Friday, June 14, 2013

SOP Friday: Billing Procedures and Policies

Prelude to the Policy: Before you get down to sending out invoices, you need to be very rigorous about getting the right information into your PSA. For example, you need to sure about what's Included and Excluded from managed services. Which is to say, what's Billable and Unbillable. Even within "covered" service requests there can be billable time entries.

Review your time entries against your policies about on site and off site labor as well as normal hours vs. after hours rates. In all cases you need to keep track of your minimum charges. You also need to apply any credits or write-offs.

In other words: GIGO - Garbage In, Garbage Out. You can't get out of the system something you haven't put into the system.

You need rigorous procedures to make sure all the time entries in all the tickets are correct. Then you can proceed to the billing process.

See the post on SOP: Invoice Review and Processing

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So let's set the scene: You basically have three times when you invoice clients. First, you invoice for monthly services such as managed services, BDR, hosted exchange, etc. Second, you have project labor that might be billed in advance, weekly, or monthly. Third, you will have product purchases such as hardware and software.

That earlier article walked through the process of cleaning up time entries and invoicing for periodic labor. Other invoicing is similar. You need to decide whether you want to run all billing through the PSA or deal with it separately. "Separately" might mean a quoting tool such as QuoteWerks or Quosal, or it might simply be QuickBooks.

But what are you billing policies?

For most of us, our policies just evolved over time. They may not be coherent. We may have different policies for different clients. Obviously, you can predict what I'm going to say next. You need a small set of consistent policies about how you bill and when you bill. Let's take the three categories one at a time.

Get Paid in Advance!

Let me preface this by saying that we get prepaid for 98% of everything. Everything. Period. I get so much push-back from consultants who have convinced themselves that they cannot get paid in advance. "My clients wouldn't do that. They'd go somewhere else. They'll leave me."

Not true. Not true. Not true. With VERY few exceptions, most clients will simply comply. If you feel like you have to make excuses, blame the economy, your supplies, the bank, or me. But just write a memo and be done with it. Think of all the things you pay in advance. Your clients are the same way. Don't have both sides of the conversation!

Billing Policies for Monthly Recurring Charges
Proposed policy: All monthly recurring charges must be paid in advance by credit card or ACH on the first day of the month.

That means you need to get invoices out before the first of the month. About 30 days in advance is fine. We actually do ours ten days in advance. That's because everyone is on auto-pay so they only need an invoice for their records.

In my opinion, there is no reason you should not be paid in advance for any service that is fixed fee and monthly. You might be flexible about the the date (1st, 2nd, 3rd of the month), but that's it. You are providing necessary and valuable services. You are committed to your suppliers for the month (e.g., anti-virus, spam filtering, RMM, PSA, email hosting). You have lots of legitimate reasons for being paid up front.

Exceptions to the policy: Okay, there are always exceptions, but you can standardize most of them. If client absolutely refuse to pay with a credit card, you can let them pay by check. BUT it must arrive by the first of the month AND they need to pay three months at a time. I think we have four clients who took this route.

The other exception was my accountant. Helluva nice guy. Friend for 20+ years. We didn't make him sign up for managed services. We didn't make him pay in advance. But eventually we moved him onto one of our cloud plans ... and didn't give him an option. Everyone gets one "exception" client. :-)

Billing Policies for Project Labor
There are three easy ways to bill for project labor. And there are two types of project labor. The first type of project labor is "truly billable" labor for clients that is not covered by managed services. For example, we cover the maintenance of the operating system and software. Adds/moves/changes cost extra. So if we install a new program, that's billable.

The second type of project labor is actual projects such as migrations, installing a new equipment rack, or moving a client to a new MSP. This kind of labor might be flat-fee or hourly.

The first way to get paid for project labor is most relevant to flat-fee projects: Get X% up from and the remainder when the job is finished. Note that X can equal 100%.

The second way to get paid for project labor is via blocks of time. So, for example, the client pays you for ten hours of time and then they can chip away at it. When you would bill them an hour, you simply remove 1.5 hours from their credit on the books.

The third way to get paid for project labor is in arrears. That means that you bill the client after the work is done and they have a certain number of days to pay. Common time frames are 20 days and 30 days. I really wouldn't make it longer than that.

Because we have so little billable labor for clients on managed services, we bill in arrears for that. It's a very small amount and we have terms of net 20 days. Projects are billed at flat fee unless we really don't know what we're getting into. We ask for half up front and the rest upon completion. And that means ON completion - not 30 days later.

Billing Policies for Hardware and Software
This one is easy. We got into selling hardware and software when we didn't know anything about the business. We would run to the store and buy something, make very little profit, and then bill the client and let them pay in 30 days. Over time that led to buying from real suppliers (e.g., Ingram/Synnex), making more profit, and much larger projects.

In other words, every part of our process evolved except payment.

Eventually, we adopted a very simple rule, and I believe you should do the same: We get paid in advance for all hardware and software orders.

This is easy to install. Write a memo and do it. "Beginning August 1st, all hardware and software purchases must be prepaid." That's it.

If clients would rather go online to Dell, HP, CDW, or Tiger Direct ... they will pay in advance with a credit card. Your clients pay in advance again and again and again with everyone else. You are simply coming up to speed with the 21st century.

There are two really great reasons to adopt this policy. First, you are never out of pocket for hardware and software purchases. That means you have conquered cash flow. Second, there are clients who give you the "go" and then change their mind. If the timing is wrong, you've ordered equipment and now you need to return it. In the meantime, you haven't been paid for it.

Life is much better when you get paid in advance for all hardware and software. Unlike monthly charges, we have never had any client argue about this or question it. Just do it.

Payment Policy Summary

Monthly recurring services will be billed ...

Project labor will be billed ...

Hardware and software will be billed ...

If you haven't reviewed your billing policies in some time (or ever), now is a grea time to do it.

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

Next week's topic: The Managed Services Grid

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