Undercharging Clients Can Be a Chronic Condition

UnderchargeAre there gaps in your invoices? Are there hours missing from your project logs and time records that should be billed to your client this week? Perhaps it’s only one or two hours for each client. But what if it’s actually three or four hours missing? Most business owners are so busy doing a good job for their clients that they can become unaware. Gradually they’ve begun giving thousands of dollars yearly in free work the client would pay if only invoiced. Don’t be one of them.

It happens to the best of business owners. As the business gets more successful and busy, people start to work faster. Since invoicing and record keeping are happening, attention turns elsewhere. But multiple common traps can cause contract services business owners to consistently undercharge their clients. If you find even one of these items in your company, you can bet it’s a chronic condition.

Most common undercharging pitfalls:

#1 Record keeping. This is not about accurate estimating of fixed bid projects, but billing by the hour or fractional hour. Hours can be lost when the process is not sufficiently robust to accurately capture all of the hours worked regardless of the time and place. Telephone calls in the car, work done at a different desk, conversations not tracked – mostly because they occur in a location other than the normal operational site.

Second, work done after the normal recording has been completed for the day can be lost by not being logged. The only way to assure complete tracking is to create a logging system that adds up total hours for the day across all projects, including the non- billable time like lunch and errands. That way, when you look back and see only 8 hours logged for Monday you know some hours are missing. You can find them from your notes, your emails, your memory. Hopefully you’re doing this on Tuesday while it’s still fresh!

A half hour lost over five employees twice a week at $95/hr is $24,700 in lost revenues of pure profit since those expenses would all have been paid.

#2 Working outside your sandbox. We love your clients. We want to be helpful. We’ll go over and above our duties to get the job done; even if it means running to the copy center, the hardware store or debugging some other company’s work. We know someone else should have done it, but we were being the Good Samaritan so we didn’t charge. A few hours spent here and there would be okay. When the clients start thinking that these ‘extras’ are part of our job, we have to start charging. It’s a good thing to train your clients that you are dependable and helpful; now train them that your time is valuable too.

Accomplish this by beginning to charge all your new customers for these ‘extra’ services. Bundle them into your offerings. Add them to your price list. The services must be needed or you wouldn’t be called into the breach repeatedly. Once you feel comfortable charging your new customers, you can begin discussions with your existing customers. If one customer is taking advantage of your goodwill, here is the opportunity to have a heart-to-heart chat while being confident that your time is worth it. For valued customers, delaying the price introduction of this service is a valued discount you give for their long-standing patronage. You can negotiate this against price and service increases elsewhere.

#3 Wishy-washy, wiggle room project descriptions. Whenever there is room to misinterpret project scope and features, you lose. Are you charging for travel time? What if the configuration is slightly more complicated than originally defined? How many color changes are allowed? How many drafts before the final must be approved? Who has authority to commit requests for changes? What is the actual change control process? These details must be defined up front.

Change control may not imply that an elaborate, multi-page contract is neccessary. That depends on your industry. As simple well-defined form describing the change, its cost, limitations, and ramifications may suffice for some situations. What is most important is the communication process between you and the client. You need to make sure that the change cost is discussed early enough such that the client feels he has a choice if the request is discretionary. With larger companies, make sure the person requesting the change has the authority to spend the dollars.

#4 Irregular billing. An invoice sent three weeks after the service has been rendered makes us embarrassed when we add up all those hours. That little side project didn’t really take that long to build, did it? Thus, we tend to shave off a few hours; often forgetting that the customer was partially the cause of the time overage.

Invoice regularly. Invoice always on the same cycle weekly, bi-weekly, or semi-monthly at worst. Delegate, hire a reliable person or stop what you are doing to do it yourself. Regular, frequent and accurate billing is the most important business function in your company. It will do wonders for your cash flow too.

#5 Follow up invoicing
. Okay you invoiced, but then you never sent a follow up invoice. One invoice really can get lost in the mail. Send another one each billing cycle. Make sure each invoice clearly states the dates of the project work and the itemized activities especially if you have multiple outstanding invoices to the same company. Even in small companies the person writing the checks can get confused over whether this invoice is the same as another one or for separate work.

Put the aging on the bottom. Mark the invoice with its age: 20 days past due, 30 days past due. Let the customer know you keep track. Don’t get irate with a customer too quickly if it’s overdue; often a phone call will do the trick.

#6 Invoicing off the beaten track. Avoid casual billing. Do not hand an invoice to the customer one time, then send an email invoice the next. Even if your process is to hand the customer an invoice when you are working in their home, use your follow up invoicing process and mail them a ‘Courtesy Copy’ if you did not get paid on the spot.

Most businesses have one inbox where mailed bills come in, get sorted and processed. Items outside that flow get lost, dropped, forgotten or miss the normal check writing sequence. Send an invoice in an envelope with a return envelope. That way you have the best chance of getting paid with the normal flow. The propane company comes on its own schedule, unseen by the client, putting the bill on the door knob where the wind blows it away; and the client never knows until they get a phone call about a late payment (a true story).

In summary, the busier you are, the more likely some portion of your hard work is not being billed to the clients. Looking for the funds for expansion? For retirement? For kids college? For a vacation home? Some of them might be already there.

Are you getting back what you put into your business? Merra Lee Moffitt learned that the hard way building her own 40-person consulting practice. Now, as a SCORE counselor, small-business profitability consultant, and Certified Financial Planner every day is spent giving back. She directs business owners in techniques that make, keep and grow more from their businesses. Your first question is free. Call her at 888-920-2030 or email her at merralee@captureprofits.com. © Copyright 2005 Merra Lee Moffitt