I talk a lot about cash flow in Small But Mighty – that’s because it is the lifeblood of your business. As a refresher, cash flow is the amount and velocity at which cash enters your business (and bank account).
There's a reason why cash is favored in economics and business. It is the essence of your business. To be clear, this is not your revenue, which is the total amount of money you are making, but rather when that revenue becomes cash. Here’s what I mean, let’s say you invoice a client for $20,000 to pay for a project you are working on with them. The $20,000 is revenue, but not cash since the client hasn’t paid the invoice yet. Now, let’s say you get a check from the client for your invoice- it’s still not cash yet, since it isn’t deposited. When you actually deposit the check and it clears – now it is cash.
Why do you care so much? Because having revenue is not enough, without converting it to cash, you have a lot less security. Let me give two examples of what I mean. Let’s say, as we did above, you invoiced your client the $20,000. After 30 days they haven’t paid, so you check in. They delay more and soon they aren’t responding to you. Next thing you hear, they are out of business because of financial issues. Now your revenue is $0 since the organization is no longer around to pay. But if you had the $20,000 in cash already, even though the organization’s going out of business would be troubling, it wouldn’t affect your profitability.
Another scenario - let’s say your invoice goes out and the next day you need to pay your employee for the work she did on the project. But your account is empty. Yes, you will have more than enough money when the invoice is eventually paid but until it is, you still have to meet your commitments. As a result you may find yourself lending your personal cash to keep things flowing (and now your own account is lean).
Both these are not far-fetched scenarios- I have known multiple consultants who have faced one or both of them.
And cash flows the other way too – as you pay your bills, you obviously decrease your cash position. Yes, your expenses, once incurred are something you need to pay, but when and how you can pay them can mean life or death for your company, as shown in the following example adapted from the field. Let’s say you have $100,000 in outstanding invoices; $15,000 in cash; and $14,000 in outstanding bills. From one perspective you look very good - you have $115,000 in assets (the cash + the outstanding invoices) and only $14,000 in liabilities, so you are up $101,000. However, let’s say you pay all your bills before your invoices are paid with your $15,000 of cash on hand. Even though you have $100,000 in invoices due to you and $1,000 in cash on hand, you have put yourself in a dangerously low position if any unforeseen costs come up or even if payroll or another expense comes due before those invoices are paid.
As you can see, how you handle the cash flow in and out of your company can make or break your firm – this is a large part of the reason people say “cash is king.”
Increasing Your Cash Flow
Though you may know that cash flow is crucial, it is hard to manage and affect. For example, you can’t usually invoice a client one day and have the funds deposited the next day. At the same time, there are some things you can be doing that are easy, acceptable, and will positively impact your cash flow quickly.
Here are five things that I have found to be most valuable in running Civitas Strategies:
1. Include an upfront payment – Whenever possible include a portion of your fee due payable upon signing a contract. For example, let’s say you have a $12,000 project that will be implemented over three months. You could state that the contract will be paid in four equal installments of $3,000, the first due upon signing and the rest at the end of each month the project is implemented. As a result, just starting the contract you will have $3,000 of cash immediately coming into your account. If you are working on payment based on a milestone or deliverable basis (i.e. you get paid when you complete a set part of the project) you can agree with your client to have an early win that would unlock at least some money quickly. I always include an upfront payment and have found even organizations that typically do not do an upfront payment will make an exception for me. Why? Because I use a clear rationale – the moment you start working for a client you are incurring costs (for example, a trip to meet them, initial research or the development of a work plan). These are all real costs and for a small business and being able to cover them with cash on hand (until you can make and get paid for your first invoice) can be difficult.
2. Set clear payment terms – Every invoice you send should have a date when payment is due. For example, you may have a statement on your invoice saying that payment is due within 30 days (which is typical, but you may adjust based on your business model and clients). This sets a clear expectation with your client up front and sets a deadline when you should ask about an invoice being past due and request prompt payment. This may seem obvious, but I know of many consultants who don’t do it and then, when payment is not forthcoming are hesitant to ask when they will get paid, further delaying when the cash will flow into their account.
3. Enforce your payment terms - When the payment term is up you must reach out. Monitoring the term can be easy – most accounting programs will visually indicate and even send you email alerts on past-due invoices. Once you know an invoice is past due, what should you do? First, take a deep breath – asking about money owed can raise anxiety to a level that leads to inaction. Remind yourself that this is not usually a contentious subject- typically it is an oversight and your client will be embarrassed and want to send payment as soon as possible. Here’s how to broach the subject. Send a quick email to the person responsible for invoices. Reattach the invoice and just write something like:
I just wanted to check in on the attached invoice. I sent it on July 1 and it is now past due. Usually you are such a prompt payer, please let me know if you haven’t received it (sometimes they end up in a SPAM folder).
Let me know the status and if you need any more information from me.
Typically, a missed payment is an honest mistake - most of the time your contact will fix everything and an expedited payment will arrive within a business day or two. If the issue persists for more than twice your payment term (for example, if your payment is due within 30 days, this is 60 days after you issued the invoice), I suggest bringing it up to your client. I recommend being frank with your client by phone and letting them know that if there is a serious issue you may need to cease services. I have had a few cases where it has come to the “serious talk,” but I have never had to cease services. Every time, this conversation simply conveyed a message of urgency that resulted in flowing. And, to be clear, it never affected the ongoing client relationship.
4. Stretch out your payments - Just as you have terms on your invoices, people and organizations billing you will also offer terms of payment. This could be as simple as the due date of your next credit card payment or an invoice that you get from a contractor, which says payment due in 30 days. To preserve your cash, you want to stretch payment of these expenses as long as you can. That way the cash only leaves your account at the absolute last moment when it is due. In an era of automatic payments and reminders you can easily use existing systems to assist you with this. For example my company credit card is always paid automatically on the last possible day. I set this up all via the credit card company’s system so it was easy to do and now I don’t need to worry about it.
5. Increase fees – This may seem a little bit out of place but one thing I have found is that consultants for nonprofit organizations are more likely to underprice themselves then to price themselves fairly. I am not suggesting that anyone should raise the rates to “gouge” their clients, but at least once a year you should go through an exercise to verify that your current fees are at market rate and not below it (in Small But Mighty I suggest one process for doing this). You will be pleasantly surprised how quickly you can adjust your rate, if needed, and arrive at a number that is fair to you and your clients. You will will also quickly start bringing additional cash into your accounts.
This is certainly not an exhaustive list of everything you can do to boost cash flow. How are you doing it right now? Share your strategies with your peers on how they can preserve their cash and ensure the long-term sustainability of their firm.
As always if you have any questions that you would want answered in the blog or just directly don’t hesitate to email: firstname.lastname@example.org
With more than 15 years of management and consulting experience, Gary has the expertise and skills to help public serving organizations move from vision to implementation. He is currently CEO of Civitas Strategies, where he helps clients establish realistic strategies that connect to communities’ needs and strengths. Gary has consulted with a wide array of organizations including: the W.K. Kellogg Foundation, The Annie E. Casey Foundation, Take Stock in Children, The University of Florida Lastinger Center for Learning, and SmartStart Georgia. Gary has also been a line manager in science and engineering firms, (the Battelle Memorial Institute and Shaw Environmental & Infrastructure) and WestCare, Inc., a regional substance abuse prevention and treatment agency. Gary has lectured on human services project management at Boston College and the future of early childhood education at the W.K. Kellogg Foundation. Gary is an active member of The American Evaluation Association, the Alliance for Nonprofit Management, BoardSource, and the Association of Fundraising Professionals. Gary’s book on starting and growing your own consultancy serving nonprofits, Small But Mighty, is due out Winter 2016.