15 ways to get paid with less hassle as a freelancer (or consultant)

These are the techniques I’ve found most effective to get paid fast when doing technology freelancing.

1. Ask for a portion of the fee upfront.

This one seems obvious to me now, but I went several years before I moved beyond the “work a bunch of hours then send an invoice and wait” model. You can do this whether you are fixed fee or hourly, basing the latter on an estimate.

2. Ask for the entire fee upfront.

You’d be surprised how acceptable this becomes once you simply start making it your convention. And, really, it’s not all that strange when you consider that you can’t drive away with a car (or even walk out of Walmart) before paying for your purchase, as well as the fact that in most cases you are taking on greater risk than the client is by working on a project for a client for a few weeks or months with only the “hope” that you’ll get paid at the end. You are a freelancer, not your client’s banker/lender.

3. Set expectations upfront.

If the buyer can make the full investment decision upfront, rather than hope or guess, it’s easier to get paid faster. A lot of delayed payments are really because the buyer is disappointed with either the fee, the value, or the result. If your fees are fixed and thus entirely set upfront, this is easy. If you charge hourly/daily/weekly, estimate conservatively and… see the next item.

4. Offer compelling value.

I prefer to not only discuss the project upfront, but to then come back to the client with a written summary (which ends up being the proposal). The summary is in my own words but drawn entirely from our discussions. It contains, at a minimum, with a nod to the value-based fee model taught by Alan Weiss:

  • The situation appraisal
  • The business objectives (outputs/improved conditions) tied to the work
  • The believed value of the work (business-wise and sometimes personally and professionally for the buyer)
  • The implicit or explicit metrics or indicators of success for the work against the objectives

In this way, the buyer and I don’t proceed until there is a true “meeting of the minds” over the value of the work. It’s easy to get into a discussion about the inputs (tasks), but the real value is in the results. The better understanding I have of the ideal result that the client has in mind, the closer I can tie my work to compelling value. And the happier the client will be to pay, period.

5. Constantly communicate.

You know when you should be providing updates. Generally it is whenever you’ve promised to, just before or after major milestones, when there are hiccups that may impact scheduling or results, or any other time you know you should but are avoiding doing so only because you are concerned about the reaction. 🙂

6. Meet commitments.

If you make a promise, meet it. Simple, but not always easy. If something isn’t going as planned, just communicate that and adjust. Unless you make a pattern of it – or don’t learn from your mistakes – it’ll be probably okay.

7. Use plain language. (Avoid legalese.)

Don’t create proposals that require legal departments / attorneys to get involved. And if you can’t avoid it entirely, keep them sane. Business is risk.[1]

8. Make it easy to pay you.

Accept checks, eChecks (ACH), and all major credit and debit cards as well as, if possible, via multiple processors. I accept payment via PayPal, Google Checkout, and Stripe. There is overlap between these, but every buyer/client has their own favorite service. I don’t care which they use, just as long as they pay as promptly or – preferably – as rapidly as possible.

If you are concerned about paying 2% to 3% on credit card transactions, you are overlooking that you are in a high margin business. Paying 3% on credit card transactions will make you cringe sometimes, but don’t overlook the big picture. You are providing a service with an 80%-90% profit margin. And, having money in your hand – rather than “in the mail” – is the difference between an actual sale and just talk. It’s also the difference between putting food on the table and starving waiting for money to arrive in the indefinite future.

9. Follow-up when a payment is late. Do so immediately and in a professional, consistent, and assertive manner.

I suggest clear language that doesn’t whine (it’s not their problem you can’t pay your mortgage, but it is their problem they are failing to fulfill their commitment). I prefer automated follow-up so that it always happens, otherwise I will put it off. Most on-line invoicing solutions can be set-up to do this automatically for you after a configured number of days.

10. Always make payment arrangements and discuss payment problems with your buyer (the decision maker / business sponsor), not the client’s bookkeeper or accounts payable department.

The buyer can escalate, assert their authority, and negotiate when there are problems. They are also the one who is impacted if a missed payment results in a project delay. The A/P department on the other hand isn’t any of these things.

11. Generate professional invoices that are easy-to-read.

They should clearly describe the work, account for every hour (if you are billing for time), and reference the project, proposal, and buyer clearly. Make them very simple, without any extra language or legalese.

12. Send invoices in a timely manner and do so consistently.

Immediately upon gaining agreement on a proposal. Consistently at milestones or the agreed upon dates. If possible, generate and schedule delivery ahead of time. If a series of invoices is likely, you can even provide them all upfront with rolling due dates, if that seems like it’ll be helpful.

13. State a late fee on every invoice generated that applies if it is not the balance is paid in a timely manner.

Pretty self-explanatory. A flat fee or charging interest are fine, but if the latter make sure you understand usurp your state/country specific restrictions on charging interest.

14. State all invoices as being “Due upon receipt.”

If you learn an organization is taking advantage of this phrasing to not pay within 7-10 business days, change their next invoice to be “Net 15” (due in 15 days). If they can’t pay on time, tell them to use a credit card.

15. Offer a small discount for pre-payment in full upfront.

I always ask for a portion of the fee upfront for every project, while offering a small discount for pre-payment in full upfront (in the 5% to 10% range). For projects I consider to be relatively small (e.g. <$5,000) I don’t offer a discount, but outright require full payment upfront.

Photo credit: http://www.flickr.com/photos/damianspain/9345483102/


  1. I am not a lawyer.

Consultants Need To Be Multilingual

Alan Weiss writes on his blog:

Just this morning, an IT consultant complained that I was unfair castigating IT people for not being customer-oriented, and he prided himself on being a “level three” service provider, or some such thing. Right in his letter of complaint, he was being obscure. He was speaking his language, not mine, but expecting me to adapt to him. Is level three good or bad? Who cares?

Consultants Need To Be Multilingual – Alan Weiss, PhD

How to Trigger New Business – When Starting Out or Already Established

Today we’re going to talk about a simple email that triggers referrals and inquiries from your existing professional and personal network. It is amazing both in its simplicity and effectiveness.

It’s a great way to get started out – and it can even be reused periodically to generate new referrals and inquiries. That’s how I still use it.

This technique has directly generated tens of thousands of dollars of freelancing income for me. Indirectly it’s likely accountable for a bit more, but I can’t determine that for certain.

I did not think to send out anything like this systematically until, embarrassingly, about three years ago. This was well after I’d started freelancing (and well after I’d made some other vague ad hoc attempts to email my network about my availability and services).

I call it the “launch” letter. It is strategically designed, both in form and wording, to facilitate referrals and inquiries both immediately and over time.

It can take the form of an email sent to those who already know, like, and trust you as well as a standard business letter sent to the same individuals and possibly a slightly larger portion of your network.

It can be used in three situations by both new and established freelancers alike:

  1. When you’re getting a new freelancing practice going
  2. After you’ve been freelancing for a while (when you realize you haven’t formally “launched” your business to your network)
  3. Every couple of years to “relaunch” (a way of updating your network on what you’re focusing on right now and reminding them about what you do, since they’ve probably forgotten, and to do so in a friendly way.)

I did not invent this idea. I first read about an approach taken by Thomas Myer in From Geek to Peak: Your First 365 Days as a Technical Consultant. I took the concept and tweaked it to my personality and practice, then ran with it.

Here’s how Thomas describes it:

The goal of the email is very simple: tell them about your “new news” and describe what you do in a very easy-to-understand way.

And the key to success:

The key to making this email succeed (90% of which will be received by the recipient and then filed away or trashed without comment) is to stay non-salesy in your approach and ultra-specific with the details.

Further (this is the real kicker):

These people are probably not going to hire you personally but each of these persons has connections to someone who might hire you …treat this email as though it might end up being forwarded to someone else, because it very well may be.

The nifty thing about this email is that it can be used to both launch as well as (periodically) relaunch your freelancing business …and it works even if you aren’t (yet) following up with your network / mailing list in any other way.

Now when I first set out freelancing I did sent out emails to various folks I already knew. Those emails, however, were vague and informal. I had not put the thought into figuring out how to relate to the recipient nor make the email “forward-friendly.”

When I discovered this more systematic approach, I ran with it on faith. The results, thankfully, were impressive. Now I aim to “relaunch” myself every 12 to 18 months.

So I’ll share with you that first “launch” email I sent out. This one, specifically, generated half a dozen inquiries and a referral of an IT manager at a large institution. Two inquiries became clients soon thereafter.

Date: Thu, 10 Mar 2011 14:11:28 -0800
Subject: Update on Josh’s consulting practice
From: Josh Richards jtr@Jxxx.com

Friends, Family, and Colleagues:

Well, it seems that 4+ years into my solo consulting practice, one thing remains the same… To quote Alan Weiss: “I’m constantly amazed at how stupid I was two weeks ago.”

Seriously. I was talking to an old friend recently. He had referred a prospective client to me and I was showing my gratitude. I expected a low-key discussion.

Instead, he “called me out” on a mistake I’d been making — as only a good friend or trusted partner can do.

Obviously, I had to pay attention.

It seems that, even though he refers folks my way periodically, he is not clear on what I do and who I’m working with these days. He hinted that he’d missed (and even avoided) referring potential business my way due to his uncertainty about my acceptance of it.

Doh! I’d screwed up and I really wanted to fix it. Immediately, but not just for him. So I slapped myself on the forehead (figuratively speaking) and got to work. Hence, among other things, this email.

I am embarrassed to say this, but there is a decent chance that you don’t know what I do, or at least not all that I do (even if you think you do, and even if you’ve referred someone to me, or I’ve helped you with a project). Yes, even if you are related to me (Hi mom!) or married to me (Hi honey!).

I apologize for this oversight. On that note, I would like to remedy the situation.

Q: What do you do?

A: […]

Q: What does that mean? What do you actually do?

A: […]

I’ve been fortunate to work with many of the region’s strongest, most successful, and highest growth organizations. I typically work with the CIO (sometimes CTO), the VP of IT, the IT director, the IT Manager, the CEO or President (sometimes the business owner). What I do is not (typically) industry specific and I’ve worked with clients in many different industries, ranging from solo entrepreneurs to Fortune 500 corporations.

If you know anyone like that in your personal network of friends and associates who needs help with their IT department or technology infrastructure could you make an introduction? I would appreciate any and all connections as I continue to grow my solo practice. In fact, to make it easy for you, feel free to forward or “cut-and-paste” this email to those individuals that come to mind. At a future date, if I come up in conversation, you can do the same or simply direct folks to my main web site at http://www.Jxxx.com.

Here is all of my contact information, so please update your address books:

(office)

Telephone: +1 805-xxx-xxx Fax: +1 805-xxx-xxxx

(email)

Primary: XXX@Jxxx.com Backup: XXX@gmail.com

(web)

Site: http://www.Jxxx.com Blog: http://www.Jxxx.com

Thanks again for all your encouragement and support over the years!

-jr

Something humorous happened the first time I sent the exact above email to my network: That IT manager that was referred to me, as a result of this same email, was referred by two separate individuals within minutes. That is, he received forwards from both of them. 🙂 He, at first, thought they’d ganged up on him, but they actually had no knowledge of each others’ actions. Yes, he became a client. 🙂

If you are just starting out as a freelancer, you can make the above email far simpler, basically following the same approach: A quick “Hello, I’ve been thinking about freelancing for a while now and feel I’m at a point in my life where I would like to start pursuing it on the side” and a list of skills or business problems saying something like “I’m available for the following, on a freelancing basis. If you run across someone who would benefit from my skills, please pass along my contact information (below) and/or this email. Thanks!”

I prefer email over letters, because they are easier for the recipient to forward as well find (using their email programs search feature) to refer back to. Letters work for folks you don’t know as well (you don’t want to spam folks with email).

If you’re just get started, do these four things over the coming week or so:

  1. Compose a launch or relaunch letter/email similar to this.
  2. Compile a list of 25-50 people that already know, like, and trust you.
  3. Send your launch or relaunch letter to your first 25 people, either by email or my mail (or both if you want to cover all your bases).
  4. Post your launch letter, or an abbreviated version of it, to your blog and social media accounts
  5. (bonus) Compile a list of another people and repeat until you’ve exhausted your personal and professional networks.

Why technical specialists have a tough time moving to higher value work

Consultant Wayne McKinnon writes:

1. In school, technical specialists are taught that there is one best answer, not degrees of better. Buyers like options, and technical people are often too focused on the theoretical “right way” versus achieving objectives to varying degrees.

2. One-upmanship is part of the culture. As a result, business meetings often turn into demonstrations of superior knowledge rather than determining the buyer’s needs. Unless this is corrected early, many buyers will simply stop taking calls.

3. The technical worker learns the importance of task rather than outcomes. Unlike their business counterparts, who have an opportunity to see how outcomes provide value to the business and its customers, the technical specialist is shielded from that view and often has no idea what the business units do or what their world looks like unless they explore the world outside.

4. There is little opportunity or reason to learn basic business skills. When moving up the value chain, the technical specialist not only has to learn how to converse in business terms, but also must gain an education in the tools of the business trade. The technical consultant faces double the challenge compared to that of the business consultant.

5. While attempting to make the transition, the technical specialist can easily feel stuck between the old world that they left, and the new world that they have net yet fully entered. Fear can cause retreat back to their technical comfort zone.

So what is the technical consultant to do in order to make a successful transition away from the labor-intensive project work with the ongoing requirement to learn new technologies?

Read the rest of Wayne’s post for his suggestions.

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.

Why Self-Employed Consultants Fail

Karen E. Klein did a solid interview with Alan Weiss on the topic of “Why Self-Employed Consultants Fail”:

Many former executives who have been downsized or have taken early retirement in recent years are consulting today. Rather than making a healthy profit, most scrape by or fall on their faces, says Alan Weiss, president of Summit Consulting Group in East Greenwich, R.I.

Why Self-Employed Consultants Fail

This interview is nice overview of a lot of the themes Alan Weiss hits on regularly. I built a lot of my practice on the things he teaches in his books.

Productizing a Freelancing / Consulting Business

Patrick McKenzie recently shared a thought provoking piece entitled Productizing A Freelancing / Consulting Business:

If the fundamental unit of value in a consulting business is professional expertise applied to a business problem, then the fundamental unit of value in a product business is capturing one thing learned into an artifact and then reproducing that artifact at scale.

Just because you’re selling your time chunked up into engagements doesn’t mean that the business has to be a hamster-wheel of death.

If you enjoy it, you may want to also get on his mailing list or read some of his most popular blog posts, several of which have great lessons from his software consulting activities.

Employee-like cash flow for freelancers

Why do freelancers have cash flow concerns that employees do not?

It’s superficial and shortsighted to say it’s because employees get a paycheck every other week. Employees simply work for corporations, which are certainly not immune to cash flow problems. Things happen — missed payroll, delaying reimbursements, and layoffs — just to name a few that impact employee wallets / purses directly.

Even so, businesses with large quantities of employees do tend to be better at insulating their employees from cash flow problems in the business than freelancers are about insulating themselves from cash flow issues in their practices. Organizations of any substantial size are able to “roll with the punches” a bit more.

Why?

It seems big business has an advantage, but it’s only because they’ve engineered things that way. Alas, they do not have magical cash flow sources that I can reveal to you. What they do have is something close though: high-impact, proven strategies for improving the cash flow in any business situation.

Specifically, for increasing the likelihood that, at any given point in time, they’ll be able to cover the bills, pay employees, and keep in progress projects moving forward.

What a typical corporation has is options and flexibility. Even solo/small technical service businesses can have these things, but it has to be engineered just like it does for the big companies.

Let’s break down what a typical corporation has in its “cash flow toolbox.” Then let’s figure out exactly how we can replicate these in our own situation. Even a solo IT consultant can learn from this. I know because I am one and I have.

How cash flow is engineered in a typical corporation

Much of the flexibility in a bigger business comes from things that any organization of any reasonable size is expected to have. As smaller businesses — especially in my experience with solo IT freelancers, consultants, and service businesses — we often don’t think about these things. Or, more accurately, we don’t know how to make them happen. After all, we don’t have a professional and experienced Chief Financial Officer (CFO) who is dedicated to living and breathing cash flow and balance sheet data. At least I’ve never considered myself one …and I am the de facto CFO for my own business.

Some of the cash flow “levers” in a typical corporation

Here are some engineered cash flow levers available to a typical corporation. We need to identify them so that we can figure out equivalents for our own business activities.

It’s not necessary, by any means, that we have equivalents in our own business for every single one of these levers. It’s only necessary that we have some, and possibly add to them over time as our own business activities mature and our risks and needs change.

  • Customer/client diversity (e.g. individual customer/client, different regions, etc.)
  • Product/service diversity (e.g. multiple offerings appealing to different customers under different conditions)
  • Capacity to borrow funds (e.g. lines of credit, bank loans, payable notes sold to investors)
  • Capacity to raise money (e.g. equity sold to investors)
  • Tangible assets to move around and/or sell (e.g. cash, physical assets, real estate, subsidiaries, etc.)
  • Intangible assets to sell or license out (such as trademarks/patents, intellectual property, distribution rights, etc.)
  • Dedicated as well as excess capacity – brains, energy, labor, manufacturing, or distribution capacity (e.g. dedicated management and staff with ideas, energy, and time to focus and tackle problems and opportunities as they come up)
  • Planning and forecasting — tools, people, data to do it
  • Budgeting — tools, people, and data to do it
  • Ability to defer expenditures (e.g. maintenance, new capital expenditures, freezing of new hiring, delaying planned and in-progress  projects, etc.)
  • Ability to delay payment — to vendors, contractors (!), and government
  • Boosting marketing investments — in areas proven to have the highest (or the shortest, depending on which is more important) return on investment (while reducing investments in lower ROI, albeit still profitable, areas)
  • Boosting sales efforts — just like marketing, focusing resources on areas proven to have the highest (or the shortest, depending on which is more important) return on investment (while reducing investments in lower, albeit still profitable, ROI areas)
  • Creating limited time price incentives (e.g. for customers to buy now, for customers who pay earlier than typical, or for customers who buy in larger quantities than they normally would)
  • Requiring payment before shipping product
  • Requiring a set-up fee before delivering a new service
  • A willingness to make investments for the long-term

These are just a few of the biggies. 

Engineering your own freelancing business for maximum cash flow flexibility

What lessons can be learned from what a typical large corporation does that can then be translated into things in your own consulting practice? Quite a few it turns out!

Here are some ideas:

  • Diversify your client base
    • In quantity (e.g. if you have two clients, get three)
    • By industry (e.g. if all of your clients are in one industry, get one from another industry)
    • In revenue percentage (e.g. if one client accounts for >50% of your annual income, get another one)
    • By region (you get the picture)
    • By size (e.g. small business, large business)
    • By type (e.g. for-profit, non-profit, government)
  • Diversify your engagements 
    • Lots of project work? Balance these out with more retainers.
    • Lots of retainers? Balance these out with some project work.
    • Lots of new clients? Increase the repeat business you get from past/existing clients.
    • Few new clients? Improve how you generate leads for new potential clients.
  • When cash flow is good (or, at the very least, you have some cash in the bank), establish a credit line associated with your business that you can draw upon when needed
  • Use your good personal credit history to establish one or two business only credit cards
    • Use these to pay bills/overhead and pay them back promptly, building up your credit profile for increased access to credit in the future
  • Look at your expenses/overhead
    • Trim unnecessary subscriptions (including for software/services) expenses, even if you think you may want them later (you can always resubscribe later on if you don’t find alternatives in the mean time)
    • Give some thought during the good times to what expenses are most discretionary in case adjustments need to be made quickly
  • Invoice your clients sooner and more often — don’t wait until the first. Switch to billing every other week or even every week. Bill immediately upon project completion as well.
  • Require a portion of project fees be paid up front
    • 50% of the estimated total fee, if hourly
    • 50% of the total fee, if using fixed or value-based fees
  • Offer a 10% discount for full payment, upfront, of the total fee
  • Package up your services, expertise, or access to you in new ways then encourage clients to buy them by making it worth their while (e.g. buying hours in bulk, buying special access to you via email or phone, etc.)
  • Defer investments not related to creating new revenue within <x> days
    • Where <x> is a criteria you set depending on how much of a crunch you are in
  • No matter what, keep investing in your main client acquisition approach or you will put yourself in an even worse cash flow situation (e.g. in my practice I have one monthly activity that entails investing in a monthly mailing of a specific type to my house mailing list every single month; at most I skip one or two months per year)
  • Re-focus resources constantly
    • Limit cash/credit use to investments in direct revenue generating activities, less on overhead and unnecessary things
    • Defer planned projects that aren’t in the top 1/2/3 (or whatever) in terms of near-term cash flow generators
  • Look for low-risk, low-investment, high-potential opportunities to boost revenue – e.g. smart marketing arrangements such as joint ventures with complimentary businesses to do an endorsement to their own customer/client bases of your services with a special offer
  • Manage your working capital / keep some cash in the bank

That’s just a start to get your brain used to the idea of thinking this way. Go back and look at the corporate list and brainstorm ways to adapt versions of the corporate approaches to your solo practice.

Let me know what you are doing to increase your cash flow, whether it’s on the above idea list or not.

Regards,
-jr

How to lose a client in 7 easy steps

Rhonda Abrams, in USA Today, shares some good reminders:

Most entrepreneurs who are self-employed or run small businesses can be classified as consultants or contractors. I was a consultant for more than 15 years. Now, I hire consultants. Some of them help me build my business and are part of my team. In all that time, I’ve learned a lot about how to manage clients and how to keep clients happy. And, also, how to make them unhappy.

Of course, if you want to build a sustainable business over time — to keep clients coming back and making referrals — you want happy clients. But if you really don’t care, I’ve got seven easy steps for you to take:

How to lose a client in 7 easy steps – USATODAY.com

Making Money != Starting a Business

Today is my birthday.

(That really isn’t relevant, but it seemed like a good way to open today’s blog post.)

The other day I ran across an article in the current issue of Inc. Magazine (thanks to Ryan Healy for mentioning the article so I would take a look at it). Last night I finally got around to pulling up the article online and to reading it through this morning.

The article caught my eye because it is by Jason Fried of highly successful 37signals, but it kept my attention because he starts off early on in the article by stating a principle I’ve long held (in fact I based the founding of the IT Consulting Success Strategies community upon it). Jason states it like this:

You can be the most creative software designer in the world. But if you don’t know how to make money, you’re never going to have much of a business or a whole lot of autonomy.

Readers who signed up to be on my e-mail list in the past year or so may recognize the parallels that statement has with the premise for the e-mail list described on the page you signed up on.

Jason’s credo is “It’s simple until you make it complicated.” He has built a very successful business, seemingly wrapped around that philosophy. Thankfully, he is also great at communicating his thinking and approaches and, fortunately for us, seems to enjoy sharing his insights in order to help others.

Here’s a more extensive quote from Jason Fried from the first part of the article (though I suggest you go read the full article entitled “How to Make Money in 6 Easy Steps: Entrepreneur Jason Fried offers the most fundamental of all small-business advice: how to get good at making money.“)

One thing I do know is that making money is not the same as starting a business. For entrepreneurs, this is an important thing to understand. Most of us identify with the products we create or services we provide. I make software. He is a headhunter. She builds computer networks. But the fact is, all of us must master one skill that supersedes the others: making money. You can be the most creative software designer in the world. But if you don’t know how to make money, you’re never going to have much of a business or a whole lot of autonomy.

This is not about getting rich (though there’s certainly nothing wrong with that). Instead, for me, making money is about freedom. When you owe people money, they own you—or, at least, they own your schedule. As long as you remain profitable, the timeline is yours to create.

It took me a long time to figure out how to make money. Here’s how the lessons unfolded.

If the above intrigues and/or resonates with you, go read the full article here. It includes six specific lessons that are both highly relevant to technical consultants and highly actionable.

Hope you enjoy it as much as I did,

-jr