Having a positive cash flow doesn't always mean you're turning a profit. In fact, your company may have strategic justifications for going into debt, such as taking on a new client.
And that's OK—as long as you know in advance how to manage your cash inflows and expenditures. This can help ensure the new engagement doesn't hinder your ability to run your business.
With a few small changes—and by learning how to maintain a positive cash flow—you can be prepared and avoid running out of cash. The following have helped me. They may help you, too.
1. Before every engagement, ask how this new client will affect your cash flow.
Not every client engagement is equal. Some engagements require more upfront investment than others, and that can negatively impact your cash flow.
Before you take on a new client or project, it's important to ask yourself how the engagement will impact your business. Start by thinking through how you'll set up and manage the engagement—where the initial funds will come from and when you need payment.
If you're a small-business owner, you can track this information in a spreadsheet or your accounting system. If you have a finance team, you can ask them for their feedback. Either way, it helps to understand the impact before you commit.
2. Adjust contracting times appropriately.
A lot is decided during the contract process—both with your clients and your vendors. That's why it's important to have everyone on your team looped in as these decisions are made.
If there's a particular engagement you want to take on that requires a lot of upfront costs or a delayed payment, there are ways to break up the costs so you can still maintain a positive cash flow. It may require that you adjust your contract terms before you start.
You can do this by ensuring your contract, milestones and payment dates don't overlap with the terms you have with your vendors. For example, if you have a 30-day-net grace period with your clients, you may want to consider implementing a 45- to 60-day grace period with your vendors.
This can help give you time to float that additional cash (or manage late payments). If you have a legal department, you may want to get them involved as early as possible so the contract isn't delayed. And, just as noted above, it helps to get your finance team involved, too.
3. Ask for deposits.
I run a service-based company. Whenever we take on a project that is expected to last longer than 30 days, we require a portion of the project be provided upfront.
For projects that are expected to last between 30 and 90 days, we ask for a 50 percent down now and 50 percent down at the end of the projects. For projects that last more than 90 days, we may ask for deposits—based on project milestone—throughout the engagement to help supplement our costs.
Doing this provides us with a built-in grace period. In an ideal scenario, the deposit covers our initial contractor fees, but that's not always the case. When it's not, the contract terms help us ensure that we're able to cover our costs for the difference.
4. Take out a loan.
If you're running a product company and need cash on hand to service a large account, you can always look into taking out a small business loan to help cover upfront costs.
Having extra cash on hand just in case is a helpful way to ensure a positive cash flow. It can help ensure that you have the funds to cover product creation, operations and delivery without it negatively impacting your business. You can start by requesting a loan through your local bank or credit card company.
5. Opt out of risky situations.
Saying no to a client sounds crazy, but sometimes it's the right decision.
If you run into a situation where you know that a client is in trouble or is notorious for not paying their bills on time, then the best way to protect your positive cash flow may be just to say no.
6. Keep your funnel full.
One of the best ways to maintain positive cash flow is to keep your sales funnel full. Networking, marketing (content, digital, events, etc.) and reliable partnerships are all great ways to ensure that you have revenue coming in on a consistent basis. Consider making this part of your process as well as operations and execution.
Maintaining positive cash flow while you're waiting on a client to pay isn't always easy, but it's important. It may simply require a little upfront work to ensure all of the members of your team are involved and your business is set up successfully.
Read more articles on cash flow.
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