Managing Business Cash Flow
It should go without saying that maintaining a steady, positive cash flow is critical to keeping your business afloat. After all, if you don’t have the cash, you can’t pay your bills. And, if you can’t pay your bills, you won’t be able to stay in business for long.
Let’s focus on billings & collections and how they impact cash flow.
Billings
If you don’t bill your clients, you won’t get paid! It’s a no-brainer, but I’ve seen business owners struggle to get their client billing out in a timely fashion. In some cases, clients start chasing after the business owners for invoices. Crazy, huh? Look, I get it. Perhaps you’re a one-person show (ex: sole proprietor, single-member LLC, independent contractor, freelancer) or you’re a business owner always on-the-go and you’re overwhelmed with client projects and assignments that you don’t have time to get to those invoices. You MUST make the time!
Sure, there are some clients who may pay invoices as soon as they get them, but many will typically pay on NET 30 terms. Even then, those NET 30 terms may easily become NET 45, NET 60 or worse. If you send a client an invoice after you’ve completed a project or assignment, you may not get paid for at least another 30 days. That in turn may require that you spread out your existing cash and vendor payments to ensure you have a cash buffer/reserve. If you’re cash heavy, it may not be a concern but if you rely on that cash flow to pay your monthly bills and expenses and don’t have a cash buffer/reserve, you won’t be able to afford waiting 30 days or longer for that cash to come in.
Establish a billing schedule based on your business and billing volume but at the very least, you should be billing your clients on a monthly basis. If you have a lot of volume or time-sensitive billing, you may need to bill weekly or on-demand/as needed. Regardless, you need to dedicate time to get your invoices generated and sent out (electronically, if possible) to clients. There’s good Accounting/Finance software available to help you manage your business finances (I’ve used Intuit QuickBooks for years) and/or you may consider hiring a bookkeeper or professional to do the heavy lifting. Consult with your CPA for guidance. And, if you’re thinking about going the makeshift route of using a Word or Excel invoice template to generate invoices, DON’T DO IT! Use proper Accounting/Finance software!
Keep in mind that if you have direct costs (COS, COGS) associated with client projects or assignments, those vendors expect to be paid on a timely basis. If you’re relying on payment from the client to cover those direct costs, you better hope those vendors will be understanding and cooperative when you’re still waiting on client payment. If they’re not, you may end up paying out-of-pocket to keep those vendors at bay and relationships intact. Also, do not treat monies for direct costs due and payable to vendors as part of your cash flow. Those monies do not belong to you and should never be co-mingled.
What do I mean? Let’s say you bill a client $25,000 for a project. $15,000 is for direct costs associated with the project (third-party vendors, production, media expenses, etc.) and $10,000 will be income to you. The $10,000 (not $25,000) will go towards YOUR business cash flow to cover house bills and business operating expenses but the $15,000 should be earmarked for direct costs (COS, COGS) due and payable to the respective vendors. Do not use those monies for your own business cash flow needs!
Tip: If you are running into issues getting clients to pay timely so that you can in turn pay vendors for direct (passthrough) costs associated with client projects, consider prebilling (aka advance billing, billing on estimate) your clients for the direct (passthrough) costs or having the direct costs billed directly to and paid by the clients.
Collections
Sending an invoice to a client looks good on the books but it doesn’t mean anything to cash flow unless you get paid. If you’re using Accounting/Finance software, you’ll have access to a range of reports. You’ll need the Open Invoices and Accounts Receivable (A/R) Aging reports. You should be reviewing these reports often. I typically review these reports on a weekly basis but depending on your business and billing volume, you may be able to review these reports on a bi-weekly, semi-monthly or even monthly basis.
When you see past due, unpaid open invoices, you need to follow-up with your clients. Send them an Open Invoices report or Account Statement, let them know which invoices are past due and inquire on payment status (when are you getting paid). Perhaps the invoice was misplaced or lost in the shuffle or maybe the check was lost in the mail. Regardless, you want to be proactive NOT reactive. Sure, you don’t want to be the squeaky wheel but if you don’t do it, you won’t get paid, your cash flow will be impacted and there will be a domino effect.
Get into the practice of sending monthly Account Statements or Open Invoices reports to your clients. This is a good way to remind clients of what invoices have been sent over, which invoices are still open & outstanding, and it helps to address invoices that may have gotten lost, misplaced or forgotten.
Offer your clients electronic payment options (if possible) like ACH and wire transfers in lieu of check payments. You won’t need to worry about lost checks and you typically get the funds faster. However, do check with your financial institution to find out if they charge fees for incoming ACHs and/or wires. The last thing you want is to be assessed hefty bank fees. If you’re considering accepting credit card payments and/or PayPal, you’ll need to carefully consider the potential fees and decide for yourself whether it’s worth it. Unless you can afford losing some of your income toward fees, it may not be worth doing.
Your billings and collections make up an important part of managing and maintaining a healthy cash flow for your business. If you find yourself struggling to stay on top of your billings and collections (and/or managing your business finances, in general), speak with your CPA for guidance and assistance. You may also want to consider hiring a professional (ex: bookkeeper or outside firm) to manage your accounting functions and business finances.