Good cashflow is vital. Many profitable businesses become insolvent because they need cash, not profit, to pay bills or loans. As a freelancer or contractor, it's a matter of having the cash at the right time therefore its important to get into the habit of producing cash forecasts based on best and worst case scenarios, so that you can take action quickly if problems arise.
The financial buffer
When planning to work as a freelancer, you will need to take into account the fact that you will no longer have paid holidays and sick leave. It' therefore important to have a financial buffer to weather periods without work and income. Use your freelancing income to build up a cash reserve fund in your company sufficient to pay you enough to cover your living expenses for at least six months.
Remember to plan for any possible future VAT or tax payments as well as other standard business expenses. IPSE has therefore created a Financial Forecast spreadsheet to help members manage the financials easier.
Improving cash flow
One of the most basic ways to improve cashflow is to get clients to pay their bills more quickly. These are some tactics to consider:
- Ask for a deposit payment in advance, of 20% or 50%, for example. Don’t assume that you have to offer 30 day payment terms – try offering 14 days instead, and where third party expenses recharged at cost are involved, insist on repayment within seven days.
- Offer early discount settlements.
- Send out your invoices promptly, and ensure that they are sufficiently clear and detailed, and that they reflect the terms of your contract, so that the client does not have any reason to query the invoice or delay or withhold payment.
- Make sure that your terms and conditions are clearly outlined in your contract with the client, and that there is no scope for ambiguity.
- Chase outstanding invoices vigorously, and keep dated notes of all conversations.
Tackling late payments
Late payment is a serious problem for a small business, which can be forced to borrow money to keep going while awaiting payment, or in extreme circumstances, even go bust.
“The secret to effective collections lies in underpinning your customer relationships with systematic and consistent credit management practices,” says Philip King, director general of the Institute of Credit Management. “Credit vetting, terms of trade, accurate invoices and a good rapport should all form part of the structured approach you take when dealing with your customers,” King advises.
However, even with a good system in place, sooner or later most freelancers and contractors will have to chase up a late payment. When that does happen, it helps to be armed with the latest information on your clients’ legal requirements.
Since November 1998, small companies have been able to charge business customers interest on late payments, under the Late Payment of Commercial Debts (Interest) Act 1998. Small businesses can charge other small businesses interest at 8% over base rate. If you have not specified a credit period in your contract it will be assumed to be 30 days from delivery or invoice, whichever is later. If payment is not forthcoming, after the credit period is up you need to follow up the invoice with with reminders which can be phone calls, letters, emails, faxes or even personal visits.
During the collection process you may encounter customers who either can’t or won’t pay. You may need to impose collection sanctions such as stopping supply, reviewing the credit limit, imposing interest, use of a collection agency or legal action. “For customers who genuinely can’t pay, it is important to determine the cause of the problem and how serious it is, what is being done to resolve it, what you can do to help and what, if any, assurances can be offered in return for your help,” suggests King.
It may be in your interests to negotiate a settlement such as a payment plan. For customers who simply ignore requests for payment, or make endless promises to pay you may need to threaten, or even take legal action. Take the advice of a solicitor before taking legal action.
Debt collection top tips
- Be courteous: Remember that every contact you make with your customer can add to your existing relationship. A professional but friendly approach can earn your debtor’s respect and cement loyalty.
- Convey urgency: Emails and faxes are useful tools in the collection armoury as they convey urgency and often beat defensive barriers when letters are being ignored or phone calls diverted.
- Be systematic: Incorporate phone calls into your collection strategy. A good strategy will timetable appropriate dates for issuing invoices, making phone calls and issuing reminders.
- Be prepared: Check that the information relating to the outstanding debt is correct and that the information is readily available when making phone calls – i.e. the account number, the invoice date and the balance due.
- Be organised: Log the details of the phone call to remind you what action to take next, but make sure that you do not log any information that contravenes the Data Protection Act 1998. The website of the Office of Public Sector Information includes further details on this Act.
Useful ResourcesManaging your money