Are Your Contracts Protecting Your Cash Flow?

Envision two small businesses.  The first owner does business with a handshake and a promise.  He delivers his products on time.  He pays his expenses out of a line of credit, and sometimes has to make collection calls to clients regarding unpaid invoices.

The second owner does business with contracts and task orders.  He doesn’t deliver the final product until he is paid, and he rarely taps in to his line of credit to pay expenses.  Collection calls happen very rarely.

Which business owner would you prefer to be?  Maintaining cash flow is especially important to small businesses.  These owners rely on timely payment from clients in order to meet expenses like payroll and operating costs. There are steps you can take to be more like business owner number 2.

Meet with your attorney to talk about your contracts.  Tightening up the language in your contracts is a key step.

One: Work with your attorney to draft contract terms that are beneficial to you.
Would it help to have 30 or even 50 percent of the payment up front?  One way to tighten your contracts is to add a payment schedule, where the client pays a portion of the agreed fee before you start work, another portion at a certain point in the work and then a final payment after you have finished.

Another way to utilize this concept is to require your clients to pay in full prior to delivery of the goods.   This works in businesses involving goods, but not necessarily in contracts requiring services.

Two:  Use Programs that incentivize your clients to pay sooner rather than later
If you provide a regular service to your clients, such as web hosting or telephone service, your clients likely pay you on a monthly basis.  You may want to consider whether it would be more beneficial for you for cash flow purposes to offer a ten percent discount for paying for a full year’s service in advance.

Three:

Review other clauses in your contracts.  Liquidated damages can be applied if either party fails to perform.  You can also add a penalty clause for late performance.  Consider using an added interest charge for late payments.  Note that it is not enough to include these items on the final invoice to the client.  The binding document is the contract, not the invoice.

ABOUT KJD LEGAL

Established in 2012, KJD Legal provides strategic legal consultation services to families and small businesses. Kathy Catlin Davis, Esq. has more than nineteen years of experience in the real estate industry, and has been a practicing attorney for more than eleven years.

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DISCLAIMER: This post provides information. The contents of this post are not legal advice. Information about the law is different than legal advice. Legal advice is the application of law to an individual’s specific circumstances.

The information in this post is not a substitute for and does not replace the advice or representation of a licensed attorney. Purchasing and reading this book does not establish an attorney-client relationship.

The author makes no representations or warranties, express or implied. The author makes no claim as to the completeness or accuracy of the information, given that the law is always changing.