Running a service-based company is about effectively managing your time, your employees’ time, your stress and your company’s cash. Running out of cash, having a cash flow problems, is deadly to a service-based company. But stop thinking cash flow has anything do with accounting or bookkeeping formulas. It doesn’t. It’s simple to understand but hard to avoid.
Here are examples of mistakes we’ve made as a former web consultancy.
If you look at thousands of service-based companies’ financial books, you’ll see spending and income trends. These businesses are seasonal and they don’t realize it. These design and development firms don’t close new business from mid-November to mid-January. Let’s think about it, that’s 60+ days of little or no income! This same hiccup often happens from mid-May to the end of June. This cash gap is usually when their customers take summer vacations. So be super careful, watch for seasonal trends, and inflate your cash pad in the fall to ensure a less stressful business during the income drought.
New businesses aren’t usually created because the business owner enjoys the “business side” of a business. They’re usually started by someone who might be a good chef, someone who loves to cook. So this chef thinks, “I’ll open a restaurant,” but they probably know nothing about running a business. Soon they realize running a restaurant is much more than just cooking great food.
So heed my warning…save money…start storing it away for emergencies. This is Priority #1. Your business should have a cash pad of at least three months of business expenses. Now this amount might be larger if your income fluctuates month-to-month.
This section has nothing to with saving or spending, but only about how you manage your clients.
Example: A web shop might design a website for a client. The invoice and contract say something like, “When your website is launched final payment is due.” But stop and think about this. The project finish line is contingent on the client adding content to the website. The issue happens when the web shop has to wait weeks or months to get the content from the client. Never set a final payment after your client’s responsibilities are met. Be very clear in your proposals and contracts, you get paid when your work is finished. Rule #1 of a service -based company: Don’t let your clients affect your cash flow.
You must insist on a deposit to start a project, or even better, get the client to pay in full first. Never do work before getting paid. Never, never, never do this.
At one point as a freelancer in 2005, I was Net 90. Which means to a client, “Hey, you can wait 90 days to pay me. Well, if you remember if I was of value and still have money.” What was I thinking? Forget Net 60 or Net 90, those are death traps. Use “Net 0”…this money is due right now. Remember Rule #1? Want even quicker payments? Put a way for your clients to pay you via credit card on your invoices to them, and do not wait on checks and the mail system. Just wait until you hear, “Oh, the check must have gotten lost in the mail.” Get paid fast, chasing checks is stressful and a time suck.
Okay so Rule #1 is huge, but the additional statement to that is: Don’t allow your clients to get behind. By having outstanding invoices, you’re basically lending the client money. You are not a bank. Well, maybe you are. But never allow the client to get behind. Repeat after me, “I stop working when the client gets behind on payments.” Very good, now go back to work.
Many times when we have a large project we get a big payment up front and then another payment weeks or months later. This causes us to be, at the end of the project, desperate for the money as we’re running out of cash. Steady cash flow in small sized pieces is probably even preferred by your client. Think about breaking down these large payments into small payments. Maybe a bi-weekly or monthly invoice/payment. But do not do this at a large admin time cost. Your job is not to chase checks.
Don’t let your clients create cash flow problems and cripple your business. Get a deposit, bill effectively, and don’t let them fall behind. And remember to build that cash pad to protect your business when the check gets “lost in the mail.”