If you’ve been in business for long, you’ve undoubtedly hit a cash-flow dry spell at least once and found yourself scrambling for funds or credit sources. It’s not fun. If the problem persists, or if you don’t have a ready source of cash or credit, cash-flow problems can make it hard or impossible for you to sustain your business.
If you’re new in the game, take this piece of advice: It always takes longer than you think to go from handshake to cashed check. Figure six months — yes, six months — between the start of a job and final payment. It may be sooner, but it could be longer, and it’s better to err on the side of caution.
Why care about anticipating cash flow? First, and most obviously, you need cash to pay expenses, so a steady flow is imperative. But by better understanding cash flow, you’ll be able to spot potential bottlenecks in time to reduce their impact.
Look out for these signs that your business may soon run into a cash-flow challenge:
- Reduction in contracts with major clients
- Declining client base
- Increase in time to collect receivables
- Failure to meet your goals
- Contributing your personal funds into the business
The best way to project cash flow is with a cash-flow statement. This can be as simple as matching your checkbook balance with a scribbled projection of funds expected to arrive over the next few months.
If you own a small business with employee salaries, payments on equipment, leased space, or have other significant capital or operating expenses, you may want to create a spreadsheet detailing monthly business expenses and projected income. It would be great to project for a full 12 months, but most creative professionals have difficulty confirming business for three months out.
Projecting cash flow is only half the challenge. The really hard part is knocking down the dams that keep cash from flowing. Here are a few tips:
- Reduce your overhead. If the well dries up, you have two choices: Make more or spend less. Spending less is a great place to start. Start by renegotiating with vendors and selling off equipment you may no longer need or on which you’re paying monthly installments. Move into less costly offices. Consolidate and reduce any debts you have, particularly high credit card interest charges. Take a hard look at all those little expenses that add up. Finally, extend beyond your work and reconsider your life expenses as well, painful as that might be.
- Be a collections champ. Your receivables are the lifeblood of your business. If you let them linger for more than 30 days, collecting becomes more difficult and your monthly cash flow is adversely affected. Give your clients continuing incentives for paying promptly. Once a client gets away with delinquent payments, payday has a tendency to keep sliding; 30 days becomes 45 days, which becomes 60 days. Studies have shown that the older the receivable, the less likely it will be paid. Let your clients know (gently) that they may be able to get away with paying other vendors late, but not you.
Figure out a strategy for dealing with past-due customers. For instance, start with an email, follow up with an email, call, call again, write a letter, go over somebody’s head, go over their head. - Offer discounts for early payment. It’s painful and regrettable, but better late than never and better half (or 75 percent) than zero. If bugging clients doesn’t work and you’ve completely exhausted all options, offer one last discount for final payment. And then never work with this client again.
- Revamp your credit policy. Do you have a clear-cut maximum credit policy? Does your contract indicate milestones for payment? Are you willing to hold up a project for payment? How soon do your invoices go out after the work is done? How soon do monthly statements go out following the last day of the month? Are the terms of your agreement clearly spelled out on all quotations, invoices, and statements?
- Do some sleuthing. Methodically investigate a new client’s financial payment history. For larger companies, use the Internet. For smaller firms, ask for names of other vendors. Use the telephone when checking trade references; vendors often talk more freely over the phone.
- Set up credit early. The worst time to ask for credit or a loan is when you desperately need it. Before you get to that point, find a source for a low-interest loan or a kindly relative willing to lend you money until you’re through the tight spots. Pay back promptly because a load of debt will only worsen your cash-flow problem and leave you without credit that you may need again later.
- Get more business. New business is a great source of cash flow and a lot more fun than chasing old money. Step up your marketing and networking efforts to find new clients.
- Bump up your fees. Blame it on the rising cost of gasoline — everyone else does. Increase your hourly rates modestly and pad your quotes with 10 additional percent unless you’re in a very competitive position.
You didn’t become a creative professional to worry about cash flow. But the sad truth is, if you don’t deal with it, you may not be able to stay in the business of being creative.
This article was last modified on January 6, 2023
This article was first published on June 1, 2007
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