How to improve your cashflow
The first step to improving your cashflow is understanding your cash flow (and measuring it). For instance, you probably know how much money you have in the bank (or how far into your overdraft you are), but do you really know where the money is coming from and where it is going to?
Profitable businesses can run out of cash. You can be making money but running out of cash at the same time, because your costs and when you have to pay for them are growing quicker than you can get your cash in. This is caused by an imbalance in your cash cycle.
Very simply, your cash in cycle starts at the point you receive a commission or an order from a client. You start to incur costs and this continues through to the point where the project is signed off by the client and delivered. Then you can invoice it and wait on payment. This is illustrated graphically below
Cash flows out until the very final stage when payment is collected. It is easy to see how to improve this – either cut down the amount of cash flowing out, reduce the time from order to cash collection or both. Let’s look at these separately.
Reducing cash out
In the agency environment, reducing the speed of cash out may be quite difficult as many of the costs are fixed and the overall project value related to direct purchases is often quite small. Employees don’t respond well to late wages! If you use subcontractors then you can negotiate extended payment terms with them, or terms which tie in with when you will receive cash. However, you can offset the cash going out by agreeing stage payments with the client, so in effect you create a number of smaller projects, each of which has a payment point.
Reduce time to delivery
Cash flow is driven by when you get paid and the quicker you can deliver a project the quicker you can get paid. This seems obvious, but many businesses don’t focus on putting processes in place to shorten project cycle times. Don’t keep reinventing the wheel! If you have done a great piece of work which is transferable across projects, take the time to document it and make sure all the relevant people in your business know about it. Agree project timetables at the outset. This has both the benefit of driving you to complete the work, but also makes sure that the client is available for meetings at points you have agreed. Work in progress (wip) is the enemy of cash flow – it’s work done but not paid for. Delays in getting meeting with clients to agree changes or get final sign off can cause your wip to grow and grow!
Get paid faster
It’s really important to agree payment terms at the outset. That way both you and your client know where you stand. Agreeing deposits to be paid before work commences or stage payments at key points in the project will help you get cash in quicker. There are also some golden rules for invoicing. They may seem obvious, but do you always follow them?
- Invoice at the earliest date possible. Once the work has been completed, don’t wait 2-3 days to send the invoice out. Get it to your client as quickly as possible.
- Make sure your invoice is accurate. A wrong invoice is a great way for a client to delay payment. Don’t give them the excuse!
- Make sure it goes to the right person for sign off. Particularly in big organisations, the person who needs to approve your invoice probably isn’t the one who will raise the actual payment. Make sure you know where the invoice should be sent.
- Make payment easy. Put your bank details on your invoices. If you use a modern financial system like Xero you can have a payment button on your invoice to allow your customers to click and make and immediate card payment.
If a client goes past the agreed payment terms don’t hang about. Get on the phone and find out if they have received the invoice and if there are any problems. Remember, you’re not a bank, so if the work has been completed and the client is happy don’t be afraid to ask for payment. Most business people will also have been in your shoes chasing payments and they’ll respect you for running your business well and asking for prompt payment.