Bad Cashflow: It's Kryptonite for Business
We all know having money is good. What we may fail to grasp as fledgeling business owners or entrepreneurs is just how important having regular money is.
While doing the big jobs and winning work that is worth thousands of dollars sounds significant, if you don’t have the little ones to fill the gaps, you may find yourself in a world of pain.
My work is very one-off project based work that ranges in costs from the low five-figures to the mid/high five-figures. Being in one of the oldest industries in the world, my clientele is very used to paying for services on an hourly basis.
The problem I found with that, was that I couldn’t send out a fee until I had undertaken the work. Which meant that as the business owner I was carrying the costs until the end of the project, which can sometimes be many, many months.
As a new business, that is just plain stupid.
1. Incremental Billing
All that pain and anguish could all be saved by simply billing incrementally, say at the end of each month, or fortnight.
I’ve actually flipped it around and am now having client’s pay incrementally upfront, and I’ve found the key to doing this, is to manage their expectations.
Therefore, I am now providing them with a one-page visual at the beginning that outlines:
• the various stages
• the timeframes for each stage
• points where they will need to provide input
• set markers for when they will need to make payment
This is all included in my engagement agreement, so everything is upfront, and I’ve been very surprised with the positive uptake and all my clients are enjoying gaining more understanding of the process.
The other positive to this is that as my fees are now set, the administration team can prepare the fees earlier, so they go out quickly and efficiently.
Many banks are now offering direct debit facilities as well, so you can provide that service to your customers.
2. Manage the expenses
The other side to cash flow is the payment of money, watching your bank account head south can be heartbreaking, not to mention terrifying when there isn’t much left in there.
My suggestion here is to circumnavigate the mountains; you want to try and avoid those large one-off payments. They are killers to cash-flow.
Wherever possible, make monthly payments. Pay for software on a monthly basis, rather than those big upfront payments. Pay for your motor vehicle registration every six months until cash flow becomes more regular.
3. Surviving the lean months
We all know that there can be a lag between sales and receipt of payment. But the bills aren’t going to magically disappear nor are they going to change their due dates because you may not have cash in the bank.
You have to hold enough cash to get you through those lean months when the flow may not be there.
The best way to do this is to build up some cash reserves. This is the part where you need to roll up your sleeves and dive into those dreaded numbers that your accountant or bookkeeper deals with for you.
Don’t stress; they aren’t scary, and if you do this well, you won’t need to look at them for long. Start with your expenses, work out what an average month’s worth of expenses and repayments are.
To be safe multiply that by three and that is the amount you would like to have sitting in your bank account on a regular basis.
Make sure you prioritise the importance of cash to your business.
About the contributor:
Jenny Letts is a forensic accountant, who specialises in helping people understand the value of their intangible assets, such as businesses, goodwill, royalties, intellectual property etc particularly during periods of change.