Hourly billing feels safe until you actually look at the math. Any slow weeks will show up directly in your bank account as this model starts at zero each month, and there’s a hard ceiling on how much you can earn (by simply working more hours). The real solution isn’t to increase rates, it’s to rethink contracts and billing cycles, and aim for more predictable, timely revenue (instead of waiting on clients to get around to paying).
Why hourly billing caps your income and your cash flow
Even if bookkeeping takes you hours to complete, if you make a business audit-ready, that service is worth more than the hours logged. Similarly, a website redesign that results in leads is worth more than the time it took you to code those pages. Value-based pricing acknowledges these realities and eliminates the income ceiling skillful professionals face with hourly billing.
Hourly billing means you are paid for your time. Inevitably, there is a ceiling on how much you or a small team can bring home with this billing structure: there are only so many hours in a week before burnout takes hold. In addition, hourly billing encourages scope creep because clients continue to ask for little favors and rationalize their requests with statements like, “can’t you do just one more thing?” As they are charged for your time and not your product, each request is incremental and justified.
One of the biggest reasons that a small company will close its doors, according to a study from U.S. Bank, is due to cash flow problems, not a lack of profitability on paper. Work gets done, customers are billed, but cash doesn’t come home for weeks, creating an issue with timing before it becomes a problem with existence. Changing your billing structure from hourly to value-based can solve timing before it becomes a problem with existence.
Converting hourly clients to a flat retainer
If you bill hourly, it’s often easy to transition long-term agency relationships to retainers. Just think about which clients have recurring design, reporting or content production needs, and pitch a retainer agreement to one of them.
Make sure you define the retainer clearly. It should specify exactly what work you’re agreeing to do, say upfront how many hours or deliverables that entails, and set out a fixed monthly fee that you’ll charge regardless of how many hours you actually work each month. Don’t shortchange the scope definition to get the deal; without that level of specificity a retainer agreement can degenerate into free work in two months time.
When you propose a retainer agreement to a client, focus on the fact that the deal will give them budget certainty, rather than higher rates. A fixed fee agreement assures clients exactly how much they’ll be billed each month, and is often easier for them to get onboard with than a rate increase. As an added advantage for you, retainers tend to generate more revenue than their hourly equivalents.
Project work: deposits and milestone billing instead of one lump invoice
Some projects that are more one-off – say a rebrand, a bespoke software solution or stand-alone campaign – aren’t going to work on a retainer basis. However with this type of engagement you still want to structure the commercial arrangement so that it isn’t down to one invoice after delivery.
Paying after the fact can put small players out of business – meaning the full cost of the project comes due at once, putting them under financial strain. Taking a deposit up front (30-50% is standard) does two things – it helps fund the early part of the project and it weeds out those clients who aren’t serious. The type of client who won’t put some money down at the start is a bad client, irrespective of what else may be in the agreement.
Then you break down the rest of the fee, billing at various project milestones, based around specific deliverables being approved. Maybe you bill upon approval of a first draft, after revisions and on final delivery. Each bill is paid before moving on to the next stage. Improved cash flow on your part and reduced risk of a client dying mid-project, in which case you only need chase them for work that’s been completed, rather than an open-ended debt.
Rewriting payment terms so money arrives before the next work cycle
In an analog era when invoices were printed on paper and lodged in postboxes, Net-30 and Net-60 terms made sense. Unfortunately, those same payment terms now force small operators to work for a month or more without actually getting paid for anything. That’s an appalling way to manage cash flow on a shoestring budget.
To improve your financial situation, simplify your invoicing process, and get your operations running like clockwork, try using Net-7 or Net-15 terms for all of your project invoices. Even better: convert your retainer clients to automatic payments. That way, there’s no need to negotiate billing terms – your money lands in the bank on the same date every billing cycle. And the money you receive for the work you completed this month should be available to fund next month’s operations. If you’re forced to front the cash for your own business, you never get ahead.
Make the billing structure self-enforcing
A service contract or retainer agreement is only as good as its revenue-protecting language. Including clauses for scope caps, auto-renewal, and late payment penalties can make all the difference.
Scope caps establish service expectations and revenue protections. Define in the agreement the number of hours, rounds of revisions, or response-time guarantees included in the retainer. And be sure to specify that anything beyond that is billed at a predetermined rate.
An auto-renewal clause protects annual revenue. Rather than an agreement that expires after twelve months – and has to be renegotiated (generally when you’re swamped and can’t find time to send a doc for signature) – include language that the contract renews automatically unless one party provides notice otherwise.
And who doesn’t love a client who pays on time? Add a late-payment penalty clause. This could be a flat fee, or a small percentage charged if payment isn’t received after a certain number of days. When they know they’ll be charged automatically, clients are more likely to pay on schedule. Contracts with language that nudges timely payments are preferable to those that require uncomfortable follow-up calls.
Standardizing the invoice itself
Right, the invoicing should be effortless for your client. Send your retainer invoices consistently on the first day of the billing cycle using an invoicing template. Think of it this way: your client receives an invoice on the first day of every month, knows what it looks like, knows what to do with it and pays it like a recurring subscription payment instead of a one off transaction payment.
Inconsistency breeds confusion, and this seeps into payment delays. Changed up invoices (different formats, send out days, payment instructions) are more work for the recipient, even if they intend to pay on time, and this work slows payment down. Automate your invoices using a free invoice generator and make sure each invoice looks and reads the same way.
If you’re billing retainer clients you may want to go one step further: automatic billing with payment details on file means the charge processes without anyone having to remember to send a reminder. This eliminates another line item on a to-do list during crazy weeks, and means there’s one fewer place payment can slip through the cracks for lack of a sent invoice.
Tracking whether the restructure actually worked
These numbers are useful for tracking the adoption of retainer contracts versus hourly contracts:
Monthly Recurring Revenue: A term popularized by software as a service (SaaS) businesses, monthly recurring revenue (MRR) is useful for professional services businesses that are adopting a retainer model. MRR represents the predictable, recurring revenue stream that you have locked in for the next month. As more clients move from hourly contracts to retainers, MRR should increase.
Days Sales Outstanding: Days sales outstanding (DSO) represents the average number of days it takes for you to collect on invoices. If you have recently shortened your payment terms (e.g., from net-60 to net-15) and/or implemented recurring billing, DSO should decrease. Allow one or two billing cycles to see the impact.
Revenue Mix: As you implement retainers, it can be useful to keep an eye on the proportion of revenue that is recurring in nature versus the amount of revenue that comes from one-off projects. A company that generates 20% of its revenue from retainers has a different business continuity risk profile than a company that generates 70% of its revenue from retainers, even when total annual billings are the same. Revenue from retainers helps to cushion a down quarter, while revenue from one-off projects evaporates the moment a client stops buying.
Pitching the change without losing clients
The restructure doesn’t need to be framed as a price increase, because for most clients it isn’t one – it’s simply a different way of paying for work that they already value. Clients gain predictable budgeting since a fixed retainer is easier to plan around than a fluctuating hourly bill. They often get priority access and faster turnaround as part of the new structure, and a stable point of contact rather than ad hoc scheduling.
Clients rarely have any problems with new contract arrangements, especially when expectations regarding terms, billing schedules and payments are clearly established as part of the onboarding process, rather than being introduced halfway through an engagement. By day one, clients understand how you bill and why, and are far less likely to raise objections in the future.
The only clients who will leave as a result of the billing restructure are the clients who are always going to be a problem. In contrast, you’ll develop more stable revenue from the clients who stay, as opposed to constantly having to chase one-off payments on an invoice-by-invoice basis.
People also read this: Slip and Fall Accidents in New York: When Is a Property Owner Responsible for Your Injuries?
