One of the toughest aspects of balancing your company's cash flow is finding the balance between paying your independent contractors while waiting for payment from your clients.
As the former Controller for a multi-million dollar creative firm, this was one of the consistent areas of the business that kept me up at night. Mostly because the "financial" part of my brain would say that we needed to wait until we received payment before cutting checks to our freelancers.
But, the other not so business-y side of my brain remembered what it was like to be an independent contractor waiting anxiously for a payment to cover my own expenses. And sometimes the wait would be 60-90 days after the service was delivered. Although this was common within the industry, it was the agency's that made the extra effort to pay me within 30 days that I loved working for the most.
And when I became the Controller, I consciously chose to listen to that other side of my brain to determine when to issue payment to our contractors. We consistently paid our freelancers within 30 days of the completed assignment, with an internal goal of issuing payment within two weeks. Whether or not we received payment from the client.
Because, let's face it. Independent contractors have the ability to work for anyone and there are hundreds of agencies available to hire them. Just like the contractor, your company needs to stand out in order to attract the best and most reliable talent. And the best way to do this is to treat your freelancers and contractors like gold.
But, I also recognized that it can be tough to do this when you have big revenue projects where the client doesn't pay you in a timely fashion. Some of my firm's big clients like Verizon and T.D. Williamson had such large Accounts Payable departments that it could take up to 180 days to receive a check from them.
To counteract this, one of the initiatives that I put in place was to make sure all large contracts had a monthly retainer component. This way we would have enough cash to pay our bills, including our contractors. Once the project was completed, we would deduct those payments from our final bill.
For example, prior to me taking the Controller position, if we had a $1M project with a large company our contract would state that we would receive payment once a quarter after they received an invoice from us. Unfortunately, once they received the invoice it could take another 30 days to see the money. For us, that meant we wouldn't see any cash for four solid months.
Not ok when you have rent, salaries and expenses to cover. So, I changed that. Going forward, our contracts stated that every month we required a payment of $60K. Period. No exchange of invoices and expense reports. All of that would be tallied up and submitted at the end.
Whatever you decide to do with your company, work with your accountant and find a way to make sure you can pay your contractors as quickly as possible. It's good karma for your business and it helps make sure that your company always attracts the best contractors.
Here are three ways to help your company attract the best freelancer talent:
- Pay all contractors within 30 days. Want to go above and beyond? Pay your freelancers within 2 weeks. I've seen some agencies guarantee payment within 7 days. Believe me, this goes a long way in building credibility and attracting the very best talent.
- Update your contracts with larger clients to include a monthly retainer component.
- Use an cloud based system to keep track of expenses and logged hours. Tools like Tallie and Zen Payroll make it really easy for your bookkeeper to issue payment quickly and gather all the necessary info to generate an invoice.
I want to hear from you. Which of these three tips will you start implementing within your company?
Be sure to check out my free webinar with Kashoo on August 21 where I'll cover 5 Ways to Improve Your Cash Flow. Kashoo is a simple cloud accounting software that received a 4.25 out of 5 stars rating by the CPA Practice Advisor. Click here to sign up.
Danetha Doe is a cloud accounting expert. A business coach and former NFL Cheerleader, she is on a mission to bring sexy back to the world of accounting.
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