Often times I speak with entrepreneurs falling in the trap of death by growth. The solution is look at how your cash flow is set up. Are you billing clients upfront for your services, or are you waiting to bill the client at the end of the month and then putting the billings on 30-day terms.
For growing companies and those particularly in the service arena, this a recipe for pain. Think about it, you work all month (don’t get paid), you bill at the end of the month on 30-day terms, so you go another month without being paid, then you hope and pray your client pays within the 30-day terms. So let’s say you landing a new client in January. It’s a great big win for the company. You throw resources at it (you actually hire two people to work it), you bill them on Feb 1, and they don’t pay on time so you actually collect in mid-March. In the meantime since you landing the client, your rent has come due three times, payroll has hit five times and all the expenses of bringing on new support are piling up.
Your enjoying all this success with the client, then BOOM, the bank statement comes and you have a private closed door meeting with your business partner about how you’re going to cover it all. Your enjoying all this success with the client, then BOOM, the bank statement comes and you have a private closed door meeting with your business partner about how you’re going to cover it all.
When my partner and I started our newest company, we made a blood commitment to each other about how we would manage cash flow and require payments up front to begin any project. The results are great. Once you get comfortable asking for payment upfront and clearly stating you don’t begin work until payment is due, you’ll find that your prospects and clients have a new respect for you. For those that don’t want to pay upfront, take a hard look at their business and decide if you want to take the risk.
Our wiggle room with clients is that if they want to start the project immediately then we’ll accept a faxed copy of the check.
For those of you that find it impossible to avoid the cash flow squeeze, Amy Feldman at Inc.com has 5 Rules for Surviving the Squeeze.
And if you don't believe me, Guy Kawasaki lists Focus on Cash Flow, not profitability as the #1 point in his Art of Bootstrapping post.
