Invoicing smack down!
February 28, 2005 1:59 AM   Subscribe

I'm new to the consulting world AND my mind has erased anything practical it might have learned in college accounting courses. My client is really slow to pay me, and I want to start charging them interest for overdue balances. My google-foo is failing, I can't seem to find any bookkeeping tutorials that tell me how to calculate this (daily? weekly? how much?), or even how to format/word it on my invoices. Can anyone either tell me how to do this, or direct me to an appropriate web resource?
posted by Kololo to Work & Money (6 answers total) 2 users marked this as a favorite
You should have this information at the foot of your invoices, so that clients can see what they are going to be charged if the go over your payment date. I was pointed at a very useulf web page:

Towards the bottom, this has a sample table to show late payment penalties.
posted by gaby at 2:48 AM on February 28, 2005

Do note that without previous knowledge in writing, even mentioning any sort of extra fee or interest may upset the client. No matter how unreasonably late they are or what sort of utter nonsense they try to pull, any penny they don't think they owe you that you demand is as good as stolen to some people.

Of course, if you can afford not having such a client, it's probably in your best interest. If you consult for a business, they should understand how imperative prompt payment is.
posted by Saydur at 3:43 AM on February 28, 2005

Note the use of positive reinforcement in the ALA example: pre-payment discount. A very useful motivator.

Also note that late fees can be subject to legal limits aimed at preventing usury. So check with a local accountant or attorney to find out what's considered reasonable in your area. ( which you also want to know because the client will know it, and be doubly unhappy if your terms are noticably shorter and harsher than the competition's).
posted by nakedcodemonkey at 5:29 AM on February 28, 2005

Yeah--be really careful on this front...just about any client is going to push back _very_ hard on this concept if there wasn't very clear language in the initial agreement spelling out the terms. As a matter of fact, if you're thinking of adding this to the equation, after the fact, because they're now so late, then you're actually on shaky legal ground whether or not you can actually make this happen at all. (IANAL, but I'm not saying that it's _illegal_--just that they could put up a good legal fight, and stand a good chance of winning, if it ever came to court and there was no initial agreement to hold them to.)

Going forward, if you want to try and impose these sorts of terms, you really need to be clear about them up front, but I want to be honest with you--after being a consultant for a long time, I've found this idea to be pretty much of a non-starter. The basic issue is that it's not a common industry practice, within consulting, so for anyone who's worked with consultants before, it really makes you stick out up front as someone who's going to be a pain-in-the-neck, while you're still trying to close the deal as someone who's supposed to be great to work with. (I'm _not_ saying you don't have a legitimate argument--I'm just talking about how 99% of clients will take it.)

The best overall option I've found is to set up interim payments at the beginning, middle and end of the project, and for a client who's been really bad about payment, to reverse the normal logic and make later milestones _dependent_ on payment of earlier invoices. (E.g., delivery of the interim specs is contingent on payment of the first invoice, and final delivery is dependent on payment of the mid-term invoice.)

The basic idea is that if you're still working with a client that's already shown bad faith in paying invoices, then they're still working with you for one of two reasons--either they know you're a pushover now, or they really want/need to use your services. In the first case, you should dump them, but in the second case have more leverage to be upfront with them and structure things accordingly.

Regarding the current outstanding invoices, one of your best bets is to actually look at "factoring"--a company that will basically buy the outstanding commitments for you at 80 cents on the dollar, or whatever, and then take on the effort and cost of following up and wringing the money out of the client.

For a client you want to _keep_, you need to make sure you can find a good factoring service that won't screw up the relationship, but they'll probably pay you a little less. For a client you don't want to keep, I wouldn't worry so much, but they'll maybe offer you a bit more, since they'll do whatever they have to to get their money back. (Disclaimer: I've never used a factoring service, myself, but I do know folks who have, and they're becoming increasingly common in the realm of smaller consulting firms.)

Most importantly, though, _don't_ fool yourself about the advantages of re-signing with a client who's already demonstrated that they're bad at paying. I've fallen into the same trap myself--we all have--but the hard reality is that a client who doesn't pay you can be much, much worse than not having a client at all. A competitive environment can limit the amout of protection you can build in up-front and still win, but there's no reason you can't set up a contract with reasonable terms and make sure you're not getting totally hung out to dry along the way. The best way to put it to a client diplomatically is that it's _your_ core responsibility to deliver great work, and it's _their_ core responsibility to make sure you get paid fairly and on time.

Personally, I structure most of my contracts with 25/25/50 payments (25% on signing, 25% on some intermediate milestone, and 50% on final delivery, with 30 days net). For someone who's been a bit late, I'll usually change it to at least 30/30/40, but that's not a big difference. The bigger difference is brushing off someone who's been really bad about payment, and using that time to try and find better clients.
posted by LairBob at 5:43 AM on February 28, 2005 [1 favorite]

Wow. Great answer, LairBob.

I was in this situation just this week, spoke to my accountant, and his advice was to advise the client that they may get charged at 8%, and to blame him.

So, the phone call went something like "Hi, my accountant is pushing me to add an 8% late fee to the invoice. I like you guys, I really don't want to do this, is there any way we can sort this out amicably?". We went from "what invoice?" to "the cheque will be with you as soon as possible" within a few hours.

Moral of the story: cultivate a friendly relationship with your accountant. He knows more about how business works than you do.
posted by Leon at 8:49 AM on February 28, 2005

Lawyers and accountants are always a great resource to play "bad cop" (even when they're not even aware they're doing it). I've definitely been involved in negotiations where we're getting down to the brass tacks, and both being pretty aggressive, but the shared fiction that "My lawyer's really insisting..." allowed us to do that without making it too personal. (I'm personally convinced that that's a big reason--and a legitimate one--for the prevalence of lawyers and accountants in negotiations. It's a useful social fiction that allows both parties to move on into the relationship without harboring personal grudges.) You do have to be careful about how you use that sort of thing, though, since it can also derail a healthy negotiation into a legalistic tarpit.

The really essential point, though, is that it all comes down to the client relationship. Just being able to broach things amicably, like you did, Leon, goes a long way to making things work out right in the end.
posted by LairBob at 9:31 AM on February 28, 2005

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