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Why cash flow is King and what to do about it

Why cash flow is King and what to do about it

10 October, 2017

Last week we talked a bit about finances and accounting as a freelancer and this week we’ll take a look at a related area that a lot of new business people like yourself struggle with, particularly when they are just getting started, and that is cash flow.

The basic issue is this, you have money coming in from customers but you also have to spend money to make sure you provide that service or product to your customer. So, the question becomes:

“Do I have enough money on hand to make all the necessary expenditure, so that I don’t run out of money before I receive the next payment of an invoice?”

If your available money becomes low or you go into debt to make your necessary expenditure, this is regarded as a lack of cash flow. And if we don’t have enough money regularly coming in, eventually it’s impossible to keep going.

To put it another way, it doesn’t matter how much money you are owed in the future (even if you’ve got lots of large invoices outstanding) if you don’t have enough money to get from now to when those invoices are paid then you’ll be in a lot of difficulty. And you probably realise that even with a specific date on the invoices you send out, there are plenty of people who will delay and make excuses for why they can’t quite pay just yet. So you need enough money on hand and enough regularly paid invoices to be able to keep operating.

This can be daunting but just by acknowledging this issue and understanding the basics of how your money works, you put yourself in a much stronger position for success. So how do you manage this and give yourself the best chance of maintaining a steady cash flow?

Improving your cash flow

Here are four areas you can focus on to help improve your cash flow.

Sales and leads.

Not wanting to state the obvious but at the end of the day, cash into your business should be coming from sales made by people who are interested in your offering (i.e. “leads”).

This means that the best place to spend money other than on the essentials of providing your product/service is on marketing and sales. So take some time to think about what your marketing activities are, where you find your leads and how you convert them into a sale. Also consider how you can do this cost effectively. For instance, currently Facebook advertising can provide you with an extremely cost effective way of reaching very targeted demographics. A quick search on “how to do facebook adverts” will give you a great jumping off point.

In fact many modern small businesses are even reversing their sales/product creation process by pre-selling products that don’t necessarily need building until after they have the sale. For instance, if you are currently an employee but would really like to go off and pursue your dream of being a freelance web designer. Instead of jumping ship and then hoping you have customers down the line, why not spend the next month advertising through Facebook ads to your target customer, or using your network of conections to find 3 or 4 new clients and agree a timeframe for completion that gives you time to resign and start building their website. Then you know you have the sales before you leave your current employment.

Keep expenses to a minimum

Again this can seem like an obvious thing but you’d be surprised how often people don’t truly stick to only spending money on the essentials. And remember, this is just as important for your business expense as it is for your personal expenses as this determines how much money you draw out of your business.

So for example, if you are a budding web designer. Are you spending money on hosting for your clients that is the best value for what they need. You might fall into the trap of having the best hosting on the market, but if their website only demands certain resources, having all the other bells and whistles is simply a waste of money. Can you have different hosting options for different customer needs?

Or, are you eating out every night of the week? Could you reduce this to once a week? Saving money in your personal expenses will mean needing to draw less money out of your business, meaning there will be more money on hand when needed in the business.

Payment model

Ideally you want a payment model that encourages cash flow. Have you considered what your invoice terms or expectations are? If you are sending out invoices with a traditional 28 day terms after the service is provided, that’s a long time to wait for money to come into your business. Here are some questions to ask yourself:

  • Could you request payment on receipt of invoice?
  • Could you request payment in full in advance?
  • Could payment be made 50% up front and 50% on completion?
  • If you’re providing an ongoing service, have you thought about a subscription model with monthly payments? This can often be a win/win situation for you and your customer because it becomes more affordable for your customer in the short term but over the course of a year you might charge more than if they were to pay in one lump sum, so your annual revenue per customer is higher.

Forecast your cash flow

You really must have a sense of what’s going to happen in the future. We can’t literally see into the future but we can forecast our cash flow to make very well educated estimates and this will enable you to plan for difficult times.

For example, if your industry has a seasonal ebb and flow and you know that you will have little or no income in January then you know you need to keep a certain amount of cash in reserve for this time period.

We’d suggest a quick search for “How to Project Cash Flow” and we’ll put up our own guide for this soon.

But the essence is this. Collate all your known repeated monthly expenditure and put this into a spreadsheet alongside all your expected income. Then look for where the margins become close or negative and start to plan for how you might manage that. Can you bring some payment terms forward? Can you make a new sale? Can you delay an outgoing expense for a period?

Conclusion

We know that talking money can seem daunting at times but just remember, if you spend a bit of time now putting yourself in a knowledgeable situation, you put yourself in a much stronger position for success. So don’t just hope for the best, know what you’re getting into and use our tips to help you along the way!

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