Debtors – Be Clear on your Business Arrangements

· 9 min read

How much time do you spend chasing your debtors? Have you thought what they do to your hourly rate and your productivity?  And have you considered the emotional cost of providing a service and not being paid?

Let’s say you buy and sell goods. You buy some goods for $500 and you sell them on credit for $1000. You have an invoice, and a clearly defined transaction. You’ve outlaid $500 to buy the goods to make the transaction possible (you’re a small business, so you probably had to pay up front), and you are hoping to receive another $500 in profit. It’s very easy to prove the transaction, and very clear for a debt collector to take steps to recover the debt, if need be.

Starting Out as a Service Provider

But let’s say you provide services. You’re small, and just getting started, and you’re eager to show your skills and prove yourself.

If you’ve taken the time to do a budget before you set out on the venture, you worked out that your base costs – laptop, software, printer, some car costs, business cards, membership fees, stationery, maybe some rent and electricity contribution – all add up to about $25,000, so to make an income of the $80,000 you want to earn, you have to bill out a total of $105,000. Based on a 40-hour week, that calculates to billing out at nearly $55/hour if you can bill every hour.

But most service industry people can’t bill out every hour; they have professional development, they have admin, marketing and networking time, and they have “downtime”, all of which can easily add up to 30% of the week, leaving 70% of the week which can billed.  In the first year, you could be lucky to average 50%.  That means to make the $80,000 per year you want, the charge out rate just increased to over $110 per hour.

The First Contract Opportunity

So you’re ready to go, and you’re excited, because you’ve just been contacted by someone referred by an existing contact. You take comfort in the fact that they know someone you know.

You meet and spend two hours talking through their needs. At the end of the meeting, the other person asks you to send them your ideas. You’ve already identified that your skills will fill a gap in their business; you feel like it’s a “perfect marriage” and you look forward to working with them. You’re thinking there’s no way at this point you’re going to raise the subject of your fees, and possibly lose the business. But there might also be a part of you which is thinking, “they asked me to show them, they should have raised it.”.

At this point, you’ve spent four hours on this person: one hour to prepare, the two hours for the meeting, and half an hour travel each way. You haven’t mentioned your fee. So far you’ve put in $440 of time at the $110 charge-out plus travel costs.

After the First Meeting

You have two choices at this point, or three if you choose to do nothing (in which case at least advise the person that you do not wish to proceed).

Your first choice is to email the person, thanking them for the meeting, and the opportunity to work with them. In that email, advise them of your hourly rate, and your charge for incidentals. Advise them of your estimate for the time you believe it will take to do the job, when you can deliver it, and provide a total figure for the job, confirming that it does or does not contain GST. Finally, again thank them for the opportunity, and to advise by return email if they wish you to go ahead on those terms, or not. (Do not ask if the price is acceptable; in doing so, you are sending a message that you are not sure your time is worth what you are asking. Stay firm, and on the front foot.)

The quote you send is for the 12 hours work to do the job, and 2 hours to present, a total of 14 hours, giving a figure of $1,540, plus a 5% estimate for consumables, giving a total (pre-GST) figure of $1,617.00. With GST, the invoice would be $1,778.70.

Your second choice is to start working on the project while it’s fresh in your mind. There’s a little bubble of annoyance with yourself that you haven’t mentioned your charges at this point, but you tell yourself it will be okay; you’re going to do such a great job that there won’t be any worries.

One Week Later

It’s now a week after the initial meeting, and you’re in one of five positions:

  1. You’re finalising the project, because they replied to your email that same day agreeing to your quote, and the delivery date is now just three days away.
  2. You’re revising your quote and the scope of the job, after they replied and said they couldn’t afford it / it was more than they wanted at this point.
  3. They replied to your email and said “no thank you”, so:
    i. you’re looking at your quote and wondering why it missed; or
    ii. you’re drafting an email asking for feedback, especially as the meeting went so well
    iii. you’re drafting an email offering to review your proposal
    iv. you’ve thought “oh well”, and are moving on.
  4. You’re working on their project, even though you haven’t heard from them, but thinking “I’ll give them a call when I’m finished and make a time to take it and show them”, hoping they’ll want it, and then you’ll send an invoice afterwards. So far you’ve spent 10 hours, partly because there’s nothing else to do.
  5. You’re working on another project, or watching a podcast, waiting for them to reply

Two Weeks Later

If you won the job, you’d have delivered it by now, and hopefully is will lead to more work.  Congratulations on that win!

But if you didn’t win, and none of the follow ups were successful, let’s say two weeks later, you look at the cost to you of each of the above scenarios.

It’s a direct “cost” when you apply or give away time and are not paid; it’s also an “opportunity” cost, because you are losing the opportunity to use that time to earn money elsewhere. But when you are not paid, there are additional indirect impacts which can be very expensive indeed.

The cost of reacting/responding to each of the scenarios above is as follows

1. Finalising project: 14 hours to do and deliver $1,540 > know you’ll get paid* $1,540: Nil cost

2. Revise scope and quote: one hour to scope down to eight hours, plus one hour to draft new email: $220
3. They said “no thank you”, so:
i. half an hour wondering what went wrong: $55
ii. one hour (need to choose wording) to draft email for feedback: $110
iii. one hour to draft email and reduce project by two hours: $110 plus potential $220

4. “oh well” and move on: Nil cost, except for initial presentation time
5. 12 hours doing job. You send e-copy or photos of job, and invoice for $1,452 (including GST) and hoping to get paid: Cost of $1,386 (including incidentals)

So, looking at the above, the only outcome that had a Nil or better net cost was actually winning the job, and getting it done within the quoted time and price. The cost (not including the initial presentation time) for the other scenarios ranges from Nil for “Oh well” and moving on, to $1,386 for doing the job without the confirmed-in-writing order.

Two-Week to Six Months Later – Impacts of Not Winning the Job / Not Getting Paid

Some of those responses, and costs, do provide an unseen benefit, which may sometime in the future may help recover the cost. Those instances where you went back to the client, firstly thanking them for the opportunity to present your “wares”, and to subsequently ask for feedback, or to offer to review your proposal, will put you back in their minds again in a positive way. They are not going to think less of you for saying thank you, or taking positive action; on the contrary, you’ll very possibly be the one they ask to do a job next time because they’ll see you as proactive, and secondly, they may feel that they owe you for the time you gave first time around, when they didn’t, or couldn’t, engage you.

But there’s a couple of responses which will cost you a lot; in time and lost opportunity now, and in time and energy and emotion quite soon after, and potentially for a long time.

The first is where you do the job – putting in a lot of energy and effort – without a confirmation of order, and it is not wanted.

The second is where you receive the order and deliver the job – again putting in a lot of energy and effort – but are then told you’ll not be paid, or payment is not forthcoming, and either way, you have to chase it.

The knock-on effect of the combination of the energy and time given (it is given until you’re paid) in doing the job, and the rejection, can be devastating to your business and you.

Financially, your business will suffer through lost cashflow and lost profit, and lost time trying to prove and chase the debt, and that will have a knock-on effect to being able to pay your business and personal bills. (If you add two hours per week for the next six months – that’s over 50 hours or more than a week – for either directly working on the matter, or lost productivity due to distraction, your required hourly rate will have to rise from $80, to around $82 for the balance of chargeable time available. Can you justify charging that to other clients?).  That lost time and increased rate going forward will take its toll on your business.

The bigger, or at least equal, impact will be the emotional one. The rejection will challenge your confidence about your business, your product, and yourself; it will make it harder to go in next time to present your services. The rejection and the lost income, the insult, and the feeling of being used and abused, will challenge you to consider whether you’re cut out for small business. It may also challenge you personally.

You can avoid the loss and the insult.

Practise Advising Your Rates and Asking for the Order

Small business has enough challenges without setting yourself up to fall at one of the most common hurdles, and yet one which can be relatively easy to jump and avoid.

It will take a little bit of courage, and perhaps a bit of “front”, to ask somebody more experienced in business for an order, and, effectively, their money. But asking up-front will help you establish the terms of the relationship, and may even help you identify and “flush out” those who really don’t intend to pay but  just want to “string you along” and take what you have while they can, and move their business forward at the expense of yours.

Ask a friend, or business mentor, someone you respect, and who you know is respected, to be a “pretend” client and roleplay the first conversation or meeting. Explain your rates and payment terms early in the meeting, and tell them you’ll be asking for the order during the meeting. Ask them to play an honest client, and then ask them to be someone who may not have honourable intentions. Learn ways to establish a connection with the first, and to identify and politely avoid the second.

Both will respect you for being clear. And you’ll be able to confidently move to scoping the project with the honest client.

And you’re not going to win every job, nor want every job. So getting a “No, thank you”, or deciding not to proceed, after a presentation is much cheaper, both financially and emotionally, than rejection later on. Getting, or deciding, a “No” early means you can save time and energy and emotion, and move with confidence on to the next opportunity.

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