It seems that with inflation growing and allegedly set to rise dramatically over the next financial year along with VAT at an all time high, many companies are increasing their rates in an effort to make ends meet. Our overheads including costs for phone, hosting and internet services have gone up considerably over the last couple of years. We are desperately resisting the urge to increase our prices in line with the trend and have managed to keep our rates fixed as of 2009. The main problem for us is not these spiralling costs, but rather short term, but expensive cash flow issues caused by some clients that pay late. On any project we have many costs which we have to pay for upfront (staff, general overheads, wages etc.) and when we are paid late this means we have to borrow from the bank to ensure we can pay all of the costs associated with that particular project. This accrues interest and astronomical fees which are not accounted for within the original quotation of work.
Like most web design companies we do charge a late fee which for us is currently 13% per month and this does cover many, but not all of the costs involved in short term borrowing. Anyone that has gone overdrawn will know that short term, unauthorised loans can be very, very expensive. It really is the case that going £20 overdrawn can sometimes cost hundreds of pounds if not dealt with quickly, and these fees seem to be higher on business accounts. This problem is exasperated on very small projects whereby the 13% fee only accounts for a very small percentage of the borrowing costs. Even when late payments result in minor borrowing from our own working capital overdraft, this can still be costly when combined with the efforts and time required to chase up the payment.
We also charge a deposit upfront for all websites and for all maintenance and design jobs that are with new clients. The exception to this rule is with long term clients requiring small amounts of maintenance work in which case we typically do not ask for a deposit. A deposit only covers the most basic of costs however and it can still cause major problems when a client is slow in generating that final payment.
The are many solutions to this problem, the most obvious is to increase our rates slightly to cover these costs and the new expenses incurred by the current economy. We pride ourselves on being competitive and are not very keen on this plan of action. Another solution would be to increase the late payment fee, which would act as a greater deterrent, however it could cause serious issues when clients are chasing payments themselves (we work for a lot of other web design firms who hire our expertise).
Instead of the possible solutions mentioned above we are pondering on reducing the payment terms from 28 days to 14. In return we would keep our rates the same as they have been since 2009 and also offer additional incentives to those that pay within 7 days. The downside to this solution is not all clients are able to generate funds within that amount of time. Inflation is a constant force however and there will of course become a time when we will have to adjust our prices accordingly.
One final issue we have to consider are cheques. Often we are sent cheques by 2nd class which then take a further week to clear making a payment that should have taken a few days go well over the payment terms we offer. Mostly, I blame the banks for the cheque situation, it really shouldn’t take a minimum of 5 working days to move some money about and small businesses would greatly benefit if cheques were banned completely. We are considering phasing out cheques eventually by offering an additional incentive to pay through quicker methods. (We currently offer a £1.50 discount on all invoices paid within 7 days via BACS. Maybe we can improve on this.) One problem we have with banning cheques is that we are hired by a lot of charities and often they can only pay this way since there are complications with trustees and the signatures that are required to release a payment.
A final thought is this: I find it odd that in our industry we are typically expected to offer interest free credit at all. If I go into a furniture store and purchase a sofa for example, I would be expected to pay for it in it’s entirety. It’s true that some places do offer credit which is often charged at credit card rates. Sometimes it is indeed 0% but any credit is only given after a credit check has taken place and it is certainly not taken for granted that this credit will be offered at all. I wonder how the situation evolved so that designers, developers, writers and other professional creatives are expected to offer interest free credit when they have to pay heavily for the same privilege themselves?
I have written this piece because I am very curious about how other professionals and actual clients feel about this whole subject and I would fascinated to know what you think and if you have any better ideas.