Let me tell you a story. A few months ago I was speaking with a Credo agency during our monthly catchup. Per usual, we were going through the clients we had sent them in the recent past and discussing them.
We do these monthly with our Preferred agencies, and often they turn into consulting sessions once we’re through the business side.
This particular agency told me that their billing process worked this way:
- Client signs contract
- Agency sends content ideas within two weeks
- Client approves content (no deadline)
- Agency sends first invoice
- Client pays with net-30 terms
At least, this is how the process is supposed to work. Even when the agency sends content ideas on time, the client sometimes takes weeks to approve the ideas. This delays the sending of the first invoice.
Then the agency sends the first invoice with net-30 payments. If you’ve run or worked on the payments side of a service business, you know this usually becomes net-45 to net-60.
At best, the agency we’re talking about gets paid six weeks after the contract is signed. But their average right now is 10 weeks, and they’ve had it take as long as 16 weeks to get the first payment.
Basically, what this means is that they’re reserving time and working on a client who isn’t paying them until the next quarter of the year.
It’s impossible to run a cashflow positive business this way! You have payroll to make, freelancers to pay, business overhead, and more. You can’t wait 3-4 months to get paid for work you’ve done.
What we ended up doing with this agency was convincing them to send their first invoice as soon as the contract was signed. No more waiting for the client to approve content ideas.
What happened? Three things:
- They also sped up the amount of turnaround time to get the first content ideas over to the client. If you’re changing processes, you need to show them that they’re getting something of value too.
- Clients turned around content approval quicker because they were already paying for the time spent.
- Average time to first payment dropped from ten weeks to five. Still not quite cashflow positive, but much closer. The CEO can sleep at night.
This is one story of many where I’ve talked with agencies or consultants struggling to make ends meet because of their billing practices.
So what are some strategies you can implement to improve the cashflow of your service business?
Strategies for improving service business cashflow
There are four main strategies that every service business should investigate implementing. Any one of these can dramatically improve your business, but if you can implement all four then you’ll really be soaring.
- Send the first invoice as soon as the contract is signed;
- Require a percentage of first invoice upfront before beginning work;
- Automate payments instead of invoicing manually.
- Get clients into an ongoing retainer;
- Consider only taking digital or ACH payments.
Let’s look at each of these.
Send the first invoice as soon as the contract is signed
This one should be a no-brainer, but often is not. Just like many people are afraid of sales, they’re also afraid of sending an invoice to a client.
Let me say this as clearly as I can: fear has no place in business if it paralyzes you from doing what is right for your business.
Fear can be great when it pushes us to do more and inspires us to action, but when it paralyzes it’s not serving you.
Sending your first invoice as soon as the contract is signed does more than just help you run a more cashflow positive business. It also psychologically triggers the client to be more attentive and get you what you need because they are now on the clock to make good on their investment.
And when they’re more invested and you know you’re going to be compensated for the time you are spending, both sides dig in harder and get better results.
That’s right. Invoicing properly can get your clients better results.
A tip for you PPC people out there who bill as a percentage of spend. Consider moving that billing model to a flat fee plus a percentage of spend. You need to work out if this makes sense for your business based on how you’re currently billing, but I see many agencies have a flat retainer plus percentage of spend above a certain level which then lets them get cash upfront and still get compensated for more spend as profitability/return merits it.
Require a percentage of first invoice upfront before beginning work
One of my favorite strategies for being cashflow positive is requiring a percentage of your first month/invoice upfront before work starts.
If you are concerned that a client will take forever to pay (or maybe that they won’t pay at all), this also guarantees that you’ll at least get paid a percentage of what your client has agreed to pay you.
Some clients will balk at this, especially if they’re not fully convinced and want to “try it out to see if it works.” It’s your choice whether or not to work with these clients (I personally decline), but it can be a sticking point for a lot of them.
To overcome their objection, I’ve used this to great success:
Hi CLIENT, the reason I require a deposit upfront is because I incur costs and time setting up tracking and everything that goes into making your project successful. It also reserves my time for your project.
If that is an issue for you, let’s hop on a call to discuss it.
I have never had a client want a call to discuss it. I’ve also never had a client refuse to work with me because of it.
Your mileage may vary, but holding strong on this is best for your business.
Automate payments instead of invoicing manually
How many times have you said “Oh shoot, I forgot to invoice CLIENT!” or had to ask your client “Did I send you that last invoice?”
Hopefully not too many, but I still see a lot service business owners manually sending invoices. In this day and age with the technology at our disposal, there is (IMO) no reason why you should still be manually sending invoices that the client then has to process on their end and then send a paper check that takes multiple days to reach you.
Tools that automate payments aren’t free, but their cost is negligible for what they enable you to do. Which would you rather do: forget to send a multiple thousands of dollars invoice or pay $49/mo?
I’ll take the latter any day of the week.
Using a tool like FreshBooks or Xero, you can set up a client and a recurring invoice to be sent at a specific time each month. With most invoicing tools you can also take credit card payments, ACH, or allow them to save their details so that the billing happens automatically.
Get clients into an ongoing retainer
Retainers are notoriously difficult to sell, which is why I wrote my guide to selling consulting retainers over on my personal site. That post is packed with strategies and tactics to sell them well.
Point blank, the way to build a consistent and profitable services business is through retained work. If you have a base of revenue you can expect each month (while recognizing that churn happens), then you can hire and support your clients well.
If you combine retainers with the automated billing mentioned above, you can:
- reduce your invoicing and billing overhead;
- plan your revenue, hiring, and investments in your business further out;
- not worry about payroll.
I was recently speaking with a friend who was waiting for a very large (life changing money for 99.9% of people) check to come from a client who wanted to pay for their next year upfront.
They had moved offices that year, and since it was also a previous client the client somehow only had their old office address on file. So, this multiple six figures check got sent to their old office.
Paper check. Multiple six figures. Wrong address.
While I recognize that some clients (often the ones who can pay multiple six figures, unfortunately) cannot do direct ACH payments, and some payments are too big to be done via a credit card, the reality is that most consultants/agencies are not exclusively working with these levels of clients.
The better way to get paid quicker is to offer only digital payment options. I exclusively accept credit card and ACH payments.
ACH payments are free, and credit cards you have to pay a percentage on. But to me, that percentage is worth it to get paid quicker. And, I simply build that percentage into the project fee so it’s covered anyways.
You can do this easily with Stripe, and many of the invoicing platforms allow you to take credit card payments (many of them use Stripe themselves!). In fact, you can also send invoices with Stripe if you wish.
What cashflow positive business strategies have you implemented that I’ve not mentioned?
Drop them in the comments 👇