Client Billing for Service Businesses: Agreements, Invoices and Payments

Agreement, schedule, invoice, payment

Client billing is four stages, and almost every problem comes from treating two of them as one.

• The agreement. What the client committed to pay for this work.
• The payment schedule. When each part of it falls due.
• The invoice. A document asking for a specific amount, on a specific date.
• The payment. Money arriving.

These are four separate facts. An agreement with no invoice raised is still a real commitment. An invoice with no payment is still a real receivable. A payment with no invoice is still real money. Collapsing any pair produces a business that cannot tell the difference between what it is owed and what it has asked for.

Start with what was agreed

Record the agreed value as a number attached to the work, not as a sentence in a proposal PDF. It should include the currency, because in a distributed business assuming the currency is how you end up with a margin figure of minus 1,800 per cent.

Agreements change. Scope is added, a discount is negotiated, a phase is cancelled. When that happens, record the new figure and keep the old one visible. There is a real difference between an engagement that was always worth 14,000 and one that started at 10,000 and was renegotiated, and only the second tells you something about how you scope work.

One rule worth setting early: extra work your team logs should never automatically increase the agreed value. Whether additional work becomes additional money is a conversation with the client, not a side effect of somebody logging a task.

A schedule is not income

The payment schedule says when amounts are expected. A deposit and a balance, monthly instalments, everything on completion, or a custom split.

Reading a schedule as income is the single most common way a service business ends up profitable and out of cash. The schedule is a plan. What actually happened is a different record, and the gap between them is the thing worth watching.

What a schedule earns you is the ability to answer "what is due now", which is a different question from "what is outstanding" and a much more useful one for deciding who to chase this week.

Drafting and issuing

Keep a hard line between a draft and an issued invoice, because they are different kinds of object.

A draft is private and freely editable. Nothing is owed, nothing has been sent, and you can change your mind about a line without any consequence.

An issued invoice has a number from your sequence, fixed contents and a due date. It is a receivable, and from this point it should not be edited. If something is wrong, correct it by raising a credit note rather than quietly changing the document the client already has.

Numbering deserves a moment. Set a format and let the system assign numbers at the point of issue, never at the point of drafting. Numbers should never be reused and never recycled, because a sequence with gaps somebody filled in later is not evidence of anything.

The four numbers people confuse

Here is where most billing conversations go wrong. Four figures get called "what the client owes":

• Received. Money that has actually arrived, whether or not anyone has matched it to a schedule item or an invoice.
• Outstanding. Agreed value minus received. What is still owed on the whole commitment.
• Due now. The parts of the schedule whose date has arrived and which are not settled. Usually much smaller than outstanding.
• Overdue. The portion of due now that is past its date.

Two things follow that are worth stating explicitly. Overdue is a subset of due now, never something to add to it. And money that has arrived is not owed, whether or not anybody has filed it against the right line yet. Computing outstanding from what has been allocated rather than from what has been received produces a client who has paid you and still shows a full balance.

Partial payments and overpayments

Both are normal and both break naive systems.

Partial payment needs to be its own state. Treating a half-paid invoice as unpaid means chasing somebody who has paid you; treating it as paid loses the balance. It is a third thing, and it needs a running balance attached.

Overpayment should become a credit, not a negative number. If a client pays 5,500 against a 5,000 obligation, they have not created a minus 500 debt. You are holding 500 of their money, which you may owe back or set against future work. Recording it as credit describes the situation; recording it as negative outstanding describes arithmetic.

Also worth designing for: one payment covering several invoices, and several payments covering one. Both are routine, and a system that assumes a one-to-one match will be worked around within a month.

Correcting an issued invoice

Once a document has gone to a client, the correct way to change it is to issue a further document, not to edit the original. This is not bureaucracy; it is what makes your records worth anything in a dispute.

A credit note reduces what is owed against a specific invoice. The original keeps its number, its contents and its payment history, and anyone reading later can see what was billed, what was credited and why.

A credit note is not a refund. A credit note reduces a balance on paper; a refund is money leaving your account and going back to the client. They often follow one another and they are separate events, and recording only one of them will eventually leave your records disagreeing with your bank.

Chasing, without annoying anyone

Most late payment in a service business is not refusal, it is friction: the invoice went to the wrong person, it is sitting in an approval queue, or the client genuinely did not notice.

Three things reduce it more than any amount of chasing:

• Invoice promptly. The gap between finishing work and issuing the invoice is entirely yours and is usually the largest single delay.
• Make the terms unmissable. Due date on the document, in words, not implied by a date in the corner.
• Automate the reminder, not the relationship. A polite note before the due date, one on it, one after. What must not be automated is the escalation, which is a judgement call about a relationship.

Once you have more receivables than fit in somebody's head, you need them aged: how much is outstanding, by client, in buckets by how late. The point of aging is not the report, it is that it makes the two or three genuinely problematic accounts visible among the twenty that are simply not due yet.

A billing setup checklist

1. Agreed value recorded against the work, with its currency.
2. A payment schedule, even if it is one line saying "on completion".
3. Drafts separated from issued invoices, with numbers assigned on issue.
4. Invoice numbering format decided, and never reused.
5. Received, outstanding, due now and overdue defined and calculated consistently.
6. Partial payment as a real state with a running balance.
7. Overpayment becoming client credit.
8. Credit notes for corrections; the original invoice never edited.
9. Refunds recorded separately from credit notes.
10. Receivables aged once you have more than a handful outstanding.

Ten items, and a business that has all ten can answer any billing question about any client in under a minute. That is the actual goal.