Not getting paid on time kills businesses. Slow payment is especially deadly in the consulting world, since in extreme cases it can cause a company to miss payroll. If that happens, their best people will leave. This alone makes missing payroll the worst thing that can happen to a software company. It shouldn’t happen for any reason.
Steamclock has never missed payroll. That shouldn’t be novel, yet somehow it is. I hear about it happening all the time. This is, obviously, garbage. As it happens, I run a mailing list for bright app developers who work at companies that aren’t getting paid: resumes@steamclock.com.
Of course, every business owner wants to get paid consistently and on time – hence the popularity of Mike Monteiro’s classic Creative Mornings talk titled “Fuck You, Pay Me.” Yet as provoking as his rallying cry may be, insults are in fact not the most effective way to make people pay you. Rather more effective are rules.
It pays to have rules around getting paid. Specifically, you need rules for two things: when clients are meant to pay, and what happens if they don’t.
The right rules for when a client needs to pay will vary depending on the size of your projects and clients. For short projects, a deposit at the beginning and the remainder at the end can work well. For multi-month projects, the least bad approach is to invoice every month for your time. Making payment a continuous function is ideal, since it reduces the chance and size of surprises. When it comes to money, surprises are bad.
Regardless of how you invoice though, the key is just to spell it out beforehand and stick to it. Pick a system, get it on paper, then follow your rules. Rules help you be diligent, and diligence gets you paid.
Now, as important as Accounts Receivable is, it’s not exactly… fun. I got into business to make stuff, not bug people for money. In our early days, I tended to procrastinate sending out invoices and late payment inquiries, especially when things were busy. After about a year of this, we had a client quietly pay one invoice, but not the one before it. By the time I noticed and got around to contacting them about it, they’d gone out of business. We lost $23,000. It wasn’t great.
Since then, we’ve treated receivables as a pressing matter, even when we have plenty cash in the bank. We invoice consistently the first of every month, and follow up with rigour. We’ve invested in automation to make this easier, too. Consistency works.
Except when it doesn’t
As far as consistency will get you, if you work with startups or other rapidly growing businesses, sometimes they’ll struggle with cashflow. To manage these problems, you need to apply fair but undesirable consequences when a client consistently doesn’t pay on time. While individual tastes vary, popular selections include:
- Witholding IP rights to the work in question
- Charging interest
- Ramping down or halting development after a warning period
- Telling a client “Fuck you, pay me” (advanced users only, offer not valid in Hawaii or Canada)
Obviously, pressuring somebody for payment isn’t fun. Fortunately, it works just like anything else in project management: frequent communication makes for far less drama. If a client springs bad payment related news on you, your response should start with “Well, as you know…” instead of “Okayy… uh…”
Communication is critical because the point of having payment rules is to spend time getting paid, not punishing delinquent clients. Having to halt development due to late payment is good for exactly nobody. The better and earlier you communicate your rules, the less likely you’ll need to enforce them. That’s why your payment rules belong in your contract.
A lot of people think contracts are about lawsuits, but that is the extreme failure case. In six years, we’ve never had a client even threaten to sue us. When used properly, contracts are about communicating expectations before getting started. Before you get started, agreeing to rules on non-payment should be easy, since clients generally intend to pay their invoices. If a potential client isn’t sure they can pay you, they may take issue with having firm payment terms in your contract. Consider that signal with great caution.
Once you have your contract in place, staying systematic and professional about receivables keeps them from undermining the good relationships you’ve worked your butt off to build. Sometimes clients will be late for reasonable reasons, and that can be fine. If their reasoning is plausible and they’ve been good in the past, cut them a commensurate amount of slack in return for committing to when payment will happen. If you’ve succeeded in being taken seriously, they’ll meet that commitment. If they don’t, then the full fury of The Rules shall bear down upon them.
And then, you get back to making great stuff. After a brief roll on your massive pile of cold hard cash. Five minutes, maximum. That’s the rule.