Where's Your Money?
Sending out a bill for your services entails numerous disadvantages. For instance:
1. Most obviously, the money sits in the customer's checking account rather than your own. You lose interest on that money. You also invite cash flow problems that could make it hard to meet a payroll or take supply house discounts or impress a banker when needed. As soon as you perform a service, you are entitled to money in return for that service. Neither the law nor business ethics requires you to give the customer 30 days to pay.
2. Invoicing adds to your administrative costs. It takes time and effort to send out bills, and further time and effort to make the inevitable collection calls when a certain portion of customers don't pay up in the allotted time.
In our industry, offices tend to run inefficiently so it usually takes a while to send out bills. It's not uncommon for weeks to pass before an accounts receivable clerk - often the owner's wife - gets around to mailing invoices. So the customer doesn't receive a bill until several weeks after the job gets done. Then he has 30 days from that point to pay. This means you might wait 45 days or more to collect your money - even though the customer is not officially late with a payment.
3. Billing increases your chance of getting stiffed. In the customer's mind, the more time passes from completion of a job, the less your services are worth. When the toilet or water heater or boiler isn't working, people generally need service quickly. They feel grateful toward the company that bails them out. That puts the money issue in its proper perspective.
But as weeks go by, memories fade of how miserable they were with their plumbing or heating broken down. All they focus on is the bill, and it always seems too high. They have it in hand to show to every handyman they know. The handyman will, of course, tell your customer that he would have done the job for much less.
Flat Rate AdvantageIt's even worse when you consider the industry's dinosaur-era policy of time and material billing. Your service tech finishes a job at Mrs. Jones' home. She reaches for her checkbook ready, willing and able to pay for the service.
Instead, your tech responds: "No, I don't want your money now. I have to take all this paperwork back to the office. They will figure out how much you owe - and send you a big surprise in the form of a bill!"
Put yourself in the shoes of that customer. She doesn't know how much the job will cost, doesn't know when the bill will come, doesn't know how much she has to have in her checking account in order to cover the cost.
The main focus of flat rate pricing is how to charge a realistic price for your labor. What any flat-rater quickly learns, however, is that the vast majority of customers prefer flat rate pricing over the scenario just outlined.
When a customer calls your office to book a service call, your customer service representative needs to utter these magic words: "Will you be paying with cash, credit card or check when our service technician finishes the job today?" It should be in a casual tone of voice, a simple statement of company policy.
Credit Cards A MustNotice that I said, "... cash, credit card or check." It's amazing how many PHC service firms even in this day and age still do not accept credit cards as payment for services rendered. The main excuse is they don't want to pay the modest fee charged by the credit card company, which generally amounts to around 2 percent of purchases.
What narrow-minded thinking this is? If service contractors would take the time to crunch their numbers, they'd discover that the cost to send out invoices will amount to even more than 2 percent of billings.
Consider what it costs to employ the accounts receivable clerk, plus postage, office supplies and collections costs. (If the billing clerk is the owner's wife working for little or no pay, then you must calculate the lost "opportunity cost," i.e., what she could earn in pay working for someone else.)
Credit cards are a bargain. Look at it this way: They enable you to get your money upfront and keep a healthy cash flow. That in turn ought to enable you to discount your supply house payments. The 2 percent you save there basically pays your credit card fee.
Worst of all is when a company insists on c.o.d. payment, but does not accept credit cards. Somehow the customer, often without warning, must come up with several hundred dollars in cash or check without knowing how much the bill will be ahead of time. A better prescription for a bad check would be hard to imagine.
In summary, I can't think of a single advantage of invoicing over c.o.d. Many contractors have told me that they'd like to switch, but have been billing customers for so long they're afraid the customers might be upset at the change in policy. The best way to handle that situation would be to offer an extra inducement, say 5 percent off, for c.o.d. payments, just to get them used to the idea. Keep track of the discounts given, build the cost into your overhead and factor that into your flat rate prices.