When business owners experience cashflow difficulties, there is usually one of two responses: immediate rallying (some may use the word ‘panic’) to address the situation, or denial. Neither are particularly effective strategies.
I have seen denial in action and it solves nothing, actually makes the situation far worse, pulls your business back and in some cases puts the whole viability of the business at risk, and does nothing to raise the bar on your skills as a business owner. Panic is just as bad as it has you clutching at anything in the hope of improving the situation.
Cashflow difficulties only go away if you address them, and there are some simple, proven steps to do that.
1. Assess your current position – do a cashflow forecast
- You have to know your exact financial position, so you can manage it.
- Make sure you know what all your expenses are over the next few weeks.
- Don’t forget to include those expenses you may be inclined to forget about.
- Know exactly what income you can expect over the same period of time; not when you invoiced your clients, but when you expect them to pay you. You may have invoiced a client two months ago, but know for sure that they will be paying you by the end of the month.
- Do a cashflow forecast. If you don’t know how to do one ask your bookkeeper or accountant to send you a template (you’ll pay them later!). It’s simply a spreadsheet by month (that’s usually the most applicable timeframe for service-based (non-retail) businesses) that tracks payments expected in that month, with payments you will be making. The bottom line is a net surplus or deficit.
- If there’s a deficit, you can move payments around by using the next strategy…
2. Track hidden costs
Not hidden but sometimes forgotten automatic debits from your account/business credit card.
- These could include insurances, memberships, subscriptions, lease payments (car, computers etc), interest payments.
- I’m not saying cancel them, just don’t forget them.
- Some may be more cost effective to pay for 12 months in advance, rather than monthly, when your cash position is good.
- Don’t forget costs like ATO payments – BAS, installments etc, as well as superannuation payments.
- Many of these can be ‘moved around’.
3. Make arrangements with everyone
You can pay any bill later than the due date by making an arrangement with the service provider.
- You can do this for the phone bill, the tax office, and most others. Institutional service providers are more lenient as they have thousands of customers; smaller service providers (like your bookkeeper or graphic designer for example) will be less flexible.
- By making arrangements to pay at new due dates, you are able to move around your payments to coincide with money coming into your account.
- Don’t forget about credit rating – you don’t want to extend beyond their timeframes and into what is categorised as being in default. Being in default can potentially impact your credit rating, so make sure you stick to agreed payment plans.
- Always communicate on an ongoing basis, especially if you need more time, but never stop communicating with your creditors when you have cashflow problems. That is the worst thing to do.
4. Increase fees 10%
This may not help immediately unless expect to receive income sooner rather than later.
- If you haven’t increased your fees for a while, you should do this anyway as good business practice!
- Small increases can help improve your cash flow quite quickly, particularly if you still insist on charging by the hour (if you work with me at any point, hourly fees will become a thing of your past!).
5. Retainers
If you do work on a regular basis for any of your clients – and ideally you do – you can propose that you shift your arrangement to a retainer. This will give you monthly income rather than waiting for potentially months to be paid after you’ve provided the service. I highly recommend this strategy as a standard business practice for service businesses wherever possible.
6. Fees upfront
This is fairly common practice, so if you haven’t done it before, you do need to start.
- A good strategy if you charge retainers.
- A good strategy if you charge by a project fee – typically a percentage to commence a project and a percentage on completion.
- The longer the project, the better for you if you charge more upfront, with one or two progress payments, so the bulk of the fees come to you quickly.
- Works even better if you combine with the next strategy…
7. Exchange discounts for earlier payment in full
For example, if a client elects to pay in full, you will give them a discount. The size of the discount is directly related to: how responsive the client is to reducing their costs, how large your overall fee is and how urgently you need the cash. This is an effective strategy to improve your cash flow quickly but don’t be tempted to give it all away. Twenty percent works well – it’s enough of an incentive to most clients, plus it is a cost to you but consider it a cost of acquiring cash.
8. Set terms and follow up
- Whatever terms you decide on, make sure they’re adhered to.
- Always follow up to make sure you’re paid.
- Some companies will pay their creditors in order of who is most demanding of being paid!
- If you don’t want to follow up, have someone do it on your behalf.
- If you are a solo professional, I highly recommend that you find someone to follow up on your behalf, so you can look after the client, have someone else interface with their accounts department.
9. Client growth
When you need more business the golden rule is always to revisit your existing/previous clients. Do they need a refresher; do you have a new service to offer them; what ways can you add more value to their organization? Do you have any inactive clients who you need to reactivate? Spend some time to think about your client base, and what you can do for them.
10. Find your friends
This strategy goes hand in hand with number 9. Catch up with everyone. Where appropriate, ask for referrals to increase your potential leads; meet with ‘connectors’ to increase your contact base. Get out there and talk to everyone.
Finally, stay calm, stay focused on what you have to do to sort out your cashflow, then focus on getting new business and increasing your revenue in the next 30 days.
–Jenny Stilwell is managing director of Bossmentor, which provides strategic advice and support to help business owners get clear on their strategy and the right structure to achieve growth.
