03/ 31/ 2005
by Jeffrey Moses
One of the most crucial activities at the beginning of a new business relationship is establishing effective and mutually agreed-upon billing procedures. Toward this end, it's important to present billing options to new clients and work with them to establish methods and terms that meet their needs and yours.
The most frequently used options include:
- A percentage of payment in advance, with billing to follow when a previously agreed-upon portion of the work has been completed.
- A percentage of payment in advance, with the remaining due upon completion of the work.
- Payments at specific intervals throughout the project, such as when one-quarter, one-half and three-quarters of the work is complete, with final payment upon completion.
- Entire payment upon completion of the work.
- Payments based on weekly or monthly intervals, no matter how much work has been done during the interval.
- Frequent billing at first while the customer becomes comfortable with the work done and with the charges. After that, larger portions of work can be completed between billings.
Owners of service-based small companies, including sole proprietorships, often feel the need to require a percentage in advance (Options 1 and 2 above)—with 15, 25 or even 50 percent being standard. This partially protects you against customers who refuse to pay after much or all of the work has been completed.
It can also leave you vulnerable when customers have legitimate reasons for not liking the first stages of work completed. When customers demand a return of the advance, even after you have spent a considerable amount of time on the project, you will have little option but to come up with the cash. Clearly, this can cause a problem if you have spent advance.
Whenever you choose Options 1 or 2, you should stash the advance in a safe place and not spend it. Do not consider the money yours, no matter how tempting, until the customer has approved the work.
Option 3 offers safety to both you and your customer because payments are made regularly throughout a project and each payment is based on specific work done. When using this payment method, it's important to carefully define what constitutes completion of one-quarter, one-half and three-quarters of the project. You should establish benchmarks so that you and your customer can be in complete agreement.
Option 4 usually works best when an ongoing relationship between provider and customer has been established. However, there is little reason for a provider not to ask for payments as the work progresses, even with established, long-term clients. Normally, the personal relationship that develops over time will make asking for regular payments straightforward, if not completely easy. Your customers realize that providers have ongoing expenses, business and personal, and that they will get the best quality work done when you feel more financially at ease.
Option 5 is, in effect, a retainer relationship, in which you are paid at regular intervals, even when little or no work is done during an interval. The important thing in this type of payment relationship is to clearly define how much work you should do for a specific amount of payment. This can be stated in actual amount of production (say, number of pages of a book written or amount of software code produced) or in actual hours spent. Ideally, you will be allowed to balance out your time from one pay period to the next so you don't put in too many extra hours without adequate reimbursement. Sometimes customers try to get you to do extra work each pay period without extra payment for the work. You need to guard against this and keep careful records of hours you put in or work you accomplish.
Option 6 usually provides the best opportunity to establish a harmonious, long-lasting relationship between you and your customer. Frequent payments give customers the chance to be closely involved with how much work is accomplished. The result is that customers have little opportunity to debate charges. It is important that you ask your customers to keep current with payments. You should ask if invoices can be sent via e-mail or fax, rather than regular mail. This gives you the chance to "instantly invoice" and helps your customer remain current with payments.
