Late-paying clients are a fact of life for many businesses, but the impact on accounts receivable can be debilitating. Fundbox‘s own research shows that 64% of small businesses are affected by late payments, with industries most affected include web design, landscape services, construction, cleaning services, accounting, and bookkeeping. It’s not surprising that many of these industries undertake lengthy or ongoing projects, often with large budgets. While some are able to secure partial payment upfront, many clients are reluctant to part with their cash until the work is complete and approved, which can create serious cash flow complications. One way to overcome this challenge is to implement milestone billing.
What is Milestone Billing?
Milestone billing is a useful practice for alleviating the problem of cash flow issues tied to large projects by invoicing your clients as you reach prior agreed-upon project milestones.
Another form of milestone billing is progress billing. This is more common in construction industries and is used when a project simply has too many components to define distinct milestones. In this case, a contractor works with the client to define each stage of the project and assign a cash value to it. Invoices are then issued monthly and a balance is calculated based on the percentage of work completed.
There’s no doubt that milestone billing can help you stay cash flow-positive throughout the course of a large project and give you enough working capital to keep investing in the next phase of the project (human resources, supplies, equipment, etc.).
Milestone billing is also good for your customers because it lets them anticipate costs and spread payments over an extended period rather than paying a large deposit upfront and the remaining fee on completion. In addition, your customer benefits from the peace of mind knowing that they can trust you to see a project through because payments are staggered, rather than made in one or two lump sums.
How It Works
Almost any job can be broken up into smaller pieces, no matter how small. For example, a writer could break up a white paper writing project into several pieces: initial research and interviews, delivery of first draft, edits, and final piece.
Use your contract to scope out the payment milestones and ensure your client approves the model. For example, if you run a web design business, you might want to structure your milestones as follows:
- September 1: Contract approval. $1,000 deposit due at signing
- September 15: Delivery of wireframe mockups. $450 due
- September 30: Develop detailed design and architecture specs. $500 due.
- October 15: Deployment of new site on staging server. $200 due.
- October 31: Q/A testing complete. $250 due
- November 15: Site launch. $500 due.
Next, when it comes to invoicing, be sure to include as much detail as possible about the work completed to date, work completed during this phase, any outstanding balance, and the balance of this invoice. Here are eight invoicing tips to speed up your receivables.
The Risks of Milestone Billing
While milestone billing may eliminate your cash flow worries, it can work against you. Consider this scenario: You’re run a web design business and your contract includes stipulations for milestone billing.
You know you need that cash to make payroll and other expenses, but you’re behind schedule because you’ve been pulled in other directions or the client was dragging their heels. In a race to make that next milestone, you cram in the hours, perhaps even cut corners, all so you can issue that next staged invoice. This can lead to a problem with staff morale, perhaps a less than top quality product, and a dissatisfied client.
A better option for businesses such as these is plain and simple monthly billing, with a deposit upfront. The deposit ensures the customer has skin in the game and helps you cover your initial costs. Then, bill monthly based on either the number of hours worked or a fixed amount based on the total cost of the project. This gives you a guaranteed fixed income each month without the worry of making that milestone deadline.
When Your Business Cash Flow is Broken
Of course, whichever billing method you use, there’s no guarantee that your client will pay your bills on-time. Invoice financing can be a great solution to these kinds of cash flow challenges. No one has time to wait for unpaid invoices, so consider giving Fundbox a try. Fundbox advances the full value of your outstanding invoices for a small fee (not just a percentage of your invoice’s value, as factoring companies do). You then pay it back over 12 weeks. Learn more about how Fundbox works here.
Read more on this topic: