Recently, a fellow small business owner asked me how I handle billing. For a small business, money is often one of the biggest concerns. Without a steady flow of cash, you can’t meet your business objectives or your personal financial requirements. As a small business, you have to determine when to bill and how to bill. Even worse, you have to define how you deal with delinquent payments – which can kill your business.
When To Start Billing?
The first question to answer is when do you start billing? This is particularly true if you’re billing by the hour. Does the clock start ticking at your first meeting? After the project requirements are defined? After the project is complete? For my business, anything after the initial project meeting is billed to the customer. I think it’s important for a customer to understand that project planning, requirements gathering, and any other tasks completed before any actual code is developed is an integral part of the development lifecycle. I typically bill the first of the month after any billable hours have accrued. I’ve found that the longer you wait, the more the bill increases. Then, you risk the customer suffering from sticker shock when you finally send the bill after months of work.
When I started my business, I was so pleased to have customers that I didn’t worry about late payments. I assumed that my customers respected me enough to pay me on time. I was incredibly wrong. What I’ve found instead is that many companies will put me at the bottom of the list of payees. Why is that? Well, I think it’s pretty simple. The customer knows they have to pay their lease on time or risk eviction. They know when they fail to pay their internet bill, they won’t be able to perform their mission. What happens when they don’t pay you? Likely nothing. Additionally, they know you don’t have a collections branch and are unlikely to use a collections agent. Thus, they have absolutely no reason to worry about when they pay you. I have learned to include verbiage in my contracts defining payment terms. I give customers a 5 day grace period, and after that the customer is charged a late fee. Additionally, all the customer’s projects are paused until payment is received. If you continue to work, you end up months behind on payment and continuing to work for free.
What About Equity?
I’ve had many ‘customers’ offer to pay me in equity. I do the work and they will give me a percentage of the revenue generated by the software. I have a very simple answer for this kind of relationship. No. While an individual may think that their idea will generate millions, they rarely do. Even worse, you’ve now wasted time developing software that you will never be paid for. The original ‘customer’ lost nothing. You lost countless billable hours to a project that will never be profitable.
Money is the lifeblood of any business. What I’ve learned is that it’s imperative to have clearly defined payment terms and procedures for your business. When you fail to make those terms clear to customers, you will quickly find that your business struggles to get by and that you are spending more time nagging customers to pay than you do performing your business’s objectives.