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A few cash flow tips for IT consultants

When trying to improve your cash flow, it’s easy to focus on the things that are outside of your control when it comes to clients paying you. But what about those things that are under your control and in their current state are hurting your cash flow?

If you focus on all the things that are outside your control, well, you’ll quickly convince yourself it is a hopeless endeavor and overlook opportunities to improve things. That usually leaves good consultants accepting their weak cash flow positioning. (It’s also a terribly frustrating way to run a business and to live.)

That’s why we end up in cruddy positions time and time again, wishing it were true or possible to do something about our cash flow (or complaining to a friend over a beer the day before the mortgage is due).

Start with the things you do control

When trying to make improvements it can be helpful to return to the fundamentals to confirm that you are working from a solid foundation. (And before doing anything too drastic.)

Today I’m going to walk through a few of these “foundational” techniques for improving cash flow in a small IT consulting / freelancing / service business. These are some of the most basic elements that impact cash flow. And, thankfully, they are most definitely under our control.

You have more control than you probably think

I had no idea of this until I sat down and inventoried everything last week, but at last count I have made 31 specific adjustments in my consulting business over the last 5 years to optimize my cash flow. (Wow!) And I’m pretty certain I’m still overlooking a few…

These are techniques I use at various points within my business, mostly at various prospect and client touch points. Ranging from how I send my invoices, how I discuss fees, what my payment terms are, how I disclose my terms, how and when I do invoicing, how I handle late payments, the specific language I use, who I talk to about money, when I ask for it, how I position myself and my business, when I follow my own rules and when I decide to break them intentionally, when I charge on an hourly versus fixed fee basis, how I scope and frame the work I do for clients, what milestones payments are tied to, when I start work, how I help prospective clients self-select themselves to filter out the incompatible ones, etc.

Don’t worry, just improve

Even now it is a very imperfect process. After all, there are only so many things under your control as a consultant. And, in my case, sometimes I fail to follow my own advice or I screw up in some other way. 🙂

I’m still learning and experimenting, which is also why I’m still able to improve. This is my challenge to you as well. Learn and experiment. Take a few steps forward …and a step or two back. It is the only way to improve.

Your clients are not your adversaries

Your clients are not your adversaries. Just because they do not give you exactly what you think you want (or, worse, deserve), without you even having to do anything to make it happen, does not make them your adversary. Good consulting relationships are built on mutual win-win arrangements. One party does not have to lose for the other to win.

It is your responsibility to get what you need, while finding ways to make it happen within the confines of a genuine partnership. To do that you need a couple of things. First, to decide what you need. Second, often in parallel, to wrap your head around what is possible. Third, you need to do something about it.

In fact, it is your professional responsibility to establish a viable business so that you can serve your clients better. This does not mean giving away your life and your business, little by little, to those who want to abuse your relationship and goodwill.

Are there clients that don’t think win-win? Sure. And I’ll give you some options to address those eventually too (just before you get rid of them for good), but — as I said at the start — focusing on the exceptions and the things you can’t control isn’t going to get you anywhere you want to be. Those things are a distraction. They are just noise.

Alright, lecture over, let’s get down to this week’s techniques. 🙂

A solid foundation

At first I was a bit embarrassed to tell you about a few of these “foundational” techniques. That is because some of them seemed obvious. Nor are they clever or exciting. Yet that is precisely why they are overlooked or, worse, taken for granted.

I also realized, thinking back, that I’ve had to learn the subtle nuances of these seemingly obvious techniques on my own. Make sure you are doing the absolutely best you possibly can in these first three areas — because quite a bit of the other techniques build on these.

The professional invoicing technique

I look back now and can’t believe how I used to invoice my clients, when I first started out (this was years ago now). I had text files strewn around in client specific directories and post-it notes in client folders (if I was lucky). Once a month I would manually add the time up and try to get everything all formatted just right in a Microsoft Word file that I copied for each client invoice as a template. I manually modified it for each one! Oh, and I had to get the alignment just right for the addresses to line up neatly in those stupid envelope windows…

Thankfully, things are much better now. We have excellent off-the-shelf options available to us, that are very low cost and even free. And just about everybody will accept electronic invoices these days.

So this first technique should be pretty easy (minimal time investment) and low-cost to accomplish. That said, don’t mistake using some of the excellent off-the-shelf solutions, with using (configuring) them in the best possible way to head-off issues that your clients may use — intentionally or not, consciously or sub-consciously — to keep you from getting your cash when you want it and with the least hassle.

  1. Your invoices should be professional, clear, simple, accurate, and consistent in appearance and formatting. Easy enough, right?
  2. Yes, but the value is all in the details, which you control (and thus, if you’re anything like me, can still screw up from time to time)…
  3. Every invoice should have just enough information to know, at a glance, what they are for, when they are due, and who the buyer is.
  4. An invoice should only be for work and results previously agreed upon with the buyer (the person who directs you to get paid — the person who literally agreed to hire you for the work). I typically include a reference to the proposal date, proposal title, and buyer. If it was emergency work the approval is generally implicit, but I still document each line item.
  5. If billing by the hour, rather than on a fixed fee basis, there should be a reasonable explanation for all itemized hours / hour blocks so that a buyer (or his staff) taking a “trust, but verify” attitude can rapidly make a sanity check assessment to confirm that there’s justification for the hours backed by documentation.

You can manually format things in Word/OpenOffice or use some other homegrown solution, but I highly recommend against it. Instead, use something like FreshBooks, which will not only meet the aforementioned requirements, but also reduce your time investment (or, procrastination) and, critically, enable lots of the other techniques we’ll be getting into in the coming weeks.

The professional time tracking technique (if you bill by the hour for any of your work)

If you charge by the hour it is reasonable for the client to expect some explanation of your hours worked. This means not just having a line item that says “42.25 hours x $100 = $4,225” and expecting payment. (Don’t laugh, I’ve done this before.)

How does this mean you are more likely to get paid or that you’ll get paid faster? Think about it from the client’s perspective: they’ll feel confident you are being honest, that you embrace transparency in your billing practices, and they’ll be less likely to ask questions or, worse, dispute an invoice. It creates trust in the relationship and they’ll like you more.

Operating this way is the right thing to do, and it’ll help you get paid faster to boot, get it?

While you could come up with the explanation text for your hours afterward, I find it not only easier to remember and keep accurate but also more difficult to dispute if you do it as part of your work flow. It’s also more honest.

For example, when you sit down to do something or immediately after you finish up a period of work (but not necessarily your entire task or project):

4/12 – 12:50 – 1:50 Looked at server configuration; noted a few concerns, more later

4/12 – 4:30 – 5:30 Looked more deeply at the areas of concern I found earlier; adjusted NIC configuration

When you add up these (and, likely, several more) at the end of your billing period and send along your invoice, make sure to include each of these on your invoice too before totaling, so that the client can have confidence and be comforted that you didn’t just pull some numbers out of nowhere and see that you clearly have good and concise record keeping. The client will relax. e.g.

4/12 – 1hr Looked at server configuration; noted a few concerns, more later
1hr Looked more deeply at the areas of concern I found earlier; adjusted NIC configuration

When you are using something like FreshBooks this is even easier as it is designed around time tracking in this way and then automatically incorporates your comments into the invoice. That’s how I do it.

If a dispute does come up, rather than getting defensive or simply giving in even if you disagree, you’ll be able to calmly discuss the issue with the data in front of you. This is super powerful when you start to realize, later on, that most billing disputes aren’t really about the dollar amount, but covers for other problems that really need to get discussed and worked out. You can’t do that if you are mired in uncertainty with regards to what hours were for what.

The consistent and on-time invoicing technique

When I first started out, I had a love — and a hate — relationship with invoicing (which, at the time, was supposed to happen every 1st of the month). Sure, I wanted to get paid, but the whole process was tedious and boring. (It didn’t help that my first introduction to invoicing was manual which also made it a lot of work.) It should be no surprise that this all lead to one thing: procrastinating.

Some months I billed on the 1st …others on the 11th.

Later, when I streamlined the process and things got WAY easier, I still found myself sometimes procrastinating when invoice time came around. Eventually I discovered that the more consistent and on-time I was with invoicing, the more consistent and on-time my clients paid. This was both because I invoiced sooner (obviously), but — this is my hypothesis — also because clients took me more seriously. I was viewed as having “my act together” and it showed.

Wow, did I have everybody fooled or what?

What I understand to be going on is that people respect — and are more likely to pay — those who they work with that have “their act together”. It also seems to reduce billing disputes, incidentally, and I’m fairly certain that it is easier psychological to cut a check for work that has happened recently (days or weeks) rather than 60 or more days ago when it no longer seems as important, a million other priorities have come up since then, and the consultant is probably even a distant memory (at least until the next time your services are needed).

Here are a few ways to make it easier to do invoices on-time and consistently every single time:

  • Use tools such as FreshBooks to track your time (if applicable) and to generate professional invoices. This makes the process simpler, automates certain aspects of it, and cuts the time commitment per invoice down to <1 minute each. Another free option is Wave, which I use for keeping the books in my businesses, and also does invoicing and payment acceptance. (I’ve only personally used it for keeping my books as I haven’t had the time/motivation to attempt to fully replace my completely working and well understood FreshBooks invoicing and time tracking set-up).
  • Choose a consistent (specific) day in your calendar (an appointment with yourself) during each billing period when you will do invoices
  • Do less work that requires time tracking. This simplifies your invoicing, but you obviously need to have some other things in order first before you get rid of hourly fees entirely.
  • Invoice more often (e.g. every 14 days rather than every 30 days) so that you have less to review and to do at once, and client concerns are caught sooner (and before balances are bigger). Plus the excitement of getting paid sooner and more often adds a little extra motivation to the process.
  • Get some (or all) of your money upfront. There is nothing like invoicing for the initial payment required, for an already agreed upon project, and knowing you’ll have payment in your business checking account before even doing any work!
  • If you bill the same amount each month to a particular client, such as under a retainer or for any sort of regular services, utilize recurring invoicing functionality in your chosen billing solution (FreshBooks has this, for example). Once you trust the system enough you can have it auto-send these invoices after generating them, but you may start out just having it auto-generate them and requiring a single-click from you to approve and send.

Those are three of the most essential foundational approaches to improving your cash flow. Remember, these are supposed to be the more obvious ones. A lot of the pieces under our control, even the most advanced ones, require these foundational pieces to be in place and operating smoothly. Don’t overlook the cash hidden inside the above areas. I’ll share some more techniques next week.

Cheers,
-jr

P.S. If you got value out of the above, I’d love for you to share it with your network and encourage them, if they want more like it, to join the e-mail list. Each week, for the next couple of weeks, I’ll be sharing more content like the above so it’s a great time for someone to join us.

P.P.S. As always, I’m here if you have any thoughts on today’s email, or even just a “this rocks” or “this really stinks” response. I’m not picky.

By Josh Richards

Josh is a consulting network/ systems/ cloud engineer, freelance high stakes IT project manager, and former technology executive. He has consulted on information technology matters for over twenty-five years. In 2006, consulting became his primary source of income (just before the global financial crisis!). He’s a big fan of craft beer, freshly roasted coffee, artistic burlesque, good food, and applying science and reason to problems and opportunities small and large (and just for fun). When he has time and energy he also likes to get out on his bike or attend a soccer match.