Keeping Cash Flow Flowing

I thought we’d be showing momentum this month but we’re still catching up on last month’s billing. It seems like we’re always late getting our invoices out the door to customers, and then it takes clients forever to pay us. Any Advice?

Thoughts of the Day: Most clients these days are stretching out cash flow – good for them, bad for you. Keep an eye on how employees record their hours – late reports and unbilled hours could be harming your company. Invoice clients in advance, and be totally clear about what they are paying for.

Think through the cash flow cycle. Any delay getting an invoice to the client delays payment. Clients often work on an urgency and expediency basis. They are most likely to pay vendors who still owe them work. Get on top of invoicing, and insist on payment within 3 days of original invoice date, not the receipt date. Make sure you have over 60 days in reserve funds so you can weather the cash flow on 30 day terms.

Here is a typical cash flow cycle. Employees do work =Week 1, get paid salary every two weeks = Week 2. The month ends in another 2 weeks = Week 4. Accounting starts putting together invoices to go to clients a week after the month end =Week 5. Accounting has to follow up with employees on late submissions and incomplete reports = Weeks 6 & 7. Accounting wraps up and sends invoices out the door to clients = Week 8.

Meanwhile, clients tag incoming bills for payment within 30 days = Week 12. Clients cut the check, take a slow walk to the post office = Week 13. Some clients negotiate longer payment terms: 60 days = Week 17. 90 day terms = Week 21+. Since employees were paid week 2-3, you floated payroll for 2 ½ – 5 months = there goes cash flow.

Explain this cycle to your employees. Don’t assume they understand the impact of their delays in recording hours worked. Prepare a report of billed hours, so that each employee can see how productive they are. Enlist employee support in cutting time out of the billing cycle and making sure that all hours worked are appropriately recorded and invoiced to clients.

Differentiate between good clients and disasters waiting to happen. Customers asking for 60-90 day payment terms, or more, are not usually good clients. They have little or no regard for the harm they may be inflicting on their vendors by delaying payments instead of responsibly paying their bills on time. They may also be signaling that they have a problem with cash flow of their own, which makes them a riskier bet. Payment in full could be in jeopardy if they run out of money. If your company cannot collect on invoices, your company just worked for free.

Some clients have an overly powerful purchasing department. Purchasing stands in the way of allowing direct negotiations between your company and the buyers who need and want what your company produces. This can mean the client loses sight of the value and quality your company provides. You may also end up with additional cost burden added for shipping, receiving, holding goods, etc. Expect downward pressure on overall prices as purchasing pits your company’s bid against a competitor’s offer.

Once you’re sure you have the right client, move up the billing cycle. Send clients bills for anticipated hours. Get a deposit. Get into the bill payment cycle early. Send the client new statements of work anticipated, in order to refresh the deposit as work is incurred.

Automate notices to clients. Have statements go out every 2 weeks. Make sure they’re going to the person who has authority to pay the bills. Follow up with a phone call to verify receipt, clarify that there are no discrepancies, and get a promised payment date.

Looking for a good book? The Lean Accounting Guidebook: How to Create a World-Class Accounting Department, by Steven M. Bragg.

Andi Gray is president of Strategy Leaders Inc., https://www.strategyleaders.com, a business consulting firm that specializes in helping small to mid-size, privately held businesses achieve doubled revenues and tripled profits in repetitive growth cycles. Interested in learning how Strategy Leaders can help your business? Call now for a free consultation and diagnostic process: 877-238-3535. Do you have a question for Andi? Email her: AskAndi@StrategyLeaders.com