How to fix tightening cash flow
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Don’t Get Caught In A Cash Crunch

Business is coming back a bit can you feel it? The sales cycle has quickened for most of my clients. The hesitation and “putting things off” that was common even a few months ago is waning.

How to fix tightening cash flow

But it’s not all cheers of good times are here again. There’s a shadow waiting in the wings- tightening cash flow.

Two trends are driving tighter cash flow. The first is a terrific trend <- more business! But when sales rise, it typically consumes cash. When sales go up,  receivables go up (we loan more money to our customers) and payroll goes up (often with more expensive freelance talent to start with). So even though sales go up, cash is going out faster than it’s coming in.

The second trend is that clients are paying slowly. Again, I’m seeing this pretty much across the board with my clients. Even the “good payers” are paying on time, not early. Some people are really dragging things out. Most companies have at least some bad debt that’s still hanging around from last year. It may be coming in fits and starts, or it may be not coming at all. But the fact is that most of us can’t quite count on our receivables.

So with money going out the door faster for new client starts, freelance help and increased sales and marketing efforts, and money coming back in more slowly from slow-paying clients, owners are caught in a cash crunch. Even successful growing companies can run out of cash – and being out of cash means being out of business whether your sales are strong or not.

So what do you do about it?

1. Get more money upfront.

I frequently see service businesses propose payment terms of one-third down when you sign the contract, another third halfway through the project, then the rest upon completion. That’s a great deal for your client, but a lousy deal for you. If you bill that last third upon completion, and they take 30 – 45 days to pay, that’s a third of your money that you don’t get until long after you’ve spent all the money on this project.

Instead, propose half upfront, another 40% after 30 days, and then the remainder after 60 days or upon completion (whichever comes sooner). This means you have all the money you need to complete the project in-house in the next 60 days (and way before the project is done). Your income and expenses are better aligned and you aren’t feeling that cash-flow pinch. If your prospect balks at these payment terms, you are still in a better place to negotiate. If you end up at 40/20/20, you still got your money a lot faster than if it was 33/33/33!

2. Don’t discount.

When cash is tight, you need all the margin you can get. I know that you are scrambling for orders, and I know that this next order will enable you to pay some bills. But if you are taking lots of orders at a discount(and using expensive freelance help to deliver) you are fueling a cycle you can’t get out of. Your profit is what will start to build your cash position back up – so now more than ever you need to make money on every job. Maybe your customers got used to working discounts out of you and threatening you with leaving. Call their bluff. They don’t have the staff or time to find another vendor right now. With their business heating up, they are short staff and resources too. Don’t stick it to them, but don’t give in to the discount either.

3. Be proactive with late payers.

As soon as anyone falls behind, stay on top of them. Keep in mind that they have bills too — but you want to be in that line so you can get at least some portion of your invoice paid. If you don’t call, then they pay the person who did first (you aren’t squawking) and you end up waiting longer.

4. Use a line of credit as a last resort.

A line of credit is designed to help with these short-term cash flow crunches. When business surges forward and the orders come faster than the cash, you can safely dip into a line of credit because you know that you have receivables coming in to pay it back. But debt can become a bad habit, and debt in a service business is essentially personal debt. Remember that you borrowed that money and signed a personal guarantee. So if you do dip into the line, pay it down once the checks come in.

Things have bounced back, but we aren’t out of the woods just yet. Keep one eye on your receivables and the other on your checkbook, as your sales accelerate.

Photo credit: woodleywonderworks

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