This is a post in an occasional series I'll be running on ChangeOrder about the benchmarks that design businesses use to help maintain their long-term success. These benchmarks are drawn from the research that I conducted when writing Success by Design: The Essential Business Reference for Designers.
When starting up a design studio, it can be tempting to do whatever it takes to win project work with new clients. A common mistake, however, is to extend credit to new or existing clients rather than require payment up-front for project work.
It's never a good idea to extend credit to a brand new client, and minimal credit should be extended only for long-term clients that have a strong track-record of deposits, on-time payments, communicate about honestly money, and have asked you for the privilege.
In our laissez faire, credit-saturated culture, it can seem as easy to use credit cards as it is to provide credit to others. However, as a business owner, taking on debt in order to fulfill a service isn't wise. Take a deposit on the work that you'll be completing, with a signed contract in place that outlines a payment schedule tied to your project milestones. No work should start until the first payment is received and deposited.
Running a credit check on a client isn't enough. You may discover that a client has ample income at their disposal to pay you, but that isn't the only issue. You want assurance that, as the project progresses, there will be a fair balance between what compensation you receive and the you've created that is shared with the client.
Imagine in your head an old-fashioned scale. This is the kind where you place objects on one side of the scale, then various weights on the other to assess how heavy the objects on the other side are.
Let's say the client has one side of the scale, and you have the other. On your side, you pile up your expertise, which they've hired you for. It's invisible and weightless—you haven't created anything tangible yet. On the other side, the client places their money. Oh, wait—they haven't paid you yet. So right now, the scale has nothing on it. It's in balance, right?
Wrong. Your side is burdened with your studio's operational overhead, the hours that you'll be spending working on the client's work, and the projected value of each deliverable that will be provided in return for due compensation. If you aren't paid up front, the scale is always tipped in the favor of the client. With each hour that you plan to bill and each deliverable that you provide without compensation, things are further and further out of balance. You're beholden to the payment terms you'd set up in the contract: all the time you've spent working on the client project, plus all the time it takes for them to pay you back.
The larger the client or project, the harder it is to make this happen. They may have a blanket policy for how they handle vendors, or for how payment up front should be handled. They may be under the gun and want to start the project as quickly as possible, no matter what due processes must be followed. And in some cases, they may believe that since they have the money, they have the leverage. Believe it or not, some companies have unspoken policies to drag out payment for vendors as long as possible, as they can earn interest on that large amount of money in the short term before it's disbursed.
The right way to handle the situation is to make what's on the scale even. When you start the project, the client has place a deposit on their side of the scale, and on your side, you're placing a hold on the time and materials necessary to get the work done equivalent to that deposit. If you aren't paid up front for that first chunk of work, you're the one bearing the full onus and risk.
Instead of offering Net 30 payments on invoices for work that you've fulfilled, set up a clear schedule for payment. Depending on the length of the project, split it up 50/50 (half at start, half when you're halfway done) or 33/33/33 (a third at start, a third at the first third, and a third before the final stretch of the project). If the payment doesn't arrive on time, per the terms of your contract, you stop work and there is a fee to restart the project (this is in your contract).
No matter what, ensure that your final invoice is paid before you deliver the final work for your project. This isn’t NET 15 or NET 30. It’s NET 0. Mark the final invoice "Net 0" and circulate it with them well in advance of final delivery, so you don't end up in a situation where you either withhold providing your final deliverables to the client or end up showing a "good faith" measure.
Letting invoices ride out can be "business as usual" if that studio has a strong cash-flow buffer and clients that regularly pay on time or early on those estimates. You may feel like you have little to no leverage in negotiations, especially when it comes to the size of your project fee or when you expect to get paid for the work. But it's your business, and your rules regarding how you run it and how you manage your company's cash-flow. Choose them wisely.
Other posts in this series include: