Late payments from clients can cripple an agency's cash flow and operations. Cash keeps our agencies going, and when receivables are late, it can cause unnecessary disruption to our day-to-day and serve as a time suck for leadership.
Why is this such a persistent issue for agencies? Project-based businesses experience dramatic peaks and valleys in cash flow, even in the best times. When clients don't pay on time, everything goes into chaos. An otherwise healthy business can grind to a halt if it can't make payroll because owed payments didn't come in. The stakes increase as we take on larger and larger clients and projects.
Here are proactive strategies from Upsourced for creative agencies to prevent late payments from piling up:
- Have a clear accounts receivable policy and communicate upfront. Set payment terms, late fee policies, and your invoicing process during the sales process. Ensure that your aspired payment terms are part of all MSAs / SoWs. This is often a point of negotiation with clients, so you may not get your desired outcome. However, having a contract agreement is paramount to overall collection success, especially in the event of non-payment.
- Understand the client's accounts payable process. Ask them who normally approves and pays. Check or ACH? Familiarize yourself with the client's process to understand timing and who the players are in case something goes wrong. One of the largest reasons for the delay is adminstrational hold-up at the client. Someone out sick or a new hire, these things happen constantly and can derail on-time payment. The more you know the names and faces, the easier it is to track things down.
- Offer payment plans or require upfront deposits, especially for larger clients with stringent vendor payment policies. The more you can require upfront, the better. This isn’t always possible, but try to collect payment at regular intervals or on the front end of engagements. This is about limiting risk in the event of non-payment AND keeping cash flow on track (or even ahead) if you can obtain prepayment. Clients who need to spend money in time for terminating budget cycles can serve as a quick cash infusion!
- Use payment automation tools, such as recurring credit card payments for retainers or services, that allow you to debit the client's account directly each month. We do this at Upsourced by directly withdrawing via ACH from our clients' business accounts with a tool called Ignition.
- Build commission structures that incentivize account executives to collect full billing details at the time of sale rather than just get a signature. This is an advanced technique for larger agencies, but the goal is for salespeople to sign quality deals, not just any deal. Payment terms, expected gross margin (GM), and supporting paperwork (just PO vs. SOW + PO) are all indicators of deal quality and increase the likelihood we can collect in the event of late payment. If the account or sales executive doesn’t have these details after winning a contract or proposal, they’re not doing their full job.
If you do end up with late or aged accounts receivable, proactivity is critical:
- Maintain a documented escalation process for 30 days past due, 60 days past due, etc., with increasing efforts like late fees, phone calls, work stoppages, etc.
- Get in front of the client’s decision-maker. Personal contact is more effective than just firing off emails.
- Negotiate payment plans if the client has temporary cash constraints.
As a last resort, consider a collections agency for very delinquent payers or initiate litigation or arbitration via legal means. Legal remedies are typically matters of last resort, so ask yourself about the cost-benefits of kicking off a lengthy or potentially expensive legal process before making a final determination.
Unpaid invoices shouldn't be an inevitable part of running an agency. Clear policies, an understanding of client processes, payment automation, and an escalation plan can dramatically improve your cash flow situation in the event of late or non-payment. Don’t just let these things happen to your agency; be in command to the best of your ability throughout the billing and receiving process.
For more, tune into the Creative Outcomes podcast episode below!