Billing initiates the cash flow that is essential to the survival of a business. But many small businesses start off with products or services that require a per-project or annual fee. Over time, most people (myself included) realize that this billing method isn’t as effective as they thought and step back to re-strategize.
When I started my first company, I gave away everything for free and then had an upsell for $50. It ultimately did well, but I could have done better if I'd changed my strategy. I never understood why I should bill clients monthly until I sat down with my mentor Phil Horsley, who's funded some of the hottest startups in Silicon Valley and made most of them successful by implementing a monthly billing cycle. He helped me realize the following seven philosophies behind monthly billing.
1. Routine Is Good
There’s a reason your utilities are billed monthly. For years, companies have relied on a 30-day turnaround for payments. It gives customers time to get the money set and gives businesses the income they need to remain solvent. It also establishes a routine where a customer acknowledges that on a particular date each month, that bill will roll in. For clients, this means routinely setting aside money in their budget to pay for those services.
For me on the services side, it established a set of rules or metrics I needed to send each month. I've managed to send a monthly recap to all customers. Since implementing this structure, we've been able to cut our turnover in half. Routine is key to growing your business.
2. It's Easier for Clients
Each of your clients likely works with a large number of vendors throughout the month. If you’re billing more often than monthly, it may be too much to keep up with. On the other hand, if you’re invoicing annually, you may be crashing their budget by forcing them to pay a huge lump sum at once. Monthly invoicing strikes the right balance between “too often” and “too expensive.”
Some businesses may prefer to bill at the end of each deliverable in the early stages of working with a client. But once you’ve established that payment is reliable, you can discuss options to determine future billing.
3. It's Easier to Track Late Payments
If you’re billing multiple clients, you’ll regularly encounter late payers. If you’re billing some clients weekly, some monthly and some annually, it may be a logistical nightmare determining when to send late-payment notices. Although there are software solutions to help you keep up with invoicing, you’ll also spend time checking reports.
If you have monthly billing set up, you’ll be better able to keep up with late payers. When we implemented late payment reminders on Due, late payments dropped by 18 percent across the board.
4. It Can Help With End-of-Year Accounting
Year-end accounting for businesses can be a nightmare, especially if your billing isn't consistent. By billing monthly, you’ll have a neat, even billing flow that can make it easier to collect the information you need. Come tax time, you’ll be better able to see what your monthly income and expenses are if you have regular income from all your clients.
5. You Can Set Recurring Payments
There’s a reason many software companies have shifted to a recurring-payment business model rather than charging for the license upfront. When you have a large number of customers paying a small monthly fee, you have a reliable stream of income that can greatly improve your cash flow. This is especially true if you offer the option of paying by bank draft or automatic credit card charge. At that point, you’ll only have to worry about retention and attracting new customers. It’s convenient for your clients and a big plus for your business.
6. You Can Use Automated Accounting
As a small-business owner, you’re likely operating without a huge accounting department. You may even be keeping up with your billing alone. If you have a set day each month that you send out all your invoices, you’ll be able to set everything aside and take care of it. You also can take that time to review your late payers and decide which clients you want to stop working with until their past-due bills are paid.
7. There's Less Attrition
If you think of when you were billed annually or at a one-time rate for something, you'll probably realize that it was a decision point. Faced with that bill, you likely took time to decide whether you wanted to stay with the company or not. Even though your clients could make that decision at any time, it doesn’t feel as though they're coming to the end when they receive a monthly bill. Instead, a client is more likely to keep the small payments rolling until something changes in their own situation.
When your client receives your invoice, it’s probably one of many they're receiving each week. If you can find a way to make the process more convenient, you’ll not only be more likely to get paid; you’ll also be viewed as providing better customer service. As a small-business owner, that’s exactly the image you want to have.
John Rampton is the founder of Palo Alto, California-based Due and a member of Young Entrepreneur Council (YEC).
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