Has the economy uncovered poor practice about cash flow, or has the economy made your customers worse at paying on time? Actually, it doesn’t matter, what matters is your cash flow. Many business owners (including some you’d think successful) suffer cash flow problems, even though it takes a while before they’ll admit it. “How to improve cash flow” is not something one gets asked….sometimes until too late (unless you’ve got cash just hanging around).
Fundamentals of cash flow
Do work bill get paid.
Good, that was really simple. The problems exist where the gaps are in that sentence. Let’s examine the normal problem areas.
How to improve cash flow: WIP
Work in progress is where you’ve start work and not finished it, or invoices that haven’t yet been raised. The longer the invoices sit around, the more likely the client will say “No”, query the amount, or even get stuck in their own cash flow problems!
This problem has two causes:
- Being slow at finishing the job and getting the customer to sign off on it. This is specially the case in business companies who get on with new work, and don’t quite clear the old work. A weekly tick list of work started and not invoiced will help you realise these jobs and remembering it’s better to finish a job and get paid than start a new job!
- It can also be about “extras”. The customer wanted some more done than they initially asked. If that’s the case get agreement to proceed beforehand, perhaps invoice the first amount immediately and and invoice the extras as soon possible after.
In reality the problem is more to do with your flawed thinking as a business owner. The assumption is that finishing small little bits, has lower priority than doing other chargeable work.
So, how to improve cash flow becomes “What helps to bill more regularly and ensure WIP is kept to a minimum”? Different thinking may be required, and that is often hard. Can you get somebody else to do it, or a better process?
In a discussion with one business owner recently he said “we never invoice in advance of work being done”, when asked “WHY” he couldn’t answer! You wouldn’t start work without a signed contract, why not also (at the least) a 50% deposit?
How to improve cash flow: Debts
Customers receive their service, and then they get the bill. A delay in them getting round to paying can cause problems too. Improving cash flow depends on how good your are at chasing debt!
Two things I’ve seen work well:
- Outsource the chasing to somebody else – perhaps even “just” a VA. Being outside of the firm it makes it easier to keep a focus and to politely remind the debtor.
- Regular payments: Why not bill monthly (if you have regular work), or with stage payments? What’s so hard in saying we’ll set up monthly payments?
How to improve cash flow: 5 tips
- WIP: Invoice as soon as job is complete. Don’t fall into the trap of thinking it’s just a couple of extras, many companies do!
- Outstanding debts: Get somebody specific (possibly outside of the firm) to be responsible for chasing, once you’ve given them a clear procedure.
- Monthly payment: Ask clients to pay in instalments (via Direct Debit), cash flow problem goes away.
- Selling in Monthly payments: “If you pay monthly there are no increases in fees this year”
- Visibility: Lastly (perhaps because I’m a coach), I recommend having clearly visible KPIs. Every business I know that implements clear KPIs find it really helpful and it gives appropriate focus.
It’s not profit that pays you, it’s cash. It’s a lack of cash that makes more businesses fail than a lack of profit. Should you measure the total amount of cash in (paid in, less paid out) each month?
What are you doing to improve your cash flow? A successful business is successful because it always has cash coming in, not because it sells a lot!