As well as the sales, payments and expense sheets we explored in the last chapter, there are other aspects of your accounting you’ll also need to master to keep your cash flow healthy.
So, now, let’s examine how to set your payment terms and conditions, create invoices, chase payments and deal with late or non-payment.
Set your terms and conditions
When you accept a commission, take on a project or say yes to a job, there’s no way of knowing whether the work will go exactly to plan. Here’s where setting your terms and conditions will help.
Terms and conditions let your client know how you work, how you’d like to be paid and what should happen if the work is cancelled or takes longer than expected. They help you set your boundaries and a contingency plan.
There are four areas you’ll need to consider when setting your terms and conditions:
Availability
Cancellation/termination
Payment terms
Ownership
1. Availability: How many hours a day will you work? You’ll need to decide this to work out how much time a job will take, especially if you're having to juggle this with other work. You should also make it clear that you are only contactable during working hours.
2. Cancellation/termination: Unexpected termination of a project such as the company folding. Will there be a kill fee (ie a payment made to you for any work you've already completed)?
3. Payment terms: How will you be paid? Will you be paid a percentage upfront or interim payments? How long after receipt of invoice do you expect to be paid?
4. Ownership: Who legally owns the work you produce? If a project is cancelled, will you have the right to sell it elsewhere?
Create an invoice template
If you’re using accounting software, these will generate invoices for you. But if you choose to create your own template, you’ll need to include the following:
Date of invoice
The word ‘INVOICE’
An invoice number
The amount you’re charging (plus VAT if applicable)
A one-line description of the work
Your name, address and bank account details
Name of company you’re invoicing
Payment terms
Purchase Order number
Late payment clause
Although the majority of these are self-explanatory, the last three on the list need a little clarification:
Payment terms
This tells the person you’re invoicing how quickly you expect to be paid. It can be anything from payment in advance, on receipt of invoice or from 14, 30 or 60 days after invoice date.
You need to decide what’s best for your cash flow. Lots of companies and freelancers use monthly payment terms simply because many bills and other outgoings tend to be deducted once a month. If this is what you decide, use the following wording on your invoice:
‘Payment terms: net 30 days’
Purchase order numbers (PO)
PO numbers are often used in large or public sector organisations. The person who employed you will request it from their accounts department, and you must include it on your invoice, so they know who and what department is responsible for purchasing the work from you.
Late payment clause
By law, you can charge a fixed sum if you aren’t paid on time. This is thanks to the Late Payment of Commercial Debts Regulations 2002. The fixed sums are as follows:
£40 for a debt less than £1,000
£70 for a debt of £1,000 or more, but less than £10,000
£100 for a debt of £10,000 or more
These fixed sums are in addition to any interest you would have accrued if the debt had been paid on time. However, despite having the weight of the law behind them, many freelancers worry that they may not be offered more work if they attempt to exercise this right. Include the following late payment clause on all invoices.
We understand and will exercise our statutory right to interest and compensation for debt recovery costs under the late payment legislation if we are not paid according to agreed credit terms.
You are protected by this regulation whether or not you state the clause on your invoice. However, it will show employers you know your rights and will pursue them (even if you don’t intend to!) and can act as a deterrent to late payment.
Chase late payments
You’ve waited two months for a payment that was due after 30 days, so what do you do? There are four steps to take, starting from the first day your payment is overdue. These are:
1. Day after payment is due
Send a polite email with either a duplicate invoice or statement of account. Depending on the size and/or efficiency of the accounts department, it may simply have been overlooked. Make a note of the person’s name who responds to you.
2. One week late
Call the person in accounts who responded before. People often take queries more seriously if they can hear a real person on the end of a phone call. Also, contact the person who hired you. Quite often they’ll have no idea that you haven’t been paid and may be able to chase the payment, or in some cases insist it’s made, on your behalf.
3. Two to four weeks late
Send a more serious, but still polite, email. This time, add a note making it clear you reserve the right to charge a late payment fee and interest.
If a client is still refusing to pay after months of email prompts and phone calls, you can make a claim through the Small Claims Court or approach a mediation service which is less costly.
Don’t forget to transfer at least 25% of any income you receive into your tax account - that includes from late payments. When you submit your tax return each year, you’ll also need to pay any tax you owe. We’ll look more closely at the self-assessment tax return in the next chapter.
