People who work full time for an employer typically know when they'll get paid and exactly how much money will be in each paycheck. But when you're an IT consultant, your income varies. That's why managing cash flow is essential.
Customers who drag their feet on paying can really throw off your budget. So we asked an established IT consultant and a small business financial expert for advice on how IT consultants can better manage their cash flow.
Create a Budget to Avoid Running Low on Cash
small business expert
(@deniseoberry), one of the first things you should do to ensure steady cash flow is to create a cash flow budget.
"Forecast out at least six months, although a year is better, so you know where your peaks and valleys fall," says O'Berry. "A cash flow budget will tell you where there may be shortfalls."
O'Berry also stresses the importance of treating your cash flow budget as a dynamic document – one that you update frequently with actual numbers.
"You should review it at least once a month at a minimum to see where you're at," says O'Berry. "I actually like to take a look once a week. Once you get in the habit, it only takes about 30 minutes a week, and that's 30 minutes well spent if it can save you from a cash flow crunch."
Be Prepared to Come to Net
Many clients will not be prepared to cut you a check on the spot. Larger businesses often operate on "net terms." For example, if a client agrees to pay on net 30, once they receive your invoice, they have 30 days to pay it. Before you agree to work on net terms, ask yourself if you can afford to wait that long to get paid.
"Make sure you're discussing or negotiating these terms before committing to a project," says
president of IT consulting company
(@tektonicutah). "You can end up in a really tricky situation if you purchase hardware and perform a bunch of services and receive payment 30, 60, or 90 days later."
Keep payment terms as short as possible so you don't use up your cash reserves while waiting to get paid.
"Do what you can to stay out of a starvation invoice / collection cycle," says O'Berry. "Don't wait to submit invoices to clients and make sure your payable deadline is short – such as five or 10 days. Don't allow clients a 30-day payment period."
Finally, if a client hasn't paid you for a completed project and asks you to take on a new task – don't do it. Unless you enjoy working for free.
"Never continue work if you're not being paid," says O'Berry. "If payment stops, work stops. Hoping you'll get money from a non-paying client is not a good strategy for a healthy business."
Find more pointers for new IT consultants in "6 IT Consultant Tips for When You’re Just Starting Out."
Insist on Consistent Payment Terms
Consider alternative billing policies that don't involve net terms and that reduce the need to chase after clients to get paid.
"A large portion of the headache involved in consulting is receiving payment for work completed," says Anderson. "If you can remove that hurdle, it'll make your life much easier. Request that your repeat clients allow you to keep a credit card or checking account on file. If you have a payment agreement with your client and a payment method on file, you're able to quickly invoice and bill for your projects or consultation."
Another payment method to consider is milestone billing, which allows you to get paid in installments throughout the life of the project.
"Chunk a project up into logical milestones with deadlines," says O'Berry. "Once a milestone is complete, collect your payment."
An article from Mixing Light has several helpful suggestions on how to implement milestone billing. While it's aimed at creative professionals, it's relevant for anyone who wants to use milestone payment terms with clients.
Ask for Cash Upfront
If you take on a major project, consider asking for half of the money once the contract is signed and half upon completion. (For more contract pointers, read "5 Things to Know about Your IT Consulting Contract.") Anderson says asking clients to pay in advance is important if you need to purchase equipment for the project.
"Don't be afraid to ask for payment up front for hardware or for portions of the project," says Anderson. "While some companies absolutely require net terms, most will be willing to pay for hardware or a portion of the hardware / service up front. In our business, we've made it a requirement that our clients are required to pay for hardware up front."
For more tips on how to keep money flowing in, check out our article "5 Cash Flow Secrets to Eliminate 'Low Balance' Anxiety."
About the Contributors
Marshall Anderson is president of Tektonic, a managed service provider and IT consulting company based in Salt Lake City, Utah. He's been involved in the IT industry for more than 15 years and has expertise in IT outsourcing, network security, and improving businesses through technology.
Denise O'Berry is a small business expert who helps overwhelmed solopreneurs and micropreneurs take the right action to improve their cash flow. Denise is the author of Small Business Cash Flow: Strategies for Making Your Business a Financial Success, a practical guide about keeping the cash in your business – where it belongs.