Saturday, September 22, 2007

Handling Prepayments

[ KP Note: The entire "Managed Services in a Month" series has been collected, collated, and indexed. Still free. You may access it now at ]

Alexander from Miami writes . . .

    In Part 1, you mention that customers either pay for the first month with credit card, or they pay for three months in advance with check. If they go the check route, does this mean that they pay quarterly? If so, how soon would you recommend sending out the next quarter's invoice before it's due? Should the escape clause within the contract then be written to be a three month advisory? I look forward to hearing from you, and delving a lot more into the different websites/blogs you have.

The primary goal is to be prepaid for the flat-fee portion of service.

We let the three months start anytime (on the first of the month). So if you sign today, you'd pay for Oct, Nov, Dec. This is actually good because we stagger the inflow of money. Over time it should be randomly distributed. As long as you keep track of it, you're good.

We send out invoices about 10-14 days before the first of the month so that everyone gets them in plenty of time. But the service agreement plainly states that the amount is due and payable whether you've received an invoice or not. Just like the rent.

For people who pay every three months, we generate three invoices (oct, nov, dec). We don't adjust the escape clause because we're just holding that money until the month gets here. With accrual accounting, that money is not taxable income until it's invoiced. So we just hold the money in the meantime.

So you have to make sure you don't spend it until the month gets here. If someone were to cancel, we would need to come up with monthly fees they've prepaid. Of course we would also convert that sum to an amount "on account" to pay for any other services until the client was completely off our books.

Some clients will ask for a discount for pre-paying. We don't do this for the standard 3-month prepay because there's nothing unusual or special about it. It's what we do and that's built into the price.

We used to give a free month is someone prepaid for the whole year, but that turned out to be more trouble than it was worth.

So, we don't discount for that either.

Basically, we have some flexibility in the setup fees, but not in much else.


Keep those emails coming! Let me know how you're doing out there.

The month is 3/4 over. Plenty of time left!

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