Plain and simple, businesses fail when they run out of cash. Depending on their attractiveness to lenders and the equity markets, some businesses may exist for many years without generating the first dollar of cash. But at some point, every business has to generate cash to survive, and this basic tenet of business holds true regardless of whether you run a Fortune 500 company or a shaved ice stand.
But, positive cash flow is difficult to achieve, especially in a recession economy. Most businesses pay expenses well in advance of service delivery and invoicing to their customers. Accounting for this time lag between cash going out and cash coming in requires careful planning and attention.
Cash flow management in a professional services firm can be particularly challenging. Assume the following facts:
- Your firm accumulates time on a project for 60 days before the project is invoiced and delivered to your customer.
- Your customer then remits payment, but only after another 60 days has passed.
- Your project and overhead payables are due every 30 days, and you pay your employees on a semi-monthly basis.
In this scenario, you have paid four months of expenses between project inception and collection! In prosperous times, this time lag is masked by volume (i.e. robbing Peter to pay Paul), but in recession conditions, this cash flow scenario can kill your business.
Because it is much easier to change your internal processes than it is to get your customers to pay faster, here are a few observations on how to close that cash flow gap from an invoicing perspective:
- Bill regularly. I am surprised at the number of business owners who delay billing or simply bill irregularly. Your best opportunity to collect is when your service is fresh in the mind of your customer. Billing quickly and regularly will improve collections and lessen the risk of unknowingly providing additional services to a customer who is unwilling or unable to pay.
- Fix any problems with the system. Flow-charting your service delivery and invoicing processes will allow you to identify inefficiencies and bottlenecks. Eliminating unnecessary steps in the process can shorten the collections cycle by days, weeks, or even months.
- Set a monthly goal for getting invoices out and hold yourself and others accountable for meeting that goal. We close each billing cycle on the last Saturday of the month, and require that customer invoices be mailed by the following Wednesday. Meeting this deadline is the top priority in our firm, even in the busiest of times.
- Review invoice formatting. Does the invoice clearly state when payment is due and who to contact for questions?
Regarding collections, regular contact and follow up is vitally important. If payment is due within 30 days, don’t wait 90 days or more to initiate contact. Collection issues do not age well, and so it is best to handle these matters while they are current. Here are a few thoughts on how to improve the collections – most come from clients or others who have honed their processes:
- Develop a collections process and put someone in charge. The steps should be well-defined and documented. Know what you will do first, second, and third when the check doesn’t hit the mailbox on the due date. We represent a firm whose owner and controller meet each week to review and discuss receivables, which is an excellent way to keep collections on the radar.
- Consider extra measures for larger invoices and/or slow pay customers. Another client of ours calls customers to confirm receipt of the invoice and to review any questions his customers might have. The company places another call several days before the invoice due date to again handle any questions and, more importantly, to gain clarity on whether timely collection will be a problem. This may be overkill on every customer but should be considered as an additional measure for large invoices and/or new customers.
- If you have doubts about a customer’s ability to pay, take action. Think of your business as the bank – would you loan this customer money? If not, it may be time to lower the customer’s credit limit or revise payment terms. Securing advance payment before beginning additional work is one way to limit your exposure with a customer that you deem to be a credit risk.
Cash flow management is the key to business survival, and refining your business’s invoicing and collections procedures is essential to maintaining or improving the financial health of your business. Implementing some or all of these strategies will have an immediate impact on your business’s cash position.