Predicting cash flow is one of the greatest challenges in a service-based business. When workflow is steady and invoices are paid on time, cashflow is good. However, with the ebb and flow of this economy, it’s not always possible.
Inconsistency can jeopardize the stability of any business if they are not strategic and plan ahead. To combat this, consider using a retainer payment structure.
Make Retainer Payments Work for You
A retainer is an advanced payment in exchange for ensuring services covered in the proposal. These services are usually identified as the scope of work or deliverables made available within a pre-determined amount of time. The retainer can be structured as recurring monthly payments or an upfront lump sum. Retainers can be in exchange for a long-term project, phased milestones, or for access to regular services.
Retainer payment agreements create a psychological positioning for the perception of value for your clients. Being able to say, “I work on retainer,” creates exclusivity and it proves that you have a history of consistent work. This is critical for new clients.
Remember, value is not only measured by price, but quality, expertise, knowledge, and reputation. When the lowest price is the only determining factor of a bid, you have already lost. And, more often than not, you have underbid to win a project that may very well end up in the red.
Taking on a project like that occasionally—when used as a strategy to win a contract that could develop into a long-term relationship—is fine. However, doing that consistently can be damaging to your bottom line and draining to your organization’s energy. The steady cashflow offered by a retainer makes sure overhead expenses are covered from month to month.
Retainers can help you and your business by:
- Providing financial stability.
- Reducing the pressure to win new projects all the time.
- Allowing you to build a long-term relationship with a client.
- Giving you the ability to accurately forecast your business and scale growth.
Having your essentials covered, takes the focus off sustaining your business, and allows you to invest your energy into high quality services and the growth of your business.
Retainers Provide Value Proposition
Requiring a retainer up front shows confidence in your service product and ability to deliver; it also shows that you are selective in choosing clients, which gives greater confidence about the value you deliver.
As business owners, sometimes asking for the sale is hard. Chasing late invoices is harder if you are an engineer, lawyer, accountant, consultant, etc. Implementing a retainer payment structure illustrates the value of your service(s), and you control the leverage on the provider/client relationship. This confidence creates authority in you—the business owner—and the services you offer.
In the long term, the aura of excellence will develop a brand known for superb quality of service. This shifts the disparity of power rom always chasing the next contract to developing a pipeline of projects/clients. Shifting the perception of value within your client base will allow your firm to ‘work smarter, not harder,’ with the emphasis placed on excellence. Isn’t that why you started your company to begin with?
How to Transition to a Retainer-Based Model
Many business owners think that a retainer payment model can only be accessed at the beginning of a new project for a new client. However, this is far from true. A great way to transition to this model is at the completion of a successful contract.
A business should hold an off-boarding meeting for the client that proposes the opportunity to continue working together.
- What has changed in their life/business that could necessitate additional services?
- Is there a product/service they could benefit moving forward?
Use the retainer as an opportunity to build a long-term symbiotic relationship that makes your employee/services available for continued support of the client. Take the role of “their guy” for any work, consulting, or advice in your area of expertise.
Why Are Retainers Great for Clients?
The retainer-based fee model is also beneficial for the client. Firm resources can be allocated with confidence based on the scope of work. The retainer also ensures that the project does not stall due to an unpaid invoice or lack of cashflow. Cashflow shortage is cited as the number one reason for small business failure; if that happens during the administration of a client project, it can be difficult to recover professionally from the reputation of folding mid-project on a client.
Many clients enjoy paying in advance as they go. It gives a layer of responsibility to have the funds together before the next scope of work, and allows the pace at which retainers are paid to control the speed and execution of a project. Having clients as committed partners for the completion of a project also helps improve overall satisfaction.
The retainer payment model keeps the client with skin actively in the game, rather than getting stuck with overdue invoices and an incomplete job. Seriously, think of the psychology. A client project that does not move forward until a retainer is paid, places the responsibility on the client. Whereas, if a company keeps billing time and expenses to the client, but the invoices are months overdue, eventually, there will be a point where the job stops, the project is incomplete, and late fees accrue. And the account may eventually go to collections.
Regardless, your firm takes a hit for the work and expenses paid, and you are unhappy because you did not make profit or recover your fees. At the same time, the client feels like a victim because they have an unfinished project and the debt associated with it. Both companies suffer, and the business relationship is destroyed.
As we know, at fault or not, bad business ventures come with negative reviews and impact. A retainer-based model can mitigate this business failure by encouraging proactive management of the financial relationship rather than on the back end.
Advice for Managing Retainers
For additional information on retainers in CORE, please see https://blog.bqe.com/how-to-set-up-and-refund-retainers-in-core-1. Also, please refer to the CORE Help Center, our video library, connect with CORE support for guidance, or request a demo and free trial. Want your organization to evolve to the next level? Schedule an Open training session with one of CORE’s Consultants today.