it's because you've allowed yourself to be.
We eventually collect these fees from everyone. One day they'll overpay, or have a refund coming for some reason. Simply apply the refund amount to any outstanding late fees and interest changes, and refund the rest.
In very drastic cases, we have cut off clients who owe us more than $500 for more than 30 days. After a couple instances, they learn to pay on time.
- Implementation Notes -
The implementation of these processes is not difficult, and there aren't a bunch of forms. But you do need to take care of three stages of implementation.
First, you need to figure out what you want to do with your terms. Write it down, just like the paragraphs above. Put this in a binder for Operations (as opposed to Technology policies).
Second, you need to write one or more letters to your clients clarifying your policies. You should also review your contracts (everyone needs a signed Service Agreement with each client. Your agreement should state your policies and be flexible enough to allow minor changes with a memo.
Third, you need to implement your policy. Next Monday, review your past due balances. Assign late fees and email out invoices for those. Then assess interest charges. Identify clients who are grossly over due (e.g., $500 for 30 days) and take appropriate action.
Most importantly, stop worrying! You're not going to lose clients simply because you have the same policies in place that THEY have with their clients. These are very normal business terms. So don't freak out about it. Just implement and move on.
Your Comments Welcome.
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About this Series
SOP Friday - or Standard Operating System Friday - is a series dedicated to helping small computer consulting firms develop the right processes and procedures to create a successful and profitable consulting business.
Find out more about the series, and view the complete "table of contents" for SOP Friday at http://www.smallbizthoughts.com/events/SOPFriday.html.
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Next week's topic: Documenting Backups
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