There is nothing that can derail a business faster than poor cash flow.
Even with rosy prospects in the pipeline, a strong product line, and a stellar reputation, if you don’t have the cash to keep operations moving, your business will grind to a halt. It may even be forced to close.
The good news is that there are eight very specific things you can do to stabilize cash flow and insulate your business from cash fluctuations. These are the hidden keys to stabilize cash flow:
1. Design your offerings to have healthy profit margins
Business owners often price products and services without analyzing what it takes to sell them profitably. They also consider their paid time profit, when it’s actually categorized as an expense to the business. As Mike Michalowicz outlines in detail in his excellent book, Profit First, these factors matter in determining profitability:
- The time required to deliver the service or create the product
- Contractors or other paid resources (virtual assistants, subcontractors, design services, etc.)
- Business overhead (utilities, insurance, and software subscriptions)
Here’s an example of developing an accurate sense of profitability:
You charge your client $1,000 for two hours of consulting.
Your actual expenses to deliver the entire project:
Working fee: $150/hour = $675
- 2 hours of session prep time: $300
- 2 hours of session delivery: $300
- 30 minutes of follow-up: $75
Total cost of business operations:
- Cost for office space: $85.38
($3,000/month = $18.75/hour x 4.5 hours)
- Cost for utilities, insurance, internet, software, and outside services: $33.75 ($1,200/month = $7.50/hour x 4.5 hours)
- Taxes for project income: $150.00
($1,000 x .15)
Total income for the project: $1,000
Total expenses for the project: $944.13 (Working fee plus the cost of business operations.)
The total profit to the business for this project: $55.87
That means you’re putting in more than four hours of work for only $55.87 in profit. To make this service more profitable, you could:
- Increase your fee. Charging $1,500 for the same process would result in $555.87 in profit for the same time.
- Standardize your consulting process to reduce the number of hours of prep time required to deliver effective service.
2. Receive payment in a predictable way that minimizes your risk of chasing invoices
Sometimes, payment delays are the result of poor organization and planning on your part. You can prevent some cash flow issues by setting clear payment policies and staying on top of project communication.
Here are some planning tips:
- Structure services to be paid upfront.
- Have clear parameters for project payments. For example, you could include, “Due in 30 days or by the completion of milestones.”
- Have clear refund policies in place.
- Complete your work in a timely manner.
- Communicate with your client on a regular basis with project updates and status.
3. Set a clear, consistent, and organized way to manage your financials
Very often, cash flow problems seem like surprises because the business owner did not have accurate and up-to-date financial information.
Here are some tips for managing your business finances:
- Implement accounting software like QuickBooks or Xero
- Select a professional accountant to review your work
- If you don’t have time to manage your books, hire a bookkeeper
4. Have your marketing operations up and running and plant seeds for new business every day
Too many business owners execute marketing in sporadic tidal waves of activity. Instead, build your marketing plan to include very specific, small, and easily actionable activities that you can implement every single day in less than 15 minutes.
I call these “Tiny Marketing Actions (TMAs).” Depending on your industry and the related sales cycles, seeds you plant today may not bear fruit for 6-12 months, or even longer.
Here are some tips for marketing:
- Create a clear and organized marketing plan, that defines your audiences, messaging, strategies, and specific tools.
- Set up TMAs from this plan that take less than 15 minutes to execute every single day. For example: reach out to past clients to check-in, share a post on social media, pitch a talk at a local organization, or connect with key connectors on LinkedIn.
- Implement TMAs on a daily, weekly, and monthly schedule.
- Automate as many of your marketing actions as you can. You can do this with tools like marketing automation software or online scheduling applications.
5. Have a clear and organized way to follow up with leads
Nothing feels better than going to a conference or networking event and having conversations with interesting partners and prospective clients. Too often, the momentum gained while in person is lost if you take too long to follow up after an event.
Here are some tips to follow up on leads:
- Before going to an event, block time on your calendar for immediate follow up once you get back to the office
- Implement a follow-up software like Contactually, HubSpot, Insightly, or Zoho
- You can also create an Excel spreadsheet to track leads and follow up actions
- Keep your inbox clean and follow up on emails in a consistent manner
6. Have an effective sales process and close business in an effective way
Part of your cash flow problem may be that you’re losing sales you’re capable of winning. This limits the amount of time you have to devote to chasing new business.
Here are some tips for closing sales:
- Evaluate your sales process from start to finish.
- Create helpful sales collateral such as sales pages, content to share during the sales process, testimonials, proposal templates, and standard emails.
- Focus on developing your selling skills: communicating value, holding sales conversations, and listening to client needs.
7. Pursue a backup line of credit for your business and manage it effectively
Lines of credit, when used responsibly, can cover times when you’re waiting on delayed payment. It’s important to manage them effectively. Also, be sure to pay off your balance as soon as cash returns to your business.
Here are some tips for business credit:
- Evaluate and polish your credit to ensure the best interest rates.
- Explore the line of credit options with your local banker or an online banker.
- If you’re still working full-time and have a side hustle, establish your line of credit while you’re still employed. This will increase your odds of approval.
8. Prioritize your time to include planning and implementation of business administration activities
These cash flow mitigation strategies require you to be proactive in your organization, planning and daily habits. It’s critical to schedule time for this work, so you don’t continue putting them off until a cash flow crisis occurs.
Here are some tips for prioritizing your time:
- Set aside time every two weeks to focus on the cash flow of your business.
- As soon as you get a big new project, block time on your calendar for the administrative activities necessary to deliver the project.
- Schedule time with your business advisors to help you think through your strategy. CPAs, financial planners, business coaches, lawyers, and bookkeepers can weigh in with expert advice on key financial matters.
It’s impossible to control every part of cash flow. But, by strengthening these eight areas of your business operations, you’ll reduce fear and uncertainty, increase cash in your business, and ensure your business thrives in the long-term.