Business Failure: Autopsy and Recovery

Failure and setbacks in a business venture can take many forms, from a botched new product or service launch, to cash-flow insufficiency, losing the lease on the perfect storefront or office location, to the appearance of an aggressive new competitor. Business failure is painful and humiliating.

Even if the pre-launch planning and start-up capital are inadequate, significant research and planning and usually a large sum of money (that may have been borrowed) are nevertheless invested with the hopeful intention of bringing a new product, service, or company to life. If things don’t pan out, it’s inevitable that those involved feel crushed and demoralized.

The intricacies of launching and operating a business can cause any venture to falter, even if the founder is not directly responsible for the downfall. The many moving parts of a new venture can cause the founder to overlook essential factors, resulting in a failed launch.

Yet, in some cases,  it’s possible to recover and relaunch after an autopsy has been performed and you and your team (if there is one!) have figured out why things unraveled and how to avoid that problem and maybe others, too, in a second attempt. Common stumbling blocks include insufficient operating capital, an ill- conceived business model, an inadequate assessment of what target customers value and improper pricing.

Many Freelancers and entrepreneurs, after allowing themselves to grieve the loss, are able to move forward with determination and a better plan (and additional resources, most likely) to do much better in the next iteration. Take a look at these common causes of business failure and make note of the lessons to learn:

Unanticipated start-up costs and low sales revenue

Whether you self-financed and bootstrapped your business or borrowed from a bank or investors, you can find yourself in financial quicksand if your projections of start-up costs were underestimated and expectations for customer acquisition were blue-sky optimistic. It’s very easy to rack up big credit card debt and then succumb to panic that leads to making reckless decisions, such as second- mortgaging your home or borrowing from friends and family, as you struggle to successfully launch and create adequate business revenue. Unfortunately, you might find yourself unable to repay as expenses mount and customers are slow to arrive.

THE LESSON IS, do your homework. Thoroughly research the amount of money that will be required to launch your new business, or new product/ service, and make a rational plan for how to acquire the funds, whether you go to the bank, self-finance, ask to borrow from selected family and friends, or take on partners.

Regarding target customers, your first task is to figure out who will buy what you propose to sell, whether products or services. Is there a viable and growing market? Moreover, can you access those prospective customers, something that can be a challenge in the B2B sector.  Realistic financial projections will protect you, especially a Break-Even Analysis, which helps you predict when customer sales can be expected to pull into profit-making territory.

Finally, develop a profit-making business model. You must anticipate the start-up costs, be able to access the targeted customers, you must have the right method of delivering the products or services and pricing must be acceptable to the customers and profitable for the company.

Receivables collection problem

“They’d take sometimes 3 – 4 months to pay and it was killing my cash flow,” she said. “I couldn’t pay my suppliers without difficulty. (The company) refused to pay with a credit card. I was trying to get paid.” Lara O’Connor Hodgson, Co-Founder of the NOWaccount

As counter-intuitive as it seems, a business owner can have orders flying out the door and be totally broke. The problem, as described above by Lara O’Connor Hodgson, is that customers can be slow pay and the difficulty in collecting accounts receivable has put many businesses under.

THE LESSON IS, healthy cash-flow is essential to sustaining a viable business. Investigate the NOWaccount, which guarantees that invoices will be paid on time and in full (both you and the customer must have good credit). Those in a service business (me!) are advised to ask clients who contract to pay a project fee for an assignment to pay 15 % – 20 % of the total fee at the contract signing and link additional payments to project milestones or specific dates (at 30 day intervals, for example). The final payment owed should be no more than 25 % – 35 % of the total fee. In this way, you will receive regular infusions of cash and be much less vulnerable to a payment default by ghosting.

Powerful competitor

Facing a big new competitor is scary, but take a couple of deep breaths and take heart. If you’ve been in business for at least a year and managed to attract customers and deliver your products and services adequately, then you have a chance to hang on and continue with a growth trajectory. Just don’t panic; shift your adrenaline to market analysis instead. In reality, your competitor probably does not offer better quality products or services but rather has resources (like a generous advertising budget) that your organization lacks.

THE LESSON IS to 1.) analyze your competitor’s operation and determine the obstacles you need to overcome or what you need to do differently, i.e. smarter; 2.) refresh your customer knowledge to learn how their expectations and concerns may have changed to make them susceptible to switching their business to the competition; and 3.) avoid competing on price, which is usually an unwise strategy for smaller operations.

Larger companies have more money to work with and that allows them to hire more employees, offer a wider range of products and services, roll-out splashy marketing campaigns, stock more inventory and more flavors or colors and also offer lower prices because they can afford to buy in volume from the wholesalers.

Your defense is to brand your business well and customers reasons to think twice about opting for the competitor. Because no two businesses are alike, you must define for current and prospective customers why they’ll do better by doing business with you.

The heart of branding is defining and constantly communicating a company’s unique selling points, so you must 1.) understand the competition’s unique selling points and 2.) learn to clearly define and articulate your organization’s unique selling points so that you can build on the attributes that set your company apart and potentially make you valuable to customers.

When you understand your competition’s unique selling points and update your customer knowledge to learn as many specifics as possible about what resonates with them, at least theoretically, about the competitor’s unique selling points, you’ll see how to tweak your offerings in ways that reflect your company’s “house style.”

New and small businesses should definitely put an emphasis on excellent customer service. The digital revolution has not meant that customer interactions aren’t essential, even though face-to-face communication has become more limited for many.  To the contrary, customer service is even more vital in today’s business world.  Present a customer first attitude and create a pleasing customer experience. Go the extra mile to surprise and delight and your business will quickly become trusted and loved.

If you have employees, you also want to ensure you are the best employer in the industry. Having motivated and skilled staff will provide benefits for your customers and that will translate into benefits for your ability to successfully compete.

Some of the most successful entrepreneurs have suffered the frustrating experience of a business failure. For Scott Adams, creator of the world-famous Dilbert cartoons, life’s path wound through many jobs, failed startups, useless patents he applied for and countless other indignities. In his memoir, Adams shares lessons learned about keeping himself motivated, healthy and happy while racking up the failures that ultimately led to his success.

It’s fine to celebrate success, but it is more important to heed the lessons of failure.”  Bill Gates, Co-Founder and former Chairman and CEO of Microsoft Corporation

Thanks for reading,


Image: American Gothic (1930) by Grant Wood (1891 – 1942 Anamosa, Iowa, USA) courtesy of the Art Institute of Chicago. The painting depicts an Iowa farmer and his daughter.

Who Gets the 1099?

The year is drawing to a close and we’re crossing into the 11th month. Before you become enmeshed in the celebrations and obligations that the holidays demand of us, do yourself a favor and commence your tax planning. Create an accounts receivable and  invoicing strategy once you’ve decided when it would be most advantageous to receive payment for services rendered in this calendar/ tax year or the next. IRS Form 1099-MISC will be at the center of the action; understanding when you’ll need it and when you might avoid it is your goal.

The payment in question is $600, whether it was paid or received by your organization. Review the accounts receivable history of clients for whom you performed small jobs earlier in the year.  If a client paid you less than $600 in this calendar year, you will not receive or need to file a Form 1099-MISC for the money earned on that assignment.

Start with the easy stuff.  If you find yourself in mid-contract with a client as December approaches and the project isn’t urgent, might it be possible to work until just before Christmas and then resume work in the first week of January, if it appears that will allow you to cap your billable amount at less than $600 for the client in this calendar/ tax year?  That can be one less 1099-MISC to file and a little more money added to your P & L.

If the client has a deadline don’t even think of such a thing but if there is no urgency, why not ask the client if s/he might find it more convenient to take a “holiday break” starting in mid or late December? Many employees take vacation days at the end of the year in a “use it or lose it” strategy and offices can be short-handed just before Christmas and through the end of the year.  I suggest that you refrain from mentioning the tax implications.  Frame your suggestion as a way of being sensitive to what may be going on in the client’s office, i.e., customer service.

Similarly, might you be able to defer until the New Year certain invoices, as a way to keep a lid on this year’s income and taxes and wait until the first week of January to send accounts receivable for work that was performed in December? Let a couple of hours work spill over into January and make your New Year invoice legal.

Now let’s consider the 1099-MISC forms that you will generate and send.  Did you hire any sub-contractors to help you fulfill the terms of a project? Have you hired a part-time bookkeeper or social media expert or editor for your newsletter? If you paid $600 or more to anyone for business services or rents in this calendar/ tax year, then you must send that individual/ company a Form 1099-MISC no later than January 31 of the upcoming year.

So that you will have the information to complete the Form 1099-MISC, it will be necessary to request that all of your vendors and other business services providers complete a Form W-9, ideally before the work they perform commences.  Download Form W-9

Among the important pieces of information that the W-9 will surface is if your service provider’s business is incorporated as a chapter C or S entity, or an LLC or partnership that is taxed as a C or S corporation.  Along with commercial rent paid to or through a property management company (instead of the property owner), a 1099-MISC will not be required for those types of entities when payments for services rendered meet or surpass $600.

Payments for services rendered made by gift card, debit, or credit card are not to be included in the 1099-MISC tally.  Instead, the card issuers will send a Form 1099-K to your subcontractors, vendors, or you when the amount paid for business services rendered meets or surpasses $600.

Obtaining the 1099-MISC is an adventure. You must order forms from the IRS, or visit an IRS service center and pick up a few. The form is not available for downloading.  Click here to order Form 1099-MISC.

Thanks for reading,


Image: The Tax Collector, 1542   Marinus van Reymerswaele (1490 – 1546)                  Courtesy of Alte Pinakothek Museum in Munich, Germany

Negotiate Your Way into Healthy Cash-Flow

Lovely summer is here, generously rewarding us with warm breezes, long days and abundant sunshine.  Summer gives us many gifts but unfortunately, a generous amount of billable hours may not be one of them.  Two possible solutions to the impasse are to step up your networking activity starting in early spring, to help yourself meet and connect with potential clients who are in hiring mode and to let family, friends and referral sources know that you’re looking for projects.  Don’t be shy!

As a self-employed professional, you are the captain of your ship and it is your responsibility to take all reasonable measures to improve your financial position.  Your survival depends on it.  Smart marketing and prudent financial management are the foundation of a successful enterprise.

The most critical aspect of financial management for Freelance consultants and small business owners is to collect accounts receivable as quickly as possible, so that adequate cash-flow is maintained and accounts payable, employees and subcontractors can be paid on time.  Regarding your accounts receivable, I recommend that you take the following actions to encourage on-time payments:

  1. During the project specs discussion propose a payment schedule, perhaps tied to the timing and achievement of certain project milestones.
  2. Request a down payment of 20% – 35% of the total project fee and unless you’ve previously worked with the client, don’t start the project work until it is in hand.
  3. Invoice according to the agreed-upon payment schedule.

I cannot overstate the importance of these three actions.  Accountants estimate that in a given year, 5% – 10% of professional services providers’ invoices will be uncollectible.  The client is not always entirely at fault.  Freelancers must demonstrate that we intend to get paid and that’s done by being serious about the project payment schedule, requiring a project fee down payment and on-time invoicing.

Another helpful tactic is to make money by saving money.  Examining your accounts payable might help you gain a few dollars each month.  The number one accounts payable tactic is to avoid paying late fees by any means necessary.  Several years ago, many companies recognized that late payment fees are a very lucrative passive revenue stream and so they doubled, or even tripled, their penalties.  Some also shortened the length of their grace period window, when a late fee could be avoided.  Defend yourself from this predatory practice by flagging all accounts payable with their due dates as they arrive and make every effort to pay on time.

Another reason to pay on time is that a good payment record can sometimes be used to negotiate a lower credit card interest rate or request that certain fees might be waived or reduced at your bank.  While you’re on the phone and in the mood to negotiate, call your cell phone company and internet service provider and see what they can do to lower your monthly bill.

Adequate cash-flow is the life blood of every business, required to finance all business operations, including marketing campaigns, technological upgrades, professional development and other activities that support the venture.  No business can function effectively, much less grow and thrive, without healthy cash-flow.  Your diligence and negotiation skills can contribute substantively to its maintenance.

Thanks for reading,


Image: The Fruit and Vegetable Seller (1631) by Louise Moillon (France, 1610 – 1696) Courtesy of La Musee du Louvre, Paris

Cash-Flow Therapy

So many businesses in the U.S. are undercapitalized; insufficient cash-flow is a factor in the demise of many ventures that might otherwise succeed.  Cash is king, it is often said, and the wise business owner will do what is necessary to maintain adequate cash-flow in his/her organization.

Make friends with the basic three financial documents and learn to use them as analytical tools.  They exist to enable your success and they will signal you when corrective action must be taken.

Monitor the top line of your company’s Income Statement (sales revenue/ billable hours).  Observe the ebb and flow of the accounts receivable (who owes your business money) and payable (to whom you owe money) on your Balance Sheet.  Make note of the beginning and ending cash balances on your Cash-Flow Statement.  Also on the Cash-Flow Statement, notice the cash sales (representing billable hours payments received as checks, for example) and the operating expenses.

Seasonal variations in billable hours/ sales can potentially exacerbate cash-flow problems if that is an issue in your business (the Christmas to New Year’s slowdown, for example) and pop-up emergency expenses can do the same.  Unfortunately, the outcome for Freelance consultants or other business owners can be a cash deficit, an especially unwelcome state of affairs in a month that involves holiday expenses.

But the primary cause of cash-flow woes is usually a result of persistently insufficient billable hours for services rendered or product sales, perhaps secondary to an anemic client list.

Former Wall Street Journal Assistant Editor Serenity Gibbons points out that if you  struggle to generate enough at the top line, you’re probably facing one of the following challenges:

  • The optimum target clients have not been reached by your marketing campaigns, or the message doesn’t address their priorities or aspirations.
  • The product/ service has limited value to the target clients, or your offerings are overwhelmed by dominant competitors.
  • The product/ service is perceived as too expensive for the value delivered.

It’s time to take control and consider what can be done over the short and long-term to correct the problem.  Do some homework and discover the basic challenges, concerns and goals (as defined by their respective industries) that would motivate your prospective clients and guide their decisions.  Determine why they’re doing business with your competitors and not you.  Moreover, make sure that you are pursuing the best target markets for your products/ services.

A second issue is an administrative one that plagues many Freelancers—-we fail to invoice in a timely and regularly scheduled fashion.  Help your clients to take you seriously and treat you like a “real” business by invoicing when promised. Take measures to improve the odds of getting paid on time and in full.  I’ve lived through this challenge and can report that with a small amount of discipline, it can be overcome.

Third, watch your operating (fixed) and sales related (variable) expenses.  How much are you spending to generate sales revenues/ billable hours? Limit what must get dropped into accounts payable and expand what drops into accounts receivable.

There are usually ways to stem the tide of cash-flow problems, that is, if you take action early enough.  You might start with revisiting your pricing strategy.  Ensure that your pricing reflects the value of your product/ service; that your prices are comparable to what competitors in your area charge for similar services/ products; and that you charge close to the maximum of what clients expect to pay for what you offer. Do some in-depth pricing research, using GSA MOBIS, the federal contract system, as a benchmark.

Another useful tactic that serves as a band-aid for cash-flow glitches that are more inconvenient than problematic is your business credit line.  While you’re still able to pay bills on time and have a respectable credit score, investigate obtaining a business credit card through your bank.

Resist the temptation to charge business expenses to your personal credit cards!  Keep business and personal expenses separate and get your arms around the spending in each sector.  Furthermore, a business credit card usually has a much higher credit limit than a personal line and that allows you to more easily make investments in your business and earn cash back and points as you do.

Finally, if inflated business expenses, whether fixed or variable, play a major role in your cash-flow problems, then you will have some decisions to make (re: the selling expenses) and negotiating to do (re: the operating).  If you regularly pay on time expenses for inventory purchases, credit cards, or insurance, for example, get on the phone and ask for lower interest rates or a lower premium.  If variable expenses seem high, reconsider how much you must spend on marketing, advertising, sales and client entertaining.

Thanks for reading,


Photograph: Baccarat at the Sands Hotel in Las Vegas, NV, with Frank Sinatra (in black tie) as the card dealer (1959)











































































































































Thanks for reading,


Photograph: Baccarat at the Sands Hotel in Las Vegas, NV with Frank Sinatra (in bow tie) dealing the cards (1959)

Invoicing Inertia: The Cure

Freelance consultants are no strangers to cash-flow crunches and as quiet as it’s kept, the problem can be of our own doing, or not doing.  The reason for our cash-flow problem could be a slow-paying or, horrors, a non-paying client (an acquaintance who is a business accountant estimates that 5-10 % of professional services providers’ receivables will be uncollectible in a given year).  But we can be our own worse enemy in these matters and it is time to tame our invoicing inertia.

As example last week, I sent an invoice to a client that was worth four figures and was four months late.  Why was I so negligent, when I had important accounts payable to resolve? Why is it so hard for so many small business owners and self-employed professionals to stay on top of our accounts receivable and send out invoices on time?

In my consultancy, and I imagine this is true for most, client work, both performing it and networking to bring more of it in, are the priorities.  Billable hours are the name of the game. Then there is content marketing activity (this blog!) to send to my preferred social media platform (LinkedIn) and my website.  Other revenue streams—teaching twice /week, which entails responsibilities to my students, and producing a monthly post for the online magazine for women entrepreneurs where I am a staff writer—claim another chunk of time and creative energy.  Being in business requires considerable mental and physical stamina.

The invoice was for hourly work, rather than a project fee, meaning that detailed information was expected (and not unreasonably so).  The very thought of generating the thing nearly made me nauseous, so I found several avoidance-behavior activities that on the surface appeared to be ambitious, but in reality served mostly to enable my procrastination.  Then the client asked me about the invoice.  I was so embarrassed!

As I worked on the detailed, multi-page invoice, I thought about what I might do to simplify the process, so that I could easily generate scheduled invoices and would be motivated to do so.  Invoicing for a project fee is much easier than the hourly rate version and it was project fee invoices plus the job income  that sustained me while I neglected the hourly invoice.  Here’s what I recommend (my business accountant friend approves):

Collect in advance

Whether the assignment is paid by hourly rate or project fee, collect a percentage at the contract signing or email-documented agreement (20 % – 35 % of the project fee, or an estimate of the first months’ billable hours).  Discuss with the client a mutually agreeable invoicing schedule and honor it.

Create two all-purpose invoice templates

In the top left of a Word document, type in your name and/or DBA as the vendor, tax I.D. and contact info. This will become the permanent part of your template.  Below that, type in separate lines  for the client name, date, project deliverables, total amount of the project fee and the amount of the invoice.  All you’ll need to do is copy the template, drop in the specifics and presto! You’ll have an invoice to send.

The hourly rate template will have a cover sheet that is similar to the project fee template, but with the lines for rate (the dollar amount you’re charging/hour) and hours (total billable for this invoice) substituted for the project fee info.  A second page of the hourly rate template will have lines for four “week of” headings, ready for you to insert the dates and specifics of your weekly client work.

Either invoice can be used for retainer contracts.  If you are brought in to work a standard number of hours per month for a particular client, or you’re asked to perform predictable functions as needed throughout the year and you can reasonably estimate how often you’ll be asked to perform those services and your cost to provide them, then you can calculate invoice amounts in advance and determine a retainer fee.  If this is the case, then suggest a retainer arrangement at the next contract signing and bolster your income security.

BTW, it is not unusual to invite a client to pay the year’s (or quarter’s) retainer in advance. Offer some attractive incentives for yearly or quarterly advance payments, like a good discount or service add-ons.

On all invoice templates, indicate how the check should be made out (your name or DBA) and indicate that the invoice is due immediately (although it is accepted practice to pay invoices within 30 days). Finally, state that it is a pleasure doing business with your client.

Invoice on time

Whatever the agreed-upon payment schedule, be sure to follow it (not more than one week late). When you honor the invoicing schedule, you communicate to clients that getting paid within 30 days, if not sooner, is what you expect and deserve.  Timely invoicing also benefits your clients, who will be able to better manage their own accounts payable and cash-flow.  If you start to bring in more lucrative assignments, investigate the process of accepting credit card payments.  You’ll be paid faster, but a small processing fee will be deducted.

Invoice as marketing collateral

To date, my invoices are created on an unembellished Word document, but that is about to change.  I plan to align my invoice design with my other marketing collaterals.  Very soon, I’ll design an invoice PDF that contains a scan of my (lovely) business card, that will appear at center top.  All the other info will be written as described here.  You can also investigate free invoice templates in an online search.

In our hyper-competitive business environment, where clients hold the keys and seem to be looking for reasons to cancel projects that Freelance consultants depend upon, it is imperative that we project professionalism.  All interactions with clients, from the first meeting, to the excellence of our work and concluding with an accurate and timely invoice, must reflect well on our brand.

Thanks for reading,



Cash-Flow Woes and Antidotes

Lucky you.  Your sales pitch to prospects is working and clients are stacked up like planes landing at O’Hare.  Receivables are numerous and the balance sheet rocks.  So how can it be that you almost didn’t make payroll  (again)?  How can you come up short on cash,  with all the business you’ve created?

Like so many business owners,  especially those who are new or who suddenly acquire a competitive advantage that creates a tidal wave of business,  you did not recognize the signs that a cash-flow crash was impending,  regardless of how much money was scheduled to flow into your coffers.  You placed your primary focus on creating business (which is vital),  but neglected to monitor the ebb and flow of revenues and expenses (which are vital).  Every business owner must keep an eye on the money ball and take corrective actions as needed,  if we want to keep the business alive and thriving because quite perversely,  as sales go up,  cash can go down.

Here is one example of how a cash-flow crash might happen.   As business expands,  staying on top of accounts receivable becomes more time-consuming.  Those in service businesses  (like website design or public relations) may find that clients,  oftentimes larger businesses whose names we crave for our client list,  may unilaterally decide to pay receivables in 60 days,  instead of 30 days.   Meanwhile,  you have payroll,  office rent,  phone bills,  auto insurance and numerous other operating expenses that are due somewhere between right now and 30 days.

Another cause of cash-flow crashes is improper pricing.  You may sell a ton of T-shirts but if the profit margin is too thin,  you’ll find that excellent sales volume as demonstrated by number of items sold does not overcome an inadequate mark-up.  Revenues generated will not cover expenses.  It will be necessary to either acquire the product less expensively,  or raise the price.

A growing business brings up still more issues that keep its owner awake at night: capital expenditures.  You will need to decide whether or not and when  (or not)  to upgrade office equipment,  open a new office or move to larger quarters,  or hire more workers to keep up with the growing number of customers.

Fail to invest in capacity and you leave money on the table,  plus dissatisfied customers who are likely to kill you on social media.  Get fooled by the romantic delusion of further growth,  invest in demand that never materializes and you are stuck with potentially crippling debt that can bankrupt the business.

That is quite the dilemma and only the best fortune-teller can give the right answer.  John Terry,  of Churchill Terry business advisers in Dallas, TX,  recommends that the business owner focus on one question only when evaluating the possibility of making large capital investments:  will it bring money in the door?  If not,  find a less expensive alternative or learn to make do without it.  Successful business owners learn to preserve and protect liquidity.  Here is an effective antidote:

  • Hire a savvy bookkeeper or accountant to function as the business controller ( full or part-time)
  • Each week,  collect the data on key financial indicators: accounts payable,  accounts receivable,  available cash and the quick ratio (cash + receivables / current liabilities + payables) to monitor that all-important liquidity
  • Each month,  collect the data on these indicators: accounts receivable turnover ratio (how long does it take to get paid?),  the operating cash-flow ratio (cash-flow from operations / current liabilities)  and the pre-tax net profit margin

It is imperative that you are able to pay obligations when they are due and for that you need cash in hand.  Analyze the above indicators weekly and monthly and learn what is really happening behind the scenes of your business.  Track the available cash trends over time.

Seasonal variations may become evident.   You may have to step up collections of receivables or approach certain clients about speeding up payments.  You may have to request more money up-front before taking on certain projects,  so money will come in faster.  You may need to trim expenses.  You may need to raise prices.  The decision of whether to invest in capital upgrades will become clearer.

There are software programs that will track important data and help business owners resolve problems and set priorities.  Accounts receivable,  cash,  inventory and liquidity can be monitored,  along with confirmation on whether the business is on target to meet budget and revenue goals.  For those businesses that get a lot of repeat business,  it is also possible to track the profitability margins of key clients.

Thanks for reading,


Business Finance Resolutions for 2012

Happy New Year!  Thank you for coming back in 2012.  The New Year is here and the time is ripe to take a fresh look at how you can bring more revenue and profit to your Freelance business.  The purpose of this blog is to inform and inspire readers to create the conditions that will generate a successful and rewarding Freelance consulting career.  Let’s get the ball rolling and look at how effective financial management promotes that goal.

Resolve to skillfully manage cash flow

Cash is king and cash flow is the life blood of every business.  Nothing flows unless the cash does.  Cash flow management means knowing how much money is expected to enter your coffers and when those checks are expected to arrive,  along with knowing how much money must be paid to creditors and when those checks must be sent. 

Even if you show a profit on your P & L,  it’s possible to have insufficient cash in hand to pay monthly bills and other accounts payable.  We all know that working as a Freelancer can be a cash flow nightmare,  so it’s vital to get arms around the accounts receivable,  or else sleepless nights will haunt.

Cash flow management actually begins in client meetings.  Once your project fee has been addressed and agreed upon,  diplomatically state that 15% – 20%  is paid at contract signing and that invoices are payable upon receipt.  Payment schedule for the balance will depend upon the length,  type and cost structure of the job. 

Whatever you do,  don’t allow more than 35%  of your fee to be payable at project conclusion  (unless it’s a small job).  Take steps to discourage the client from preserving his/her organization’s cash flow at your expense.  Write payment terms into the contract,  right along with the scope of your work,  deliverables and start date.

Resolve to get paid what you are worth

Establishing value and getting paid for same is the goal in every service business,  whether it’s teaching piano or being a nanny.  Your pricing strategy should reflect the value that your services bring to the client.  Needless to say,  pricing supports  cash flow and revenue.  To identify an appropriate fee range,  pricing experts recommend that you focus on four factors:

  • The perceived value of the services your provide
  • The demand for your services  (and your reputation as a purveyor)
  • What’s involved in the delivery of your service  (time = production cost = the Freelancer’s cost of goods sold)
  • Your mark-up / profit margin

Resolve to create and analyze the basic financial statements every quarter

Freelancers have a good idea as to how we’re faring financially,  because we either have the desired amount of money in the bank or we don’t.  We either have jobs in-house or we don’t.  We have either big jobs in or small jobs.  Like a balance sheet,  your bank statement provides the snapshot of your financial picture at a given moment.

There’s nothing like creating and then actually contemplating and analyzing one’s cash flow and income  (profit & loss)  statements to truly grasp your true financial picture and most importantly,  receive clues as to what would be advantageous for you to do about the business model,  sales and/or marketing segments of your consultancy.  Smart business decisions are invariably data-driven.

As you analyze your financials over the years,  you may identify regularly occurring busy periods and decide to hire temporary help or bring in a Freelance sub-contractor,  to give you another pair of hands at those times and allow yourself to make more money. 

Slow periods will likewise be identified.  You’ll be encouraged to find a way to either stimulate business during those times by incentivizing clients to hire you,  find temporary work,  find classes to teach (if that’s one of your competencies),  or engage in prospecting,  networking and professional development activities.

Next week,  I’ll return with more business-themed New Year’s Resolutions for 2012.

Thanks for reading,


Kill the Deadbeats!

“Businesses don’t fail because they are unprofitable.  They fail because they get crushed on the accounts receivable side.”  Brian Hamilton, CEO  Sageworks, a  financial research firm in Raleigh, NC

A  2005  survey of American Express  small business customers found that  49%  had cash-flow concerns, with accounts receivable as the primary concern,  and  9%  of  that group worried that their cash-flow troubles were sufficiently serious to impede their ability to compete for new business.

A  2007  survey of  2000  Freelancers found that  77%  of us have had trouble getting paid at some point in our careers as independent workers.  Of  the  77%,  late payments have been endured by  85%  at least once;  42%  have been stiffed at least once;  and  34%  have received less than the invoiced amount at least once.  The survey also found that Freelancers  spend 4 hours/month on average pursuing late or unpaid receivables.

Since Freelancers are  excluded from the Fair Labor Standards Act (FLSA), which would require  the Department of Labor to assist us by investigating claims of involuntary unpaid labor (slavery!) and would authorize the Commissioner of Labor to bring criminal proceedings to recover wages owed,  we are more than a little vulnerable to this growing phenomenon.

Our options are weak.  Hiring an attorney is costly and does not guarantee payment of monies owed.  Small Claims Court is time consuming and winning a judgment does not guarantee payment.  Writing a  thorough contract,  which specifically details  services requested,  pricing,  invoice due dates and late fees doesn’t help much either if  a  client lacks the ability to pay,  or simply refuses to pay within a reasonable time frame (big corporations are infamous for this).

Smaller businesses may be caught between a rock and a hard place:  they can’t pay you until someone pays them.  Big corporations have the power to dictate payment terms favorable to their own cash-flow objectives.  Over the past several years,  including the so-called  “booming economy”  years,  many big corporations brazenly increased the turn-around time on accounts payable to their small vendors —because they could.

So what’s a Freelancer trying to maintain respectable cash-flow to do? Take every precaution and watch for signs of problem clients.  Before taking on a new client,  maybe ask around and find out if you know who’s done business with the company.  Maybe check out the BBB and find out if  a complaint has been filed and its resolution.

Milestones and money

Establish project milestones and attach an invoice to each one.  First,  discuss your project with the client and get agreement on the scope of the project and the time table.  At the contract signing,  get a deposit of 10-25 %.  At key junctures in the project,  get another 20-25% payment,  if possible.  The goal is to avoid the trap of  waiting for a large sum of money at the project’s completion,  when the client possesses the complete deliverable.  Hint:  if  the client is unable to make the initial deposit on time,  brace for trouble!

Deadbeat radar

Pay attention to client motivation—are they looking for quality work,  or the cheapest price?  If  a customer comes to you primarily for price,  then price is what will make that client leave you.  Moreover,  they will use price to manipulate you.  So do not be desperate!  It’s hard, I know, when you’re just trying to be solvent.  But customers like that pay the least money,  cause the most headaches and may not pay what they owe,  on time or otherwise. They are best avoided.

Beware the client who is in a big rush, frazzled and frenetic.  This person will appear suddenly and may also be overly concerned with price.  Once the deliverable is in hand, your invoices will be ignored,  as he/she is always  “too busy”  to deal with annoying things like paying you.  Insist on receiving as much payment up front as you can (try 50% down, including a premium for speedy delivery). You may never see the rest of the money,  or you will have to chase and wait.

Beware also the OCD type who is hyper-controlling and fussy.  If you must go there,  be excruciatingly clear about the project scope,  deadlines,  expectations,  project milestones, etc.  Put everything in writing and make sure they agree,  sign off and are prepared to make all milestone payments.  This client will be tough to satisfy and will pick you apart,  demand revisions and may withhold payment,  claiming that you haven’t delivered satisfactorily.

Put into writing how many revisions are included in the project base price plus the price for revisions.  Consider adding  25-30%  to your usual quote to make up for the time you’ll spend responding to incessant emails,  phone calls,  criticism and demands.

Recurring nightmare?

If collecting receivables is a persistent problem for you,  then it is likely that you are not qualifying clients properly or your product is considered deficient.  Clearly define your deliverable.  Set expectations for your services and make sure that you understand what the client wants and the client understands what you will deliver.  A verbal agreement should precede a written proposal/contract that specifies the work you will do,  the timetable and payment due dates and should be signed by both you and the client.

Thanks for reading,