Your consulting firm has built a solid client base. You’re doing fantastic work and charging healthy rates. This is a recipe for profit and cashflow success, right? Well, yes, to a degree. Once you earn your keep though, you need to collect on it. The process of billing and collecting revenue from your clients, aka client billing, requires more consideration than many consulting firm owners think. To help ensure your firm is set up for success, in this article, we’ll be covering the ins and outs of client billing for consulting firms, including:
Policies and terms
Client’s ability and willingness to pay
User experience (client and employee)
Policies and terms
- Makes business sense
- Competitive terms – There are various terms to determine. You should take into account your clients’ needs and expectations, but also what makes the most sense for your firm. Upfront deposits/retainers, invoice timing (advance or arrears), payment terms (due upon receipt, net 10, net 30), refund/guarantee policy, who initiates payments (firm vs. client), late fees, and interest.
- Right pricing model – Your pricing model should be driven primarily by the value you provide your clients, be competitive within your market for the nature and quality of services you offer, take into account the direct costs of delivering your services for each client/service/project, and have a clear scope of what’s included with stated rates for any out of scope work that may be performed.
- Billing of expenses – As mentioned above, you should consider direct expenses in your pricing model. Still, there are times when billing direct expenses as additional line items makes sense. Such as travel, meals, software licenses, research publications, payment transaction fees (where allowed by law), or supplies. Your contract should clearly state which expenses will be passed-through, in addition to the consulting fees that will be charged. Be sure to maintain documentation of expenses properly for tax purposes and to provide your client with supporting documentation as needed.
- Clear, understandable, and aligned to expectations – To avoid misunderstandings and conflicts down the road, making your billing policy as straightforward and easy to understand as possible is essential. Some recommendations: 1) Keep it concise. 2) Avoid confusing or over-the-top legalese. 3) Make it easy to follow. 4) Make sure it’s consistent with what you agreed to during your closing meeting. 5) Set clear expectations. If there are any disagreements on terms, it’s best to have those resolved before starting a new engagement. 6) Ensure you obtain obtained signed copies of necessary agreements.
Client’s ability and willingness to pay
- Creditworthiness – Sometimes consultants are too trusting (or optimistically hopeful) their prospective clients can afford their services, and that they have the integrity to pay what was agreed to on time. To ensure your prospective client has the wherewithal and a solid track record of paying its vendors on time, it’s important to incorporate a credit application as part of your sales process. The credit review process can include reviewing financials, reviewing tax returns, checking credit scores, and checking references. If prospective clients have no skeletons in the closet to hide, they should be okay with providing these items. If you’re worried about causing too much friction in your sales process, you can ask for these items after receiving a verbal sales commitment, or include a contingency in your contract dependent on the outcome of your credit review.
- Communicating project status and value delivered – An informed, happy customer is more likely to pay you and pay you on time. Communication is vital to ensure your clients know the status of your work and the value they’re getting from it. It’s best practice to update your clients on project status regularly. These status updates should highlight completed deliverables and any other value you’ve provided. While you may think your client is fully aware of the great work you’re doing, they often are not. You can be sure, though, if you show it to them. Regularly communicating takes discipline, though, since it may feel like wasted time or like you’re bragging. But it’s necessary to ensure your clients know the status of your work and the value you’re providing prior to receiving your invoice. This will significantly increase the likelihood they’ll pay your invoices in full and on time, without complaint.
- Accurate – Invoices are consistent with your billing policy and contract terms, and the work performed is accurately billed (if hourly billing).
- Out-of-scope – Out-of-scope and hourly work is tracked on a daily basis and billed with each invoice.
- Timely – Invoices are issued timely at the agreed-upon dates or milestones.
- Expenses – Billable expenses are captured as their incurred and billed with each invoice
- Payment options – Many consultants solely receive payments via mailed checks. Whether it’s just what they’re used to, it seems like the easiest option for them, or they think clients wouldn’t use other electronic payments methods, receiving payments solely by check has various pitfalls: 1) The timing of payments is difficult to verify. 2) Payments can get lost or delayed in the mail. 3) Cutting checks is less efficient for clients than processing electronic payments. 4) The time it takes to mail, deposit, and wait for checks to clear can take 1-2 weeks. 5) Checks may be written unclearly or not be properly filled out, leading to significant delays in waiting for another check. Some consulting firm owners may also be concerned they would have to pay transaction fees if they accepted additional forms of payment other than checks. While this is typically true, many forms of payment have minimal fees. And for those with higher fees (3%+) the cost may be well worth the benefit of being paid what’s owed to you sooner. There are currently several ways you can receive payment, including: check, ACH, wire, PayPal, and Zelle (among dozens of others). ACHs and Zelle payments are very inexpensive and offer anywhere from real-time to less than 24-hour clearing times. You can also obtain approval from your clients upfront in your contract to “pull” fees at agreed-upon times vs. waiting for clients to “push” payments to you.
- Early payment discount – You may also consider offering an early payment discount. This would further speed up payments from your clients to within a much quicker timeline than standard payment terms (for ex: 10 vs 30). For the early payment you would typically provide a discount of 1-2%. Whether or not offering this makes sense for your consulting firm depends on the creditworthiness of your clients, the size of your invoices relative to total monthly sales, and your cashflow needs. This could be the incentive your clients need to help improve your cash flow, and the cost may outweigh the cost of delayed payments (time following up, interest you incur to draw on your line of credit due to cash needs, etc).
- Accounts receivable monitoring – To determine if payments are being made timely and accurately, you must regularly apply payments and review your accounts receivable aging. This should occur at least weekly to ensure timely collections and prevent past-due invoices from turning into bad debts.
- Reminders and collections – For any past-due invoices, reminders should go out to clients weekly. It’s best to have a standard series of collections messages ready that will be sent out at different times based on how late payments are. Resist the temptation to avoid regularly following up with clients that haven’t paid on time. You’re running a business, and most business clients will understand your need to be a stickler when payments are late. Hopefully, you’re never in a position where you need to contemplate sending a client invoice to collections. However, depending on your industry and your credit application process’s effectiveness in weeding out problem clients, doing so may be necessary. Your engagement agreement should also protect your rights to cease work, withhold deliverables and charge late fees or interest due to delays in receiving payment.
User experience (client and employee)
You may not consider your billing process a part of your client’s experience. But every interaction is a reflection on your consulting firm, as well as an opportunity to provide value. Create a process that makes sense and is simple and efficient. Make it easy for clients to receive and pay your invoices. Integrate your payment system with your billing system to avoid inefficiencies and errors. There are an increasing number of payment solutions that offer a seamless, automated process and flow of payment data. This is not only valuable to your clients but also improves your employees’ experience. Employees frequently complain the systems and processes they must use are outdated, exceedingly manual, and a pain to work with. Making necessary changes to your billing process can help keep your clients and employees happy.
As you determine the client billing process that makes the most sense for your consulting firm, another key factor is cost. Costs to consider include transaction fees, software, bad debt, labor, and the potential cost of losing unhappy clients or employees. You don’t need to pay high per-transaction costs or for some expensive software. There are many affordable, easy-to-use solutions available that can help significantly improve your billing process.
What is the current state of your consulting firm’s billing policy? If it needs some work, you may need to improve your policies, processes, tools, or communication. Getting your client billing process right is worth the effort. It can significantly improve your cash flow and the experience of your clients and employees, as well as further increase the value of your consulting firm.