The agony of almost making it to the end of the month. Cashflow catastrophes and how to avoid them

Few Olympic or endurance track images are as enduring as the long distance runner that, despite a body that has clearly given up, manages to will themselves over the line.  Last place never looked so good.  But what about those that cannot make it.  They actually fall over a few agonising steps from their goal and it’s all over.  All the training, blood sweat and tears – for what?

This happens in business too and just like the hapless athlete that runs out of legs, they wonder how and where it all went wrong.  Well, we know and like so many other commercial events that can occur, it comes down to understanding the numbers.  But which numbers?

You need to spend money to make money.  True but…

Investing in your business is a brave, necessary and wise thing to do.  If you understand your customers, have refined your product or service and your marketing is humming, what could possibly go wrong?  Here’s the nightmare scenario: you could run out of cash because it takes too long to get your money back and you don’t know why, let alone what to do about it.

Consider for a moment how rapidly your dentist goes through the “sell, make, deliver, bill/paid” cycle.  You walk into the dental surgery, get treated (maybe a filling and a clean) and you pay on the way out.  Contrast that against, say a marketing company that pitches a concept for an ad campaign, weeks later production is at an end and the client is reviewing final cuts.  Perhaps billing occurs 90 days after the job has been won and yet somehow, the lagging cash flow makes you feel anything but a winner.

That may be an extreme version of cash flow pain but how many of you have felt frustrated after offering generous 21 day terms, only to be told on day 22 that your invoice was mislaid.  Now it seems you’ll be out of pocket for up to another week or so and before you know it, you’ve been running at a deficit for 30 days.  If that keeps happening month after month, eventually you’ll find that making your office rent or supplier payments becomes a bridge too far.  And down you go, a mere 3 feet from the finish line.

Okay, let’s take a breath and shake it off.  If this is happening to you then no, you shouldn’t be spending big wads of cash to try and create bigger wads of cash.  Not yet.  Not when you’re barely surviving.  First, you need to address and then fix the problem of cash flow lag due to your poor sell/make/deliver/paid cycle.  But how?

Here’s how to safeguard cash flow against an elongated sales to paid cycle

The first step towards fixing a problem is understanding the problem.  Jot down how long it takes you to sell a product or service, how long to produce or make it, deliver it and then get paid (use your payment terms as a guide).  Can you manage that 21 day turnaround or do you need to shave some days off that in order to sleep a little easier?

Secondly, ensure that you receive all or at least part of the payment upfront.  This is particularly important when you are investing significant sums over time to complete a project like website production.  No one can reasonably expect you to work unpaid for months and months on end while you complete a client’s online platform.  Communicate the need for a payment schedule along the lines of x% mobilisation fee to get started, an additional sum at the halfway point and the balance at “go-live”.  This keeps the client committed and importantly, protects your cash flow.

This is the kind of preparation that will get you over the line.  Then you can go ahead and reinvest to grow your business.