Avoiding & Predicting Cash Flow Problems

Running a small business is a balancing act between your time, your employees’ time, your resources, stress levels, and your company’s cash. While all are highly important, running out of cash can be deadly. The good news is that cash flow problems are avoidable. You just have to know how to get ahead of them. 

First, change your mindset around cash in your business. It’s less about quantity and more about running a healthy business. Believe it or not, your business is probably already trying to tell you how and when you are going to run into cash flow problems. It’s simple to understand, but hard to avoid.

Predict Cash Flow Problems, Look For Seasonal Income Trends

If you look at thousands of service-based companies’ financial books, you’ll see spending and income trends. These businesses are seasonal, and they might not even realize it. It can be more than holiday sales, too. Depending on your industry you may see an uptick in business after the New Year and perhaps a slow-down during summer vacations. In reverse, you might have a business summer season and have fewer sales the rest of the year. Watch for seasonal trends that apply to your business and inflate your cash pad before a dry spell to avoid running into cash flow problems. 

Start Strengthening Your Cash Pad

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 and 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 don’t neglect your savings account, especially at the start. Your savings goal should be to have three months of business expenses on hand. Even if you’re putting a little away each month, you’re one step closer to having a cash pad that could potentially save you from closing your business permanently. 

Fewer Cash Flow Problems with Better Client Management

The source of your cash (clients) plays a huge factor in how much cash makes it into your business. So it makes sense that your client management processes are vital to protecting and preserving cash. In some cases, utilizing your bookkeeping and invoicing software’s features is enough to keep tabs on your clients. Other times it is worth investing in a CRM tool for small businesses, like Hubspot or Monday, to carefully track and manage client relationships. 

However you choose to manage clients, stay on top of cash flow problems by sticking to the following tips: 

Never Wait on a Client

Your cash flow isn’t a priority for your clients, so make your payment terms very clear upfront. Whenever possible, get some or all of your payment before you get started. If you are working on an hourly basis or collecting payment after the work is complete, be ready to send an invoice as soon as you complete your portion of the work. If the client needs to contribute content, revisions, etc., then build that into your contract and get paid while you wait for their feedback. 

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.”  Sounds reasonable in theory, but look again. The project finish line is contingent on the client adding content to the website. The issue happens when the webshop 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.

Get a Deposit

Getting cash upfront can solve a lot of your problems. A deposit can be anywhere from 25%-50% of the full project price. You can also set it as non-refundable should the client change their mind or last minute cancellations. 

More Effective Billing

Waiting too long between the project deliverables and sending your invoice can mean your invoice can be easily forgotten, so time your invoices wisely. Use your bookkeeping software to automate invoicing when you can and send reminders to clients before they are past due. 

Stop the Bleeding Fast

Don’t allow your clients to get behind. By having outstanding invoices, you’re basically lending the client money. It’s not your job to be their bank. It is your professional right to stop all work until the client pays. If your client objects, then they aren’t worth working for in the first place. Again, automate reminders and invoices to help you save time on invoicing. 

Smaller Payments, Smaller Gaps in Cash Flow

Many times when we have a large project we get a big payment up front and then another payment weeks or months later. This can cause 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. You can set up your project to bill bi-monthly, monthly, or during certain phases of a project. This can help you and your client better handle cash. 

Offer Incentives for Upfront Payments

Sometimes all you have to do to get cash upfront is offer a small discount for payments made immediately or in full. Even a 10% discount can be enticing enough to get customers to pay quickly. 

The Secret to Avoiding Cash Flow Problems

You want to know the real secret: it comes down to two things: client trust and bookkeeping. If you can build a trust-based relationship with your clients, then you can communicate effectively about how and when invoices need to be paid. It’s worth leaving a client who has poor payment habits to find work elsewhere. Bookkeeping is essential because it gives you a live pulse on the cash in and out of your business. So set yourself up for success and avoid cash flow problems by using tools to help you bill effectively and forecast trends in your business. 

Have the bookkeeping blues? 

Bookkeeping isn’t everyone’s favorite task, but it is essential. Outsourcing your bookkeeping to professionals can be one of the best things you can do for your business. You get back your time and sanity, and you get balanced books for your business in return. Our bookkeeping pros have been helping small business owners master their cash flow problems with confidence. See how with a free 30-minute discovery call.