10/ 17/ 2005
by Tamara E. Holmes
One of the biggest risks for service-oriented small businesses is the possibility that a client won’t be able to pay for services rendered. But by looking for warning signs of a financially struggling client, you can stop cash flow problems before they start.
Detecting financial difficulties in regular clients is easiest, since you can spot changes in behavior. Several red flags indicate trouble.
Billing Cycle Changes.
If a client generally pays you within 30 days of being invoiced and suddenly payment takes 45 days or 60 days, take that as a warning sign. The client may be trying to stretch funds, which could indicate financial trouble.Late payments. When clients who generally pay on time start making late payments, it may point to cash flow problems. While one late payment may only require a raised eyebrow, you shouldn’t ignore multiple late payments.
Invoicing Mishaps. Everyone makes mistakes. But if a payment from a client is regularly tardy because of lost paperwork or accounting errors, you may want to pay closer attention to the situation.
Payment Plan Requests. Some clients will come right out and admit that they are having difficulties by requesting a payment plan for services. When a client asks to have payment rolled out over a longer period of time, take that as an indication that your services are no longer as affordable as they once were to the client.
Once you suspect a client of having financial difficulties, what do you do? It depends on how important that client is to you, and how much you need the money the client brings in. At the least, make sure you have enough clients, so if you lose this one to financial difficulty, enough money still comes into your business. If you don’t, focus on increasing your marketing efforts.
Clients making late payments because of carelessness may be more diligent if you charge them a late fee. If late fees don’t spark a behavior change, however, these clients might simply be unable to pay.
If a client tells you about payment problems and asks you to put them on a payment plan, consider whether the plan will hurt your small business’ financial health, and how it will affect your business if you don’t get the money. If the work is already done, take the payment plan, if that’s all the client can afford. It’s better to get some money than none. If services haven’t been completed, check your business’ financial health to determine whether a payment plan makes sense for you, or if you should look for a new client to replace this one.
Another way to handle a client with questionable financial stability is to change your billing procedures. If you generally invoice once work is completed, you may want to charge a portion of the fee up front, then invoice for the remaining amount once the job is completed. That way, you’re guaranteed to get something for the job, even if the client can’t pay the entire amount.
If you do a lot of work for a client who seems to be having financial difficulties, you may want to scale down that amount. You don’t want to do anymore work for that client than you can afford to lose. You can use the time you gain scaling back with that client to increase your marketing efforts and possibly find financially healthier client.
Cash flow is key to any small business success. By taking action when a potential problem begins, you can deflect your business from a client’s financial fallout.
