Navigating cash flow challenges
Some tips to have a healthy, less stressful business.
This topic has been coming up more often with the clients I’m working with and potential clients in our discovery calls. They’re running creative businesses that are doing well, but for one reason or another, they’re struggling in terms of cash flow.
One note — I’m not a bookkeeper, accountant, or finance professional. That said, I’ve been running P&Ls and Cash Flow Statements in one form or another (as a business executive, business owner, and business coach) for 20+ years, so I know my way around basic business finances and how to use them as a tool to help you scale. If this post raises questions for you, check with your accountant, bookkeeper, or financial advisor.
What cash flow is.
For service-based businesses, cash flow CAN be synonymous with a profit and loss statement, but that’s not always the case.
Here’s a visual refresher from Business Lesson 1 — Know your numbers from the start.
If you’re running low on cash at any point throughout the year, having a good handle on both of these reports will help, but especially a cash flow statement.
What causes a cash flow crunch?
This is what I see (and have personally experienced) when it comes to running low on cash. Take a read through and note those that apply to you.
Not working on your business: This is by far the biggest challenge I see with my clients. When things are going well and you’re full-up with client work, the first thing to go is working on your business, specifically doing proactive outreach, and focusing on business development and marketing efforts. When things slow down, which they inevitably do, there’s no funnel to help fill the gaps in your client roster.
Inconsistent income: If you’re heavily project-based in terms of your service offering, fluctuating revenue can lead to periods of high income followed by slow periods with little or no revenue. Add to this your payment structure and you could have additional dry spells.
Not having retainer agreements: Without retainer agreements (aka “ongoing contracts”), you might struggle to produce consistent income streams.
Delayed payments: You might find yourself in a situation where clients are slow to pay, which may lead to gaps in cash flow. Many small business owners are loathe to enforce penalties for late payments or create incentives for timely payments.
High overhead costs: Your expenses such as rent, insurance, software subscriptions, and salaries or contractor payments can quickly add up and drain your cash.
Poor financial planning: If you’re not putting in the time to forecast and budget on a quarterly basis, you can end up with unanticipated expenses or insufficient funds when revenue gets lean.
Over-expansion: When business is good (really good), it’s easy to over-invest in resources and infrastructure. Financial management goes out the window.
Inefficient project management: I don’t see this that often, but didn’t want to omit it, as there’s a chance you might have been in this situation. You end up with a poorly managed project where your time is consumed and/or you have increased costs to complete the work. This results in reduced profitability, which affects overall cash flow.
Now that you have your list, here’s…
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What you can do about it.
To more effectively manage your cash flow, to ensure financial stability and long-term growth (and end your sleepless nights)…
Consider doing some or all of the following:
Create a cash flow forecast: If you don’t already have one, create a cash flow forecast to anticipate upcoming revenue and expenses. This helps in planning for slow periods and managing working capital effectively.
Regularly update and monitor your cash flow statement: Make it a habit to update and review your cash flow statement to understand where your money is coming from and where it’s going. Book the time each quarter (or month) and don’t skip the session. Analyzing your cash flow statement can help you identify trends, anticipate future cash needs, and make informed financial decisions to manage and grow your business.
Pay attention to seasonality in your business: Based on your history, can you identify consistently slow periods where revenue has dipped? If so, knowing this can help you with your cash flow forecast. You can build in the slow periods.
Maintain a cash reserve: If you don’t already have one, open a business savings account and set aside a portion of your revenue each month in that account to build a cash reserve. This buffer can help cover unexpected expenses or gaps in income during slower months.
Build non-negotiable business development time into your calendar: Even one hour a week can make a difference. If something pressing arises in the allotted time, you move the block to another spot in the same week (no punting to the next week).
Diversify your income streams: Explore additional revenue streams, such as digital products, workshops, or affiliate marketing, to reduce dependence on a single source of income. Diversification can help stabilize your cash flow and provide financial security.
Implement retainer agreements: If it fits with your business model and service offerings, have clients sign retainer agreements for ongoing services. You get a steady income stream versus one-time projects. This was the case with one of my very first consulting clients. Our work together for the first couple of years was to increase the percentage of revenue coming from writing contracts versus project-based opportunities.
Invoice in advance: If you have retainer clients, invoice in advance so that each payment arrives in your bank account at the start of the month in which you’ll be doing the work. If you have project-based clients, invoice 50% at the start of the project so that it’s paid before you start working, and the remaining 50% before you deliver the final product. Another option to smooth out cash flow would be to invoice the second 50% in two installments of 25%, the first payable halfway through and the second before the final deliverables are submitted.
Negotiate better payment terms: Work with clients to establish payment terms that benefit your cash flow, such as requiring a deposit upfront or offering discounts for early payments. This can help ensure you have the funds you need when you need them.
Streamline invoicing and payment processes: Consider using automated invoicing systems to send out invoices per the above plan and set up reminders for overdue payments. And offer multiple payment options to make it easier for clients to pay on time.
Review your expenses each month: Conduct regular reviews of your business expenses to identify areas where you can cut costs, change plans, or find new online tools. Also, take a look at what’s working and what’s not in terms of your business development and marketing spend. Cut what’s not delivering the desired results and redeploy those funds to initiatives with a better return on your investment. You’ll increase your profit margins and improve cash flow.
I hope there are one or two takeaways here for you to adopt in your business to improve your cash flow.
Until next time.
Katherine
#ICYMI
Business lesson 1 - Know your numbers from the start
Business lesson 2 - Choose your clients and customers wisely
Business lesson 3 - Don’t undervalue your services or products
Business lesson 4 - Know your client/customer and why they buy from you
Business lesson 5 - Everything is a test
Business lesson 6 - Pretty much everything will take longer than you think
Business lesson 7 - Don’t jump on every business and marketing trend
Business lesson 8 - Passive income is not passive
Business lesson 9 - Thoughtfully spend money to make money
Business lesson 10 - Ask for help
Business lesson 11 - Build a business that works for you
On being adaptable in your business - Flexibility is key to success in business
Not all business is good business - The art of saying no
On what you expect to see - And missing what's right in front of you