Get in the (Cash) Flow
I’ve been self-employed for eight years now and what I love most is being in complete charge of my earning potential. What I really hate, however, is having little control over my earnings’ arrival. Some days, that uncertainty can have me longing for the salary years.
Every day I head to the mailbox in nervous anticipation. Will today be the day that invoice I sent six months ago finally gets paid? Will I joyfully head to the bank to deposit a mad amount of money, or be relegated to borrowing from savings to pay checking until the company’s byzantine accounting department decides to cut me that fat check?
It’s the feast or famine of freelance life, one experienced by many people who are dependent on irregular payments from a mishmash of clients. But it’s really the wrong way to do business, says small business expert Denise O’Berry, author of “Small Business Cash Flow: Strategies for Making Your Business a Financial Success.” We go into business for ourselves because we want freedom, but if we can’t maintain stable cash flow we’re prisoners to our payment cycle. Or worse.
“If you don’t manage cash flow your business won’t survive,” O’Berry says. “If you have more money going out than you have coming in, then you don’t have any way for your business to do what you need to do.” Also, when you manage your cash flow, rather than it managing you, you can gather information vital to charting a path toward growth, a.k.a. more feast and less famine. Instead of living for that daily walk to the mailbox, you’re confident that your business will be strong regardless of what the mail carrier brings that day.
How do you get there? Here are five strategies.
Set Up a Cash-Flow Budget
In order to manage your money, you need to know how much you have, how much you spent and how much you anticipate earning. O’Berry recommends creating a cash flow budget sheet that forecasts profits and expenses for six months into the future. This helps being unprepared for budget-crushing big bills, such as that quarterly tax payment or insurance bill. “It’s awful to be in one of those famine stages and get this notification that you owe hundreds of dollars,” O’Berry says. “Planning into the future helps you sleep a lot better at night.”
Putting numbers to paper also helps you see trends that can grow your profits. Look six months into the past and see when your sales soared. Did a certain marketing campaign work really well? If so, you now know you can repeat it and expect similar results. Conversely, if sales were down you know you either haven’t been marketing enough or your methods need to change.
Negotiate Payment Terms
The traditional “payment due within 30 days” tagline on an invoice is outdated and bad for business, says O’Berry, especially in an age when payments can be made quickly via credit card or PayPal. In order to keep cash flowing, you need to be paid as quickly as possible. “When you go to the grocery store, you don’t walk out of the store and tell the grocery store owner, ‘I’ll come back in 30 days to pay you, and only if I like this food,’” says O’Berry. “So why would it work for people that are service providers? It’s just silly.”
Ruth Anne King, 56, owner of Business Ventures Corporation in Norcross, Ga., says getting paid quickly is the key to healthy cash flow. “Ask for cash on delivery wherever possible,” she says. “Make friends with the accounting department. Clearly state payment terms on all invoices, send invoices electronically and call to make sure they are received and send invoices the same day as the products are delivered or the projects are completed.”
Since 30 days is the norm, don’t wait until the project is done to address the issue of when you’ll get paid. Whether it’s “payable upon receipt” or “within five days,” make sure you negotiate this point with your client when you take on that work. If you have a signed contract, add payment terms that are agreeable to you and negotiate ones that are not. Consider asking for partial payment upfront, before starting the project.
And if a client doesn’t pay promptly, thus forcing you to waste billable hours on chasing down payment, the solution is simple: Don’t work with her again, O’Berry says. An aggressive marketing campaign can make you less dependent on clients who don’t pay promptly.
Bank Your Payments
When you do get that huge payment, don’t suddenly start buying rounds for your employees. Instead, bank that money. “Many times cash flow gets low because we overestimate how far we can stretch a dollar,” says Lisa Cash Hanson, 43, CEO of Snuggwugg Inc. in Las Vegas. “Most entrepreneurs are very optimistic that way. So when cash flow is high I don’t overspend. I operate the same whether cash flow is high or low and that helps maintain consistency.”
And just like your household budget, you should have six months of reserves to get you through the famine times.
Don’t Become Complacent
When your bank accounts are flush is exactly when you need to keep marketing like mad. “People get a windfall and sit back and think, ‘I don’t have to market now because I have all this money,’” O’Berry says. “That’s baloney because your market will forget about you, and your competitors will come into your space. Continue to do the same practices that you’re doing as if you are in famine mode.”
Even if you feel you are too busy to search for new business, figure out a way to preserve that niche of time to focus on marketing. You can do this by outsourcing those tasks that don’t earn you money and don’t require your special touch. The extra earnings during the feast mode can be used to pay for help, thus freeing up your time to focus on the money-making tasks. And with any luck, you’ll be able to stave off the next famine.
Develop a Solid Referral Strategy
To maintain cash flow, you must maintain solid work flow. And it costs a lot more to bring in new clients than to get more work from current ones. So, leverage your current relationships and see how you can not only continue doing work for the same client but how you can use their network to bring in even more work. “With that kind of word-of-mouth strategy you can pull back a lot on your marketing,” says O’Berry. And you’ll ensure a steady stream of work that will turn into steady cash flow.