The first Flash Consulting problem I did was from a woman who runs a very successful small business. She initially phrased the question as an accounting question (cash vs. accrual, which I know enough about to be able to find problems in a financial statement but not enough to survive an audit, so don’t hire me as a bookkeeper). But as she explained it, it became apparent that the problem was really about cash flow and a need to reframe ideas about good service.
In brief: She’d booked over $250K in the previous month but had only seen actual cash payments of less that 10% of that. Her clients were on a net 60 (meaning the invoice she sent asked them to pay within 60 days), but she had an additional $300K outstanding that was past due from the 60 days.
Seriously, she was running a business that was doing so so well (and they’re great at what they do), but they were struggling because clients weren’t paying. Maddening.
I asked her if she’d built in a penalty for not paying at 60 days, like a 2% service charge for every 30 days past due the payment was. She said she hadn’t, because she wanted to give good customer service.
Aha! That was the core of the problem right there. She’d put herself into a position of weakness in an effort to be good to her clients. When, in reality, the best thing you can do for clients (and friends, and kids, and bosses, and vendors, and grandparents, and lovers, and pets, and ANYONE) is to create good boundaries and then enforce them.
Randi Buckley of Healthy Boundaries for Kind People always says that creating boundaries is a form of kindness. And it’s true. When you make good boundaries you’re being kind to your client by telling them what you expect (I bet some of those clients in the outstanding $300K had no idea my client was so annoyed at them for not paying), and you’re being kind to yourself by asking for what you need (she had a right to the money she was owed and it didn’t do anyone any good for her not to have received it). By creating healthy boundaries you get to put yourself AND the client on the same side of the line you draw, instead of making you adversaries.
So here’s what I suggested:
1. Offer the late $300K clients a percentage discount off what they owed if they got it in in 10 days.
2. For future transactions, create both a stick to prevent late payments (a percentage penalty for every 30 days late a payment was) and also a carrot for early payment (a percentage discount for payment within 10 days of receiving the invoice). Note: This is super-common in many industries already, in different configurations. (I didn’t create the idea out of my unicorn brain.) A big part of why it’s so common is that it’s great for both sides. It creates value for both of you—if the client can pay early, they save money and you get your payment faster. If the client can’t pay right away, they can still pay on time as per the original terms of the deal. If the client has to be late, they can pay a penalty which creates more value for you.
My client expressed trepidation about assessing anyone a penalty. “If you enact the standard penalty you will never once charge it, and that will be even better client service,” I said. Having that line in the terms of the contract means you can give them a call the day the payment was due and give them the chance to pay right away and offer to waive the penalty if they can get the payment in in three days. Setting up the terms like that means that you can make penalty exceptions for clients while still being paid in a reasonable amount of time, and make everyone happy at the same time. It frees you up to give great customer service while still being paid for your work.
My client was happy with the solution I gave her, and asked me to bill her. (I didn’t include either a stick or a carrot in my bill. She paid right away.)
I don’t know if she collected all $300K in ten days or not. Maybe if she reads this she’ll write in and tell me how it went. (I’d never ask about someone else’s business. But how awesome would it be to have given someone a 1,200,000% return on investment, if her $250 Flash Consult with me allowed her to collect $300K?)
Building in a penalty AND a discount when you bill clients lets you give fantastic customer service while still being paid.
Find your own solution with me. The how-to and details are at FlashCons.com.