Becoming Your Own Boss (BYOB, 5.5)

In the first series, Becoming Your Own Boss (BYOB, 1.x) "Introduction, Today's Employment Picture", you learned some of the facts related to the current employment picture and examined some of the choices that were available to you. In the second series, Becoming Your Own Boss (BYOB, 2.x) "Examining Your Situation", you answered some key questions to figure out if starting as an independent contractor was a good idea for you. In the third series, Becoming Your Own Boss (BYOB, 3.x) "Preparing for Business", you examined the numerous topics (from taxes and insurance to your need for equipment and an office) that need to be considered before you take the step to establishing an independent contracting business. In the fourth series, Becoming Your Own Boss (BYOB, 4.x) "Establishing Your Business" you learned the many requirements involved in operating a business from the business name and structure to the business forms you will need once you establish your business.

In this article you learn about the topics of billing for services and a "hopefully never needed" topic of collecting from deadbeats.

Billing for Services

At the start of each contract, and particularly with a new client, make certain that you and the client understand the billing and payment process. Suggest frequent billing (weekly, if possible - smaller invoices shock less). Insist, as much as possible, on payment within 10 working days or 14 or 15 calendar days of invoice submission. If it is the policy of the client's company to handle all invoices for net payment at 30 days, that should raise a caution flag to you to watch the billing very carefully. If it is common practice for the client to delay payment beyond 30 days, unless you really need the work, consider refusing the contract.

Do not offer a discount for early payment. We often hear it recommended that a contractor or some other business person should offer a discount such as "2-10, net30" (2 percent discount if paid within 10 days, net or full amount if paid after 10 but within 30 days). The theory is that the discount is equivalent to a generous interest rate and that clients will gladly take advantage of such discounts. Two percent is indeed a generous discount rate for 20 days - much, much too generous. But our experience, and that of many people we know in the business, is that the accounts payable department very often will accept the discount and reduce the invoice amount by the appropriate amount. The only problem is that, again very often, they then pay in 30, or 40, or more days, according to their regular schedule.

Our experience suggests that, if you offer a discount, many companies will take it and then pay as they would ordinarily. We offered discounts early in our business lives, learned the hard way, and stopped the practice. Offering discounts did not significantly affect the timing of our receivables, but it did affect the amount, by the discount percentange. The proper method is to discuss the billing and payment process at the start of the contract, then live according to the agreement and see that the client does also.

As a part of that effort, visit the accounts payable department at the client's company if at all possible. Determine who will be handling your invoices and discuss the process with that person. Ask how you can help to expedite the process. Offer cooperation in any way possible. Perhaps a minor change in your invoice form would help. Perhaps submitting invoices on a certain day of the week would help. Friendly cooperation will help to ensure that your invoices are paid in the minimum time.

At the end of each billing period, prepare an invoice for submission on the first day of the next billing period. The "Invoice Form" section of article BYOB 4.4 lists the items to be included on the invoice form to allow you to design the form. We repeat most of that information here, but add further details. The invoice should include the following information:

1. The invoice number. This number should include a client code number and a year code number to facilitate your tax records, and it should include a provision for consecutive numbers for invoices on a continuing project.
2. The date of the invoice.
3. The client's name and address. If the client company is large, include the name of the direct client, and the intra-company mailing address if appropriate.
4. Your name, address, and telephone number.
5. Your federal employer identification number (EIN) if you have one; your taxpayer identification number (TIN, Social Security number) if not.
6. A task statement.
7. The billing rate. If the contract calls for separate rates for different task segments, list all rates.
8. The billing period, including the month, day, and year for the beginning and end of the period.
9. A short activity description. Do not include details here. A short listing of task statements will suffice. Extract the highlights from your daily log entries.
10. The number of hours expended during the billing period. If the contract includes multiple rates, include the number of hours for each rate. The increment might be as fine as tenths of an hour (six minute increments), but half hour increments are usually adequate.
11. The amount due. Provide only the total amount, not the amount for each invoice entry.
12. An approval signature line.
13. A statement about payment being expected within 10 working days or 14 or 15 calendar days.
14. A statement about adding interest after 20 days. Specify the interest at the current average rate for credit cards.

NOTE: It might be necessary to extend the period for the last two items above to 30 days for those clients who insist on net30 terms. In such case however, remember the caution flag mentioned in the first paragraph in this section.

Print three copies of the invoice. Place one of these in your accounts receivable file, give one to the client for the project file, and ask the client to sign (approve) the third for the accounts payable department. If it is possible in the client's accounting system, it might be advisable to hand deliver the invoice to the accounts payable department yourself rather than send it through the company mail system. Our experience is that the mail systems in large companies are often slow and sometimes misplace mail for extended periods, or at least that is a common excuse given for a late payment.

When you receive a check in payment of an invoice, staple the statement that comes attached to the check to the invoice copy in your accounts receivable file and transfer it to your paid file. If the check does not have a statement attached, note the date, check number, and other pertinent information on the invoice form before cashing the check.

Collecting From Deadbeats

Although it is not prevalent in industry, it does occur that, for one reason or another, a client will sometimes elect not to pay a bill, or will stretch the payment interval beyond what is reasonable. Be prepared for such an eventuality, and always be vigilant. Your primary defense weapon is your contract. Always make certain that the contract is properly worded, is in writing, and includes an attorney fees clause.

Some states offer extra protection to individuals regarding nonpayment for services. Such protection is aimed at keeping "the big guys" from taking unfair advantage of "the little guys". Determine if your state does so. If it does, determine the extent of the protection and secure the details. Do this before leaving regular employment as part of your preparation process.

If payment for an invoice is delayed for more than a few days beyond the expected, call the accounts payable department. It is possible that the invoice was lost or delayed for some minor reason. But it is also possible that the company is having financial problems or is simply careless. Send a new invoice at 30 days, including added interest at approximately the current average rate for credit cards.

Be prepared to take appropriate action. If you suspect problems, or suspect that problems will occur, make certain that you have deliverables that can be delayed to add pressure. Contact the client by telephone or in person and ask that he or she investigate the reason for late payment. Make it known, diplomatically of course, to the client that, unless payment is made soon, you will have no choice but to stop work on the project.

Evaluate the client. Unless there is some extremely good reason for allowing the client more time, and unless the amount is significantly less than twice the projected cost of legal action, take action if payment is not forthcoming.

REMEMBER - The rule of thumb is that legal action usually costs at least twice the attorney's projection.

The next series of articles (BYOB, 6.x) covers the Accounting Practices that you need to be aware of and use in your independent contracting business

To read the rest of the series click here