As with any business, your income should exceed your outgoings. Here are ten tips on how to maintain positive cash flow
Usually it’s one or two things that bring a business to its knees: severe damage to its reputation and/or cash flow problems. There have been numerous examples of both in the past few years. We tend of course to hear about the higher profile cases, but many smaller businesses fail for the same reasons.
Our reputation, particularly in the coaching world, is founded primarily on the interactions with clients on a day-to-day basis. As such, we arguably have a high level of control as to how our reputation is managed. Even if some parts of our services are sub-contracted to associates for example, we have control on the selection and monitoring of such parties.
Managing cash flow should be simpler. After all, it’s about ensuring the income flowing into your business exceeds the outgoings. But we all know it’s not so easy. We often have expenses to pay before we get paid by the client, and client invoices can take a while to make their way into our account. At the extreme, it can be hard or impossible to extricate monies from some clients.
As such, here are some techniques to help maintain a positive cash flow:
Ask for staged payments
Rather than billing the full amount at the end of a six or 12-month coaching contract, seek for say half at the start and midway, or quarterly payments. For coaching consulting assignments, either apply the same principle or bill on a monthly basis for work undertaken in that month.
Prioritise payment of bills
Paying tax is a priority and if you are VAT-registered then you will most likely need to pay your VAT on a quarterly basis. Be careful in using the VAT you collect as working capital before you pay it out to HMRC as you might find you don’t have enough to pay your dues when the time comes. One simple technique to manage this risk is to transfer the VAT component of invoices paid to you into a separate bank account which is ‘out of bounds’ other than for settling your VAT bill.
Establish a working capital buffer
This allows your business to operate without needing to go into the red in the short term. A rough rule of thumb is to hold three months of average expenditure.
Know your clients
Understand the nature of the clients you are targeting and adjust your cash flow management strategy accordingly. At Leading Figures, the vast majority of our coaching and consulting assignments are for corporates in the finance and professional services sectors that are generally good at paying within a reasonable timeframe. This doesn’t mean they don’t need chasing from time to time. And some of our larger, multinational clients have centralised payment processes that run at their own speed, so we adjust our payment terms to reflect that.
Plan for growth
Ironically, it’s when businesses start to grow quickly that they can suffer most from cash flow problems. The lag between receipt of monies in and money out for expenses is amplified by the increasing number of clients, and that can put real strain on your finances. Creating a cash flow projection of monies in and out over the next 12/24 months is a simple but effective way of managing such growth.
Russell Borland, Partner, Leading Figures
- Thomas Chalmers is a co-founder with Russell Borland of Leading Figures. Thomas is a chartered banker whose previous careers span 10 years in commercial banking followed by 14 years as owner/partner of a seafood business. Russell was previously at Hymans Robertson where he held a number of senior leadership positions including firm-wide managing partner.
- www.leadingfigures.com