Being a creative entrepreneur is hard. Creatives get little to no training in business while learning their trade. Art schools can help us build a great portfolio, but it doesn’t prepare us to be entrepreneurs. And so we have to learn on the job.
One of the first business lessons we learn the hard way is managing our cash flow. Creative assignments are often contracted on basic terms of 50% up-front and 50% upon completion. This model has some real liabilities to it, especially its vulnerability to unearned revenue distortions. But another problem creatives face is simply getting the revenue they’ve earned into the bank! It’s one thing to send an invoice for 50% of a project fee, but it’s another to actually get paid.
Always Specify Your Payment Terms Upfront
In order to get paid in a timely manner, you first have to establish payment terms when you agree to take on a project. If you don’t set these terms clients will assume that they have at least 30 days to make payments, sometimes more. And even then, your client may not submit your invoice to their accounts receivable department right away, and then AR sets their payment 30 days after that. Add to that the delays that occur between when an AR department processes payments to when you actually get a check in the mail, and it’s not uncommon for 45-60 days to pass between the time you send an invoice and the time you actually get paid.
So the first step in getting paid is making sure that your payment terms are clear from the get-go. Always send your invoices “Due Upon Receipt.” That won’t result in an instant payment, but at least the client and the accounts receivable department won’t presume upon an extra 30 days to hold the invoice. In reality, though, there’s not much hope that your clients will turn around payments in less than 30 days. Occasionally a client might fast track an initial payment, especially if you require that the first payment be made before you begin work, but once the project begins, they’ll revert back to their standard slow payment processes.
At the end of the day, you have to assume that your invoices will be paid somewhere between 30-45 days. If you are doing work for a large institution like a university or a government agency, it’s not uncommon for the typical turnaround to be 60-90 days. Always take this into consideration at the outset of your projects.
Build Realistic Payment Assumptions Into Your Cash Flow Planning
One way to protect yourself from cash flow pressures that result from these kinds of payment practices is to build this into your cash management plan from the beginning. If you use a cash flow spreadsheet, which you should, you should never place your new invoices into your current month’s receivables. Always put them into the following month, or the next if you cut the invoice toward the end of a month.
If you practice this kind of conservative cash management, you will significantly smooth out many of the financial pressures that accompany creative entrepreneurship. Of course, in order to do this, you need to be operating on a profitable basis—you have to be able to operate on the revenues you’ve received in previous months as you wait for future payments. Many creatives fool themselves into thinking that payment issues are the reason why they are having profitability problems. It’s actually the opposite. Payment stresses are the result of profitability problems, not the cause.
Break Milestone Payments Into Smaller Increments
Another way to help smooth out cash management as you endure payment delays is to break your invoices down into smaller more frequent cycles. Instead of 50/50 billing consider billing in thirds or fourths or more, if you have longer project schedules. This practice also protects you from unearned revenue problems.
But what if you have a client that just isn’t paying? It’s one thing to have to wait for a payment, it’s another if they simply won’t pay. In my decades as a creative entrepreneur, I’ve had very few clients that simply defaulted on a payment. One way to avoid non-payment is to do a better job with client qualification. Established businesses will almost always pay their bills. Individuals with grand ideas about a new startup are much less reliable.
Occasionally, a client won’t pay because they feel like they did not get what they feel they were promised. Client conflicts like this can be touchy. Sometimes clients just had entirely unrealistic expectations and so they end up being disappointed (another good reason to carefully qualify new clients).
But sometimes creatives do drop the ball. Usually these blockages can be discussed and negotiated, if both parties keep their cool. If you feel like you failed, either in the deliverable, or perhaps just in assessing the gap of miscommunication that led to the disappointment, an offer to discount your bill can go a long way toward re-establishing good will and getting most of your payment. Considering the costs of sending an invoice to collections, or entering into small claims court, a 25% reduction, when warranted, can be the smoothest path toward settling up.
Allowing for Longer Term Payment
Lastly, sometimes a client doesn’t pay simply because they’ve entered into a financial hardship. The best approach in that case is to ask them to make a payment plan. Perhaps pay 10% per month for ten months, or whatever you can negotiate. Such an agreement has two benefits, it can get you paid, albeit over a longer period of time, but it also establishes a legal precedent that the client accepted the completion of your work as acceptable—that the reason they didn’t pay did not have to do with your deliverable. If they ever stop their monthly payments you would have a very easy time getting a lawyer or court to ensure your payments.
Hopefully we don’t encounter these worst case scenarios very often, but even in the best case, learning to manage your cash flow, and match your revenue needs with the realistic pace of accounts payable departments is a key skill that creative entrepreneurs need to gain.