Have you ever had a client pay you after the due date on their invoice? Has it happened more than once with the same client? What about multiple clients?
Chronically late-paying clients can be a burden on your cash flow and can put your agency at risk. According to the Small Business Association (SBA), 30% of businesses fail in their first two years and 50% within 5 years. The second leading cause of failure for new businesses is that they run out of cash. The key to the success of your agency is to learn how to manage and maximize the cash flow in your business, and the timing of collecting payments from your clients can have a huge impact on your bottom line.
The following chart illustrates the difference between a 60-day accounts receivable cycle versus 45 days versus 15 days. This example shows that adjusting the payment expectation and strengthening the collection policy can increase cash from negative $30,000 at the 60-day mark to $50,000 in the bank with a 45-day cycle. Tightening that even more with a 15-day cycle can increase cash by $280,000 in just four months. It’s important to note here that we didn’t increase prices or our revenue volume. The only thing that changed was the payment terms and tighter policy enforcement.
So, how do you handle your agency clients who consistently pay late?
Enforcing a payment policy can be tough as an agency owner. You don’t want to lose the client or the revenue, but you can’t work for free either. Chronically late-paying clients know this on some level, even if they’re being obstinate. Here are five simple steps for training clients to pay on time, leading to increased profitability in your agency:
1) Make sure your payment terms are clear. Payment due dates and late penalties need to be well-established. These should be communicated with new clients upfront. For existing clients who are paying late, re-iterate your payment terms and penalties.
2) Offer early pay discounts. Some enterprise or large companies are required to take discounts when offered. Consider offering a discount of 1-2% for clients who pay 10 days or more before the due date. You will also want to require these early payments are made by ACH to ensure they are received early. By offering a discount and controlling the payment method, it’s a win-win for both you and the client.
3) Connect the right people. You want to be sure to introduce the key players to one another when it comes to the payment process. The person issuing the invoices on your side needs to be properly connected with the person making the payments on the client side. This relationship should be established from the very beginning. When you introduce the two, you can also take the opportunity to work out any process details that will enable you to receive payments from the new client as quickly as possible. For example, if you know the client cuts checks monthly on the 15th, make sure your AR process is set up to issue their invoices prior to the 15th. Issuing the invoice after the 15th will result in a delay of up to a month before you get paid.
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4) Follow up immediately on late payments. Reach out to new clients 15 days before their first invoice date to check in and proactively work out any issues that may affect the receipt of the invoice. This is not a collection call and you don’t need to do this after the first cycle. It’s simply a courtesy and ensures you and the client are both on the same page.
After that, if your due date was clear and you have a client who misses the deadline, you need to then follow up with them immediately. Give them a call within a few days of the missed deadline to make sure they received the invoice. You can give them the benefit of the doubt at first; maybe the invoice got stuck in somebody’s inbox. But you don’t want to wait 45 days to find out that the invoice wasn’t received for some reason.
5) Enforce your policy When the expectations are clear and you’ve done your due diligence following up with the client, it’s time to enforce your late payment policy. One way to do that is by charging a penalty fee. If you do have a late payment fee, you might waive that for new clients one time as a courtesy but after that, it becomes a matter of training your client to pay you on time. Another way is to halt work for the client. We’ve found that it’s usually more effective to stop work with the client than it is to collect a late payment fee. Again, it’s important to ensure the terms are clear and transparent.
More than likely at some point, if you haven’t already, you will encounter a client who needs to be trained to pay you on time. These five steps will help you establish healthy boundaries with the client while also protecting your cash flow. Consistency is the key to timely cash flow. Ultimately, the financial well-being of your agency relies on your ability to collect payments from clients promptly. Whether your payment cycle is 60 days, 45 days or 15 days, it’s imperative that the payments are collected on time.
About the Author
Adam Hale, CPA is the Co-Founder and COO of Summit CPA Group, the world’s largest Virtual CFO firm specializing in digital agencies. Adam and his team have worked with hundreds of agencies helping them clarify direction using Summit’s forecasting and Key Performance Indicator (KPIs) tracking methodology. Adam also has extensive experience assisting clients with M&A planning, lender financing, scaling, as well as employee performance plans
About Summit CPA
Summit CPA is a distributed accounting firm with a non-traditional approach to accounting. We have an amazing team of CPAs and accountants who provide professional Virtual CFO Services and 401(k) Audits for companies all over the United States—many of which are remote companies as well. We fully understand the accounting, bookkeeping, cash flow management, and business tax nuances that come with being distributed, and we love helping our clients overcome these challenges through our own experience and expertise.
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