In this episode, Scott and Robert will be talking about getting paid and managing your business expenses. We'll discuss getting starting, options for dealing with customers who pay late and different ways to setup and structure your contracts.
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Robert: This episode, Scott and I will be talking about getting paid, because you really need to get paid to run a business.
Scott: This is the Stretch Goals podcast where each week we’ll share insights and lessons learned based on our experiences as entrepreneurs. We’ll challenge you to create ambitious goals as you start and grow your business. I’m your host, Scott Davis.
Robert: And I am Robert Dickerson. We all want to get paid. It’s the point of running of a business. We want to get paid from the people we’re doing services with. We want to get paid if we have a SaaS, and so I think this episode we’re gonna talk about how you do that because not everyone pays on time, as you and I both know, so how do you keep your business running, how do you deal with clients that pay late? How do you structure contracts? I know this is something that you’re really thinking about right now.
Scott: Yeah. A full disclosure, I’ve got several months of unpaid invoices from multiple customers. The big thing and the topic of this podcast today is how to protect yourself to make sure that you’re getting paid. You still want to achieve the objectives of your customer, but at a certain point there’s a place where you have to say "Enough is enough. Right? I’ve got one customer right who’s four months overdo. That’s well beyond my normal tolerance level, but there’s reasons why you may make exceptions, right? Really, today, we just want to talk about how can you protect yourself. How can you ensure that the process goes smoothly to make it as easy as possible for your customers to pay you? Maybe that’s a limiting factor and then figure out how to make that whole process squeaky clean in the process.
Robert: What are those exceptions because I know that can be hard-
Robert: As you start working with customers, you start getting more entrenched. You start really investing your time and your businesses time and developing. You’re doing a lot of services works, you’re developing apps and that sort of thing and so there’s an expectation that you need this client and you keep going. They don’t pay, so how do you balance that?
Scott: Yeah. No. That’s a great question. For me, I guess, some of the agreements that I give involve a percentage of equity in a company, but then there’s also other situations where … I work with a lot of startups, and in doing so, they might be in a funding round and when they’re in a funding round, they might actually be locked on the runway and not have any cash to give, knowing full well that they’ve got these signatures that are pending and then a windfall of cash will come falling onto their plate.
One of my customers, who I’ve been working with for a year and a half, they’re in the state right now. They were in that state last year. Funding ran out. They were waiting for the round to close, so cash flow wasn’t there, so I understand that but then you do get to a point, the holidays coming up, I’m taking a little trip, different things. My son went to the ER. You’ve got bills that need to be paid, so you want to make sure that that they’re keeping the communication lines open and basically I just went to them and said "Hey, look. I need to know what’s going because a contract’s a contract.
You’re technically in violation. I’ve been really flexible. I’ve been really understanding and I want to know what’s gonna happen from here.
Robert: I think it’s important not to let it drag on, that you need to really nip it in the bud quickly, so if that first time the person’s not paying, you need to make it clear that that’s not acceptable or at least communication. Get them to communicate why they’re not paying so you can renegotiate something if you have to, like you were saying because I think the percent equity, if you’re not just getting paid outright really puts you in a bind in a hard place because there’s this opportunity for a larger payout if you keep holding on and keep doing things, but then like you said you’re not getting paid during that time.
Scott: Yeah and equity is not a reason to not pay. A contract is a contract, right? A lot of people hold equity over your head, which is not right, but some of these projects that I’m working are things that I believe in and I typically won’t do equity arrangements just because of the nature of it, but when it’s something I believe and something I want to get behind, in that scenario, I’m open to it, but, again, your customers need to be honest with you and you need to be honest with them. Sometimes I’ll let it slide. I don’t say anything. I don’t even charge a late fee sometimes even though I’m technically supposed to, because I understand what it’s like, but recently I’ve realized that taking that approach basically just paves the way for recurrence of that same scenario.
I read an article this week about how to handle customers and things like that that aren’t paying you on time and how move forward with it. It opened my eyes up to just business is business and I need to make some adjustments, so that’s what I’ve been doing. This whole week has basically been “Hey”. I’m working with a large customer in the sports industry and a name that we would all know and he’s not paying me. He’s in a spot that’s put me in a position to say “Hey, look. Now you’re getting late fees and, by the way, I’m picking up my fingers from the keyboard. I’m no longer doing this work for you until this is solidified.”
I hate to be in that position, but it’s really a result of my customer not paying and maybe perhaps myself not making it clear that these things in the contract are going to be adhered or I won’t adhere to my end either and at some point I will pursue further action to get those payments. That’s kind of where I sit.
Robert: I think one thing, too, that you kind of talked about a little bit was that the person you’re dealing with is not always the person paying the bills, right? Sometimes there can be a disconnect there that there’s some back office people that are paying the bills. I’ve dealt with that myself and so a lot of times a lot of the invoices I’ll send I’ll copy those people that are actually sending that, paying the bills because the process within the company is unorganized and so it never make it to the right person to pay the bill or maybe it’s been paid but hasn’t been mailed. It’s not been signed yet, so there’s all these different steps. Especially, you’re dealing with large companies.
Scott: Yeah. You’re reducing points of friction and that’s really one of the important pieces to getting paid on time is, get it to the people that need it. I have a new customer and I said, “Hey, should I send the invoice to you?” He said no. Send it to myself and this person. Now I know. I’ve got two people who I can refer to. They both get the invoice and I can refer to both of them when I have questions about the process. “Where’s the status. You’re late on the payment, blah blah blah blah blah.” Like you said, reducing those friction points will make that process easier.
Robert: I think the late fees is something I’ve been negotiating into contracts now. Usually I do a 30 day window. Sometimes if it’s a customer that I’m unsure about I’ll do two weeks, but it just kind of depends on the relationship that you have with the customer, I think, in how you negotiate that and then what do those late fees look like. You’ve talked a little bit, too, about not committing code or not giving a deliverable and that’s another way that you can do it to kind of force their hand to get them to pay because if you just keep doing work and you don’t speak up, they’re not gonna know there’s an issue there.
Scott: Right. The process continues and the expectation is that it’s okay. I’ve been toying around with maybe the concept of milestone deliverables for payment and basically an example of that would be “You will deliver these five features by this date for this payment.” Basicallly it just breaks the payment down into some more specific items. If I meet those goals, I get that portion of the payment, but a lot of my customers, they want to pay you for 30 days of work, a full month, and typically you don’t get paid until after you’ve completed that work. Some customers pay up front. They’re like “here’s your money. Get my work done” and then they do it again the next month.
I’m toying around with different mechanisms to see what works for different customers. Every customer’s gonna be different. Every projects gonna be different and your cash flow expectations for each of those projects is gonna be different. Maybe you’ve got more resources on this project so you need to be more diligent about how that money’s coming in for that project. One of the things that I’ve looked at is “Do I do net 15 or net 30?” What works for some doesn’t work for others. Larger companies, they need more time. It’s just how the process goes. You’ve got this bureaucracy that you gotta kinda flow through, so I usually do net 30, which is I send you an invoice. You have 30 days until it’s considered overdue.
I’ve always put a stipulation in for late payments just to protect myself. I usually don’t exercise them, but lately the last two or three months I have and how you negotiate that with your customer is a completely different topic because a lot of them are hesitant to agree to it, but the reality is is those are usually the ones who ended up paying you late.
Robert: Yeah. Most of the contracts I’ve negotiated, they don’t like to pay late fees either. They just want to-
Scott: Pay your bill on time.
Robert: Because they know. Yeah. Pay your bill on time right? They’re gonna try to float as long as they can. Most companies will. You have to kind of factor that in to doing the work. You’re not gonna get paid for the first 60 days probably when you start.
Scott: Right. Yeah. What about the idea of escrow? Some people have said that that’s a good way to go. I don’t know that that’s any better than anything else, but it’s always an option.
Robert: The two ways that I’ve done it is I’ve done … If I’m doing a services work, consulting work, then they’ll pay me basically by the hour so it will be the hours that I spent that month and I’ll bill them and usually it’ll be 30 days from that. I’ve also done the milestone payments. I think that works really well. Especially if you have a large project over a large period of time, especially if it’s a fixed price contract, you don’t want to wait till the end to get paid everything, right? You want to split that up into milestones. I think it helps both parties because it helps you get paid but it helps them see progress towards their end goal and so they’re not throwing it over the wall to you and saying, “Okay when you’re done you get paid.”
Another point I wanted to make to that, especially in software development is that development never really ends, right? Even though you might get paid for a feature, there might be issues or enhancements and so that’s a whole other thing to deal with as you deliver it. If you’re saying, “okay I want to deliver this milestone”, there has to be clear communication of what success means when you deliver that, so that they’re not just, “oh, you need to do this and this and this” and it just keeps dragging out until you complete all these different things, so you’re initial milestone might drag out even longer as you’re continuing to fix things.
Scott: Have you even had a customer come to you and want to pay up front for a duration of time?
Robert: I haven’t. No.
Scott: I have and it’s actually kind of nice. They’re like, “Hey, can we just go ahead and pay you for the year?” And I’m like, “Absolutely.” When that happens, you’ve got a sense of obligation to always make sure you’re delivering what they expect on time because they’ve gone ahead and given you money for a period of time in the future. That mentality kind of changes. It’s an interesting dynamic. The other piece is, I find that sending invoices per hour, those customers tend to pay more on time than people who I’m billing on a monthly basis.
Robert: Yeah. I think some of the … I’ve done contract work with the government and so the way that works is you basically negotiate a contract up front of a sum of money for the year and then they just pay you as it’s ongoing, so you know how much you’re gonna get, but it’s just kind of paid out over time. That works pretty well, too, but it’s still the collection part is the hard part. I think, also, when you’re collecting this money it’s figuring out your cash flow of your business as well of how all these things go together. How are you gonna pay your employees? How are you gonna handle late fees? And how do you kind of work your way through that.
Scott: What tools do you use to manage your cash flow and forecast it?
Robert: I think if we talk about billing, I actually use FreshBooks. I found that’s a good way to manage time, so I get myself and other employees and contractors to put time into that and then I use a lot of freelancers as well, so I use Up Work. Actually, Up Work pays my freelancers on a weekly basis, so I’m paying these people out every week, but I’m getting a month’s worth of money from the customer and I actually do that manually through Excel. I just have an Excel spreadsheet that I kind of keep tabs. How about yourself? How do you manage that?
Scott: I use a combination of QuickBooks and this is app that I found a while back called Harpoon at harpoonapp.com. Basicallly it’s just a forecasting tool. It basically allows you to enter invoices and you can kind of see where you should be in terms of expected revenue and where you actually are. It’s a quick little dashboard that shows you lots of things like overdue invoices and things like that.
Robert: I try to get customers to do direct deposits as well instead of sending me checks. A lot of times that works a lot better and it’s a lot faster.
Scott: It does. It does, and actually, I have one customer right now that does that and it’s great. I just know it’s gonna show up regardless of what they’ve got going on.
Robert: A lot of times they’ll send e-mail alerts when they paid it and you can see that they’ve paid it and so it won’t take that much time to kind of go through the system and enter into your bank account. Let’s change it up a little bit and talk about subscriptions and how that factors in because I know with you, you’re working on apps, your building apps and so you’re getting paid through Apple through Google based on purchases through the app store and then we can also talk about SaaS apps and people getting paid through monthly subscription services if you’re going that route, so there’s other ways that you can get paid, not just through services but also through selling your products.
Why don’t we talk a little bit about that, about how you manage cash flow through the app stores. Is it kind of consistent month by month for the apps that you’ve launched or is kind of all over the place based on the time of year?
Scott: It varies on a lot of different factors. If your app is featured you get these bytes. If your getting tech write ups you’re getting spikes in traffic and then the correlation is obviously more traffic, more revenue. Subscription models are the safer one where let’s say you’ve got 1,000 customers who are paying 99 cents a month. They tend to forget that they’ve got that 99 cents going, which is in your favor, but that’s sometimes taken care of for you. You’re not out trying to actively get new payments, so the recurring subscription model’s a little bit better than just individual one off purchases, but money’s money. You want all that you can get, but Apple and Google, they each have their own sets of rules, so you gotta pay attention to them.
There’s a limit. They’re not gonna send you a check for 99 cents. They’re going to send you a check once you meet a certain threshold similar to what AdSense and these other providers do, so there’s all those different things that’s a factor. When you’re looking at your cash flow make sure you understand what your thresholds are so that you can plan what your payouts are gonna be. You look at your analytics tools. You can gauge where your cash flows are from individual products and you get a sense for when that money’s gonna be coming.
Hopefully it’s monthly, but if you’re in a new app it may not be. One thing that’s important to note is that Apple, if you’re doing in-app purchases and subscriptions Apple changed their policies about a month and a half, maybe two months ago. Specifically what I’m talking about is, they used to do a 70/30 revenue split. Now if you’re doing subscriptions after the first year that 70/30 goes down to 85/15, so Apple is only taking 15 cents on the dollar instead of 30 cents on the dollar, so if you’ve got a subscription model that’s a big difference. You’ve automatically increased your expected revenue outside of the first year. That’s something cool that you can kind of plan on if you’re in that model, but then you’ve got other considerations to make, too. Maybe you’ve got advertisements that help pay the bills. Maybe you’ve got placed advertisements instead of just ad banner. I don’t know. What are you doing? What have you seen in that realm?
Robert: I know I did some apps a while back and the 99 cents apps. It was kind of all over the place. I felt like after a while I was getting consistent monthly revenues from it, so it was easier to plan, but starting out it was difficult to figure out how many customers were purchasing. Another thing that I’m doing right now is I have a set of courses online that generate revenue for me every month, so I created a course on Google Maps. That has a consistent number of people that sign up every month and purchase the course. That’s really nice as an additional revenue stream as well.
Scott: Are you actively pushing that and marketing that or is that just organic, coming through naturally?
Robert: I launched the course on SitePoint and so they have a premium subscription where you sign up for a year and they really handle all of that and so my course is one of maybe a couple of dozen courses on there that people can take and they have other videos and things and so I get paid based on if a user watches a certain number of lessons within the course. There’s these avenues like that as well where like U-2-Me and Skillshare and others, they already have the audience for the courses and so once you launch your course then you get paid some percentage based on whether the person watches or signs up. That’s been kind of nice to have that passive income stream as well to help boost my other products.
Scott: Sure. Yeah. Money’s money.
Robert: Yeah. I think, too, another thing I wanted to point out was, as you’re launching a product or even a service, you need to think about what sort of upfront capital you need to have to get yourself to kind of level things out and get yourself through the first couple of months until your starting to make money off of these things so that you can pay the bills, you can pay the developers, these sorts of things. You touched on a little bit before is trying to figure out what your costs are gonna be up front and figure out how can I have enough up front capital for a couple of months in order to get myself started, but then also as you get paid to handle late fees and other things so that you still have cash on hand to level out those dips and continue growing your business through those times.
Scott: Yeah. It’s hard when you’ve got salaries to pay. It’s hard to accurately forecast that. Every single night I’m thinking about where’s money gonna be moved and who’s gonna be paid when and from what project, so it is constantly on my mind, but that’s definitely something that you should think about.
Robert: I think the more projects you have going on, the harder it becomes as well.
Scott: Oh yeah.
Robert: Because you have to deal with them all.
Scott: Ideally, everyone pays the same day of the month. The first of the month you’ve got all your money in. Everybody’s paid, but it never happens and when customers are late it creates this snowball effect. Now you’re living paycheck to paycheck so to speak in order to pay your team and that’s not fun.
Robert: Yeah. I think that’s really part of life as an entrepreneur is one thing is balancing all this out and you have to squeak by some months and it’s not always pretty about how you organize things and how you do things, but you have to get it done, right? I think these are really good things to think about as you start growing your business. Even as you get into your business, it can be difficult from month to month.
Scott: Yeah. You heard it here first. One of the main requirements for being an entrepreneur is partial insanity.
Robert: Yes. You must get paid. I think these are the difficult things that you have to think about. It’s not just building a product it’s getting the money in and worrying about that and in a typical nine to five job you’re shielded from those kind of things. You don’t necessarily have to worry about that. You just get your check and you do your work and you go home and you don’t have to worry about whether or not you’re going to get paid. Someone else has to worry about it.
Scott: Here’s a question and something to think about. What if you don’t have money to pay your team this month but you’ve got a good relationship with them. Do you just tell them, “Hey look. Here’s my book. Here’s what’s going on. These customers haven’t paid. I want to keep this relationship going with you.” Now you’re the customer who’s not paying your team. What do you do?
Robert: I think you have to be transparent. I think it has to be transparent maybe even before you get to that point that there’s an issue, right? You don’t want to have someone doing a bunch of work and then you get to the end and say “Oh, I can’t pay”, so I think that needs to be transparent.
Robert: If you have a good working relationship that person might be okay. If it’s one month out of … You guys have been working together for years it might not be that big of a deal. They might say, “Okay. Yeah, an actual couple of weeks isn’t a big deal. Go ahead” but I think trying to hide is the wrong move.
Scott: I actually got blindsided by a customer not too long ago who had been paying me for a while and we had a great relationship and they knew that their money was running out but forgot to tell me and the day my invoice was supposed to be paid they were like, “Oh yeah. We’re out of money. We can’t pay you.” I’m like, “Okay. When did you know about this?” “Oh, well we’ve known for a while.” “Okay, well next time you better let me know.” It’s just not cool. Along the same lines, if I’m ever in that situation I’m gonna do the same thing for my team. I’m gonna say, “Hey, here’s the reality. If you need to step away, I understand. You will get paid for the work that your due, but here’s the reality.”
Definitely, you gotta let your guys know ahead of time. Hopefully you’re never in that situation, but the reality of it is if you’ve got customers who aren’t paying or you’ve got one big customer who’s not paying, then you’ve got problems in terms of cash flow and it’s really where you need these tools to help you manage it. If it were me, I would probably put some of my personal money in to make sure people are getting paid and then reimburse myself later just to make sure things are okay, but you may not be in that situation.
Robert: Yeah. I think transparency is really key and also having the people invested, your team members invested in what you’re trying to do and understanding what you’re dealing with and maybe they can help take some of the burden off of you. I think it’s okay to kind of let people ramp down sometimes, too, if you need them to do that. You just have to be transparent about what they need to do and how long it’s gonna be and that sort of thing.
Scott: If you’re honest, man, people understand. If they feel like they’re being lied to, they’re gonna jump ship. For me, I build these tools, I send a report to my team every month. “Here’s how the company’s doing.” Every project, they know. Which can be good and bad. They can be like, “Hey I’m only getting paid X”, but the point is, "Here’s how the company’s doing. It’s not like once a year you get to find out your company’s about to go under, but at least every month I’m like, “Hey, here’s how we did. Here’s how the quarter looks. Here’s how the year looks so far.” I think people appreciate that. They would rather have too much information than not enough information and then they can make their decisions based on what they feel is best.
Robert: I agree. I guess the one comment I would make is there’s a lot of ups and downs in that. One week you could be not getting any money or any contracts and the next week you’re fine, so you have a lot of money. I think it’s important to be transparent, but maybe not everyday you’re letting people know those highs and lows because there can be a lot of swing so you need to kind of level it out for them and make sure that it’s transparent but the picture’s also clear of what you’re trying to do and how you’re trying to position yourself and your team so people don’t freak out, right?
Scott: No. Absolutely. You’ve gotta set those expectations and everything. I know this is the topic that we want to talk about in this podcast, balancing highs and lows, so we’ll get into that a little bit more at that time, but I think you’re right. You’ve gotta set those expectations and you don’t want to give too much bad news repeatedly but at the same time you want to be transparent. It goes back to the point of today’s episode is we gotta be open and communicative about expectations for payment from our customers. To all of them. You gotta treat them all the same way. It’s a business. They need to understand that and just be open. “You need to pay me on time or here’s what happens.” Hopefully you don’t get to a point where you need to go to collections, but that’s always an option.
There’s services out there, by the way online that you can go to that allow you to go out and make a claim, they go after them, they take a cut and that’s their model. I’d rather pay someone 20 percent of my revenue for the month than get none of it. That’s always an option. Hopefully you never get to that point.
Robert: Yeah. I think for customers, too, it’s awesome if you can find good paying customers that pay on time. You want to value those customers and treat them well because some customers don’t, so you want to make sure that you’re building up your client base that has strong customers that are paying and that sort of thing.
Scott: There’s also something to be said for the old school way of doing things, which is let your customer know that you appreciate it. “Thank you for paying on time. We really appreciate it.” Those types of things go a long way, especially if you’re dealing with smaller customers instead of big ones, that type of thing, like I said, it goes a long way.
Robert: Yeah. The personal relationships, right? That’s what you need to have and like you said before, don’t be afraid to stand up and say you need to get paid and be firm up front because I think if you do that you establish that trend going forward throughout your relationship.
Robert: Get paid, right? We all need to get paid.
Scott: Show me the money.
Robert: So we can pay the bills. All right. See you next week.
Robert: Thanks for listening to this episode of the Stretch Goals podcast. You can access the show notes for this episode and listen to other episodes by heading over to stretchgoals.fm.
Robert Dickerson is the Founder and CEO of Mapout a mobile learning platform that uses video courses to educate customers and train employees. He helps companies develop and launch their products.
Scott Davis is the Founder and CEO of MobX, a mobile development software agency. He has 20 years of experience developing software for Government, Finance, Sports and the Telecommunications industry.