Consulting (Part 2) — An Important Cash-Flow Lesson
September 18, 2011
Money matters seem to be uppermost in people’s minds when they ask me about consulting. Mostly they want to talk about how quickly and how high they can crank up their billing rate. But before we even get to that information I need to teach you one very basic, yet very important thing you need to know about managing your cash-flow as a consultant.
Part of the contract you agree on with your client will spell out the terms under which you invoice and get paid. For example, “bi-weekly, net 30” would mean that you invoice every two weeks (“bi-weekly”) and the client has 30 days from receipt of your invoice to cut the check (“net 30”). Sounds fine to you, especially because you’re mentally calculating all of the cash that your amazing hourly rate will bring in, so you sign on the dotted line.
30 days later you’re behind on rent and starving. And you won’t get paid for at least two more weeks. What just happened? You made one of the classic consulting blunders that all newbies make. You forgot to anticipate the lag-time between the start of the contract and your first income.
Let’s project our “bi-weekly, net 30” example to its inevitable conclusion. Say the start of your contract is “Day 1”. You don’t even get to submit your first invoice until the end of Day 12– and it really hits the Accounts Payable department at your client on Day 15 at the earliest. From there, they have 30 days before they actually have to cut you the check. So you’re a minimum of 45 days out before you get your first payment.
And even if the client is on time cutting that first check, there are inevitable delays. It will likely be mailed to you, so figure in 3-5 days for the USPS to jack around with it. Then when you present it at your bank, they may put a hold on the funds for up to a week. Now you’re looking at maybe 8 full weeks before you can actually start spending that money.
And let me tell you from personal experience, the first check is never on time. What happens in the real world is that your invoice goes through the Accounts Payable system, and gets approvals from the people in the company who you’re doing the work for to authorize the funds. But then when Accounts Payable gets around to actually triggering the payment they realize that (a) you’re a new vendor and you have to jump through a whole bunch of paperwork hoops for their system to pay you, or (b) they mistake you for another vendor and send your check to the other guy (true story, it actually happened to me), or (c) some other arcane craziness in their processing ensues. Suddenly that 45 day goal for getting your first check cut seems like wishful thinking.
How are you going to live for the 45-60+ days it may take before you can spend that first check? Remember what I said in Part 1 of this series about having six months worth of expenses in the bank? Well this cash-flow issue when starting new contracts is one of the reasons why that six month “float” is so vital. You may have to dip into those savings while you’re waiting for the money to start rolling in. And by the way, when the money does start rolling in, you want to “pay back” those savings as quickly as possible so they’ll be intact for future emergencies.
Now the good news is that once the first check gets kicked out of the system, clients are usually good about paying other invoices on time. And when the contract is over, you’re still going to have 30 days worth of outstanding invoices that will be catching up with you. So if you can arrange for your next contract to start right after the one you just finished, then the outstanding invoices from your previous assignment will carry you over the inevitable payment start-up problems with your next client. It’s gaps between contracts that are a problem.
So hint #1 for managing your cash-flow is to starting looking for your next contract before the current one ends. This is a delicate balancing act. First, it might not be clear exactly when your current contract is going to end. Second, your next client isn’t going to wait forever, so you can’t start looking around too early. I find that 30 days before the end of my current gig is the earliest reasonable date that I can start talking to people about my next engagement.
Hint #2 is to carefully manage your payment terms. Even if the client wants you to bill bi-weekly, see if they’ll let you submit your first invoice after a week– “just to flush out any issues with Accounts Payable,” you say. Also see if they’ll agree to shorter payment terms. At this point, I’m insisting on “net 15” with most clients (they’ll still be late on the first check, but at least you find the problems quicker). If it’s a fixed-price contract, I insist on a chunk of the money up front before I begin work.
Hint #3 is to be pro-active. If possible, hand-deliver your first invoice to Accounts Payable. Be friendly. Introduce yourself as a new vendor and ask if there’s any special paperwork they need to enter you into their system. A week before your first check is due to be cut, send them a note asking if there’s anything further they need in order to process the payment, referencing your company name, invoice number, and the responsible management in the company you’re working for. And if they actually pay you on time, send them a nice thank you note (I’ve even sent flowers).
Hint #4 is to not be afraid to be the bad cop. In addition to payment terms, have your contract spell out penalties for late payment. I normally charge credit card level interest on late payments– around 1.5% per month, compounded. And if your client is more than a month delinquent on their first payment (remember this means you’ll have been working there for two months without getting paid), tell them you’re going to stop work until they pay you the outstanding invoices. This will usually light a fire under the management of the team you’re working for and get any Accounts Payable logjams broken up.
Normally you have to live through some huge payment SNAFUs like I have in order to be hard-hearted about getting paid on time. But you’re doing your best work for your client, and you deserve to be paid according to the agreed upon terms. If you follow my advice here, hopefully any issues you have will be taken care of quickly. And they won’t impact your quality of life, because you’ll have enough float to carry you over the rough spots.
Meditate on this advice. In the next installment we’ll talk about how to figure out your billing rate.