Archive for the ‘Costs’ Category

Last week, my business made £1,180 from a customer without doing any work. All it took was for this particular customer to pay their invoices late.

I know that Late Payers are a constant worry for the majority of freelancers and small businesses. The majority of my own customers pay late. However, on the whole, my late payers are only 2 or 3 days late in making their payments – which I can live with.

But this one customer was over 80 days late in their payment, and the amount was large – very large. In fact, the original invoice was nearly £60,000 in value. As you can imagine, when the amount is so large, and with payment being so long overdue, it can lead to a lot of sleepless nights – will they pay at all? Will I have to take them to court? Will they eventually turn around with 1,000 reasons why they are not paying (delivery was not as they wanted, etc)? In short, would I ever see the money?

I had a signed contract – so was covered from that point of view. In the contract, it talked about my terms and conditions, which included my late payment penalties – so was covered there. And my online accounts system (the wonderful FreeAgent was regularly sending them chase notifications).

After the invoice was 30 days overdue, and after a lot of worry – I bit the bullet – and raised a late payment invoice for 30 days of interest (8% over the base rate – so maths = (((amount of invoice + 8.5%)/365 days) * 30 days) plus my £50 admin fee.

30 days after that, I raised another 30 days of interest and another late payment fee, and then a third late payment invoice. They now had four invoices outstanding (the original plus 3 late payment invoices)

After the third invoice, it did seem that I was wasting my time – I was calling them and was being given more and more complex reasons for the late payment (we have a new accounts system, the payment manager is on holiday, its in the next payment run) – I even started to research on Google which debt collection company would have the most success (and which would cost me the least).

And then, guess what…. they paid. There was no email or call or anything – the money just magically appeared in my company bank account. Not only did they pay the original invoice, but also the late payment invoices – so an extra £1,180 into my bank for no effort from me.

And you know what – that’s more money than I would have gained in interest in having it sit in a bank – so I am very happy.

We all suffer bad payers – but don’t give up. Chase, chase, and chase some more. When things get too much, threaten and then do it – raise that late payment invoice. Don’t put up with those late payers. And don’t wait until they pay to raise a late payment invoice – raise one a month – it acts as a reminder to pay the original invoice (and that you are serious).

As long as you have a signed contract and a clear set of terms, the law is on your side.

I found myself in an interesting discussion the other day on profitability.  To be specific, the discussion was centred around how much profit is enough?  When you work on a project (be it a contract, or a freelance/small business ‘project’ for a customer), what is a typical profit % you should be happy with?

Now when I was a permie, working for somebody else in a large(ish) software house, it was drilled into me that they were looking at a profitability of around 25%.  This is fairly typical and expected.

Of course, how you measure profit can change the number, but they (and now me) calculated profit as the difference between how much you charge the customer, minus tax due, minus the cost of your time (including your expenses and tax).

So, take a project where your final invoice is for £1000, but your costs (for your time, salary, teas, coffees etc) add up to £750 – your simple profit may be £250 – but is it?  The answer is – no, it may actually be:

£1000 (invoice), minus £200 (vat element ),  minus £750 (your cost) = £50 profit.  And of course, of that £50 profit, you then have to remember that you pay corporation tax of around 21%, so that’s another £10.50p off the profit back to the government.  Ouch.  Where did the money go?

A couple of recent examples

I track my own time, so I can work out my own costs on projects.   This also allows me to make sure I am making a profit at all stages of the project.  When I am in profit, I am more open to scope creep and ‘favours’ for customers than when the profit starts to dissolve through unplanned work.

If I take 3 or 4 projects this year, the profitability has varied from a low of 22%, through to a high of 75% (yes, 75% of one project was profit).   This is achieved by efficiency savings through process and development automation, use of tools, and through running multiple projects at the same time.  Yet, each customer has still felt (I hope) that they received what they pay for and received good value for money.  I also charge as if our processes were performed manually (so we make money through our efficiencies).

Double Edged Sword of Profitability

Of course, being more profitable is a double edged sword.  Yes, it’s good to receive more money and it’s good to see the bank balance rise.  But, the amount of corporation tax grows with it – which hurts.   It’s a sad fact that in the UK and USA, most individuals are paying around 68% of our income in tax (think income tax, national insurance, then VAT/sales tax at 20%, extra duty on alcohol and fuel, insurance tax, etc).  When you run your own company, this increases to around 76% paid as tax (with corporation tax).

In a Nutshell

So what does this mean in terms of what you should make as a profit?  Well profit can only be made if people give you work.  Charge too much and you have higher profits but less work, charge too little and you make no profits and become a busy fool.  But think about how much profit you need (or want) to make, and track your projects to make sure you stay on track.

If in doubt, take 25% as a target, and adjust it as you go.

Cost of Sales!  Those 3 little words have a lot of meaning for bigger companies.   It describes with all the time, the costs, the work involved in making a sale – both before and after the contract is signed.   When a company employees a salesman, all their salary and bonuses and commission is a cost of the sale.

So when you’re a small company, a freelancer or a contractor and you have to visit to make a sale – should you charge for it?    For contractors, the interview is effectively the sales meeting – should you charge for that?  What about travel expenses getting to the meeting/interview?

There is no right or wrong answer.  But for me, there is a point of time when I start charging – and that point is the delivery of the proposal.   When I am meeting a prospect for the first time, or scoping out work, or attending interviews, for me this is true cost of making the sale and so I don’t charge (at least, not up front- I may factor it into the final quote).

BUT, the moment the quotation is delivered, explained and is with them, then it becomes chargeable.  This includes meetings with my customer’s customers (which happens a lot).

So take an example where I meet with a customer, and they give their requirements and I spend a day with their team fleshing out the scope – this is all cost of sale.  But, if they then have to sell this to their own customers, or want to refine the quotation, or even step through it with me, then I generally will say the time is chargeable.

What about you?