When considering the most critical functions of a creative business, cashflow often falls to the bottom of the ever-present punchlist. As deadlines loom on the near horizon like Godzilla-like monsters out of J.J. Abrams films, our minds often focus most forcefully on what's right in front of us: the design work that needs to be completed. Pronto!
This isn't a strategy for sustaining your business in the long term, and can wreak havoc with your monthly finances. I've worked with both freelance designers and design firms that, at the expense of the actual day-to-day operations of the business, get the work out on time and on target, but end up causing massive havoc in the actual collection work necessary—from a bookkeeping perspective—to ensure that there's an actual flow of money allowing everyone to receive a paycheck, take care of the utilities, and maybe even cover those expenses you might have taken upon yourself (out of pocket) to take your client out to lunch. I have definitely been foolish in this department when I was doing freelance work, and I paid for it in an empty bank account. (More money in the bank = more interest = more liquidity = more safety.)
A critical tool you should make sure is part of your bookkeeping arsenal is an aging summary. This is a simple tool where you list what clients have outstanding sums of money due to you, in monthly increments. If a client hasn't paid you an invoice due after 30 days, you send them a client letter that notes what is due to you and how far it is past due. (Hopefully, you'll never get past 60 days.)
Most aging summaries tell a very clear story. In the example above created by David Conrad from Design Commission.we've highlighted in red the key areas where a clear story has emerged from past-due payments:
Withholding credit if the client has major invoices long past due? How could you end up working for MegaCo or Mom-n-Pop and continuing to bill them for new work, when they still have an outstanding invoice that's almost 3 months past due? It would be appropriate to work into a long-term agreement with any client that past-due (a.k.a aged) invoices may require a freeze on new work until those aged deliverables are paid for in full.
Are you providing a discount if the client pays early, within the first 30 days of receipt of invoice? Some companies require payment early if they can receive a discount as part of their accounts receivable policies. If you set your rates appropriately, this can help limit the overall aging of costs on the books.
Are you keeping in contact even over small sums? LittleCo, LLC may only have $100 on the books with you, but making sure to send a client letter at the start of every new 30-day period can be the prod that helps to facilitate a faster payment for any outstanding invoice.
Have you communicated to your client a clear boundary when non-payment is unacceptable? From a legal perspective, you must notify your client in writing repeatedly (and politely) that payment is due, and what may happen if nonpayment occurs past a certain point in time. In the case of Mom-n-Pop, you've put yourself in a bad position because you've agreed to do work even after you haven't been paid for three months.
Are you asking for payment up front? Should you be extending a client credit for even small sums, or ask them for payment in advance of getting started? I always ask for the latter.
An aging summary may seem like common sense, but many freelancers that choose not to work with outside bookkeepers often neglect to manage incoming receivables at this level of detail and keep it "all in their head." If you've never used an aging summary, it would behoove your business to start using a tool like this immediately—making sure it's available in a place that you can refer to on a regular basis. It will help you continue to communicate with your clients not only about creating great work, but also in making sure that great work is paid in full.
Thanks to David Conrad for contributing to this piece as part of our "Following the Green" presentation for AIGA Seattle.