Why You’re Not Getting Paid On Time and What to Do About It

As an owner-operator of a small service firm, whether it’s a consultancy, marketing agency, IT service provider, or any other service-oriented business, you’ve likely faced the frustrating challenge of chasing down late payments. It is a widespread issue that disproportionately affects small service firms, and it can significantly hinder your cash flow and business growth. 

In this blog post, we’ll explore why this happens, how to diagnose and measure the extent of your collections problem and offer both proactive and reactive strategies to improve your payment timelines. Plus, we will show you how joining a mastermind community like Collective 54 can make a difference.

Diagnosing a Collections Problem

The first step is recognizing you have a problem. If you’re constantly following up on unpaid invoices, experiencing cash flow issues despite a healthy volume of work, or your accounts receivables days are much higher than industry norms, you likely have a collections issue.

Common Reasons for Late Payments

• Miscommunication: Sometimes, invoices don’t reach the right person, or the payment terms aren’t clear.
• Financial Troubles: Your clients might be facing their own cash flow issues.
• Disputed Work: Clients may delay payments if they’re unsatisfied with the work or if there’s a misunderstanding about the scope.
• Procrastination: Often, clients simply procrastinate or prioritize other payments.
• Get a Foot in the Door: you worked hard to land a new client, don’t want to give them a reason to say no, and are afraid of losing the business, so you avoid discussing payment terms during the sales process leading to no expectations.
• No Policy: you did not take the time to walk the client through your policy and what happens when they pay late.

Measuring the Problem

Quantify how big the issue is by calculating your average days sales outstanding (DSO). A DSO significantly higher than your industry average indicates a serious problem that needs addressing. To calculate DSO take total revenue for the year, divide by 365 days, divide that number into your accounts receivable, which will equal the average time it takes clients to pay their bill.  If this results in less than 40 days, you are in good shape. 

In addition, it might be helpful to consider some other benchmarks. For example, if your annual bad debt write off is more than 1%, you have an issue. Also, I suggest an aging receivables report showing current, 30+, 60+, 90+ with the amounts next to each. Pay special attention to any new clients paying late. This will help you prioritize which clients to approach.

Proactive Steps to Improve Payment Times

1. Credit and Reference Checks: Before taking on new clients, verify their ability to pay.
2. Clear Contracts: Ensure your contracts clearly state payment terms, deliverables, and penalties for late payments.
3. Advance Payments: Require a portion of the payment upfront, especially for new clients or large projects.
4. Progressive Billing: Bill in stages throughout the project to maintain cash flow and minimize risk.
5. Setting Penalties: Include terms for dormant or canceled projects and enforce late fees.
6. Identifying the Right Contacts: Make sure you’re sending invoices to the person directly responsible for payments.
7. Keeping Good Records: Maintain thorough documentation of work completed, communications, and invoicing.

Reactive Strategies for Outstanding Invoices

1. Establish Escalation Procedures: Know when and how to escalate within your client’s organization.
2. Personal Guarantees: For high-risk clients, consider requiring personal guarantees.
3. Stopping Work: As a last resort, stop work until payment is received.
4. Legal Action: Consider going to court or arbitration for seriously overdue payments.
5. Write-Offs: Sometimes, the cost of pursuing a payment exceeds the invoice value. Know when to cut your losses.

Why Small Firms Are Vulnerable

Small service firms often face the brunt of late payments due to less bargaining power, fear of losing future business, and a lack of dedicated financial teams to follow up on outstanding invoices. Owners can inadvertently become their own worst enemy by not setting strict payment terms, fearing confrontation, or failing to enforce their policies.

The Role of Collective 54

Navigating the complexities of running a small service firm, especially when it comes to managing finances, can be overwhelming. This is where joining a mastermind community like Collective 54 can be transformative. Collective 54 brings together owner-operators of small service firms to share knowledge, strategies, and experiences. 

By joining, you can learn from peers who have faced similar challenges, discover new tools and approaches to manage your receivables, and build a network of support to help you grow your business strategically and sustainably.

Late payments don’t just affect your business’s cash flow; they can take a toll on your mental health and the overall health of your business. Implementing both proactive and reactive strategies to manage and mitigate late payments can significantly impact your business’s success. Remember, you’re not alone in this challenge. Communities like Collective 54 offer the support, knowledge, and camaraderie needed to overcome these hurdles together.

Take the step today to join Collective 54 and start transforming your approach to getting paid on time. It’s not just about improving your financial health; it’s about building a stronger, more resilient business ready to face the challenges of tomorrow.