A Must-Read for IT Contracting CEOs! Why Your 'Balance' Suffers as Sales Grow, and How to Smartly Leverage the New Freelance Act
Introduction
'The projects are running smoothly. I'm issuing invoices properly. ...Yet, for some reason, cash flow is tight at the end of the month.'
In the management of an IT contracting company, this concern is by no means rare. In fact, the IT contracting business model hides a unique structure where 'the more sales increase, the more cash temporarily dries up.'
In this article, we will organize a perspective on using the 'Freelance Act,' which came into effect in November 2024, not just as a legal compliance measure, but as a 'weapon' to protect your company and stabilize your management.
1. Why is there no 'cash' even though there are 'sales'?
The biggest cause of cash flow pressure in IT contracting companies lies in the decisive gap between 'when money goes out' and 'when it comes in'.
Money that goes out first: Compensation for freelancers, such as external engineers and designers (mostly closed at the end of the month and paid at the end of the following month).
Money that comes in later: Payments from customers (after delivery and inspection, at the end of the following month or the month after that).
Large projects, in particular, may look attractive due to their scale, but they can become a 'trap' where outsourcing costs are paid in advance, continuing to pressure cash flow for several months.
Whether a project should be accepted can only be judged by lining up not just the amount, but 'how much goes out in which month and when it comes in.'
2. The Freelance Act is a blueprint for 'cash flow'
The Freelance Act (Act on Improvement of Transactions between Freelancers and Business Entities), which came into effect on November 1, 2024, mandates that remuneration must, in principle, be paid within '60 days from the receipt of services'.
At first glance, this might seem like a strict rule for the ordering party.
However, from a manager's perspective, this becomes a 'compelling force to determine the payment timing of outsourcing costs before accepting an order and incorporate it into cash flow'.
It is a chance to break away from the vague management style of 'paying when the customer pays' and use legal compliance as a trigger to redesign your company's cash inflow and outflow structure.
3. Question the 'structure of the contract' before relying on borrowing
When you are short on funds, borrowing is one option.
However, covering a 'structural deficit' with loans is not a fundamental solution.
Outsourcing costs are consistently paid too far in advance.
Additional work is being accepted for free.
Inspection deadlines are vague, causing payments to be delayed.
If you increase borrowing while in this state, you will run into cash flow issues again on the next project. What is important is to distinguish between a 'temporary shortage' that should be covered by borrowing and a 'structural shortage' where the contract terms themselves are unreasonable.
4. Outsourcing costs are an investment in 'trust'
Payments to subcontractors are not merely payments for 'costs,' but also payments for 'company credibility.' Hiring a freelancer means entrusting not only their skills but also a part of their livelihood.
Delaying payments because 'the client hasn't paid yet' is synonymous with slowly eroding your company's credibility.
To protect your company's credibility, you must assess whether you can comfortably afford the subcontracting costs for a project before accepting it.
5 Self-Defense Items CEOs Should Check Before Accepting a Project
When an IT contracting company takes on a project, these are the five points you should check at a minimum.
Payment deadline to subcontractors: Is it based on work performed or upon delivery?
Timing of client payments: Can you set up a down payment or interim payment?
Acceptance conditions: Are the deadlines vague, creating a risk of delayed invoicing?
Handling of additional work: Are revisions or increased meetings being absorbed by the initial fee?
Overlap with other payments: Do the peak periods for salaries, taxes, and loan repayments coincide with subcontracting costs?
Summary: Numbers are the Result of 'Structure'
Sales are important, but you should gather the information that allows you, as the CEO, to judge 'sales that erode the company' and decide whether to accept, negotiate, or pass on a project.
Organizing the 'structure' behind the numbers is the only way to eliminate a CEO's anxiety.