Winning a consulting project feels like a victory but the real war is just beginning. While we’re always happy when money comes into our business, we’re not so thrilled when it goes out again. The movement of cash in and out of your business every month is called your cash flow.

Answer these questions:

·       What is your current bank balance? How is your current balance different from last month’s?

·       Do you have a balance sheet? When was the last time you looked at it?

·       Do you have a year end? What is your anticipated revenue this year?

You are not alone if you don’t know the answers.

The worst problem facing small business is being cash poor. It’s one of the leading causes of business failure. To have a positive cash flow, you need more money coming in than going out and it’s only the cash already in the bank that really counts. Otherwise, it is the expectation of cash, and you can’t pay a bill with that! So the trick is to manage the in-flow and out-flow of cash to work to your best advantage.

Typically, in-coming consulting cash stems from Accounts Receivable, the invoices you send your clients for work completed. The out-flow is your Accounts Payable or debts such as rent, insurance, salaries, credit card payments, and other monthly expenses.

Unfortunately, selling consulting expertise is not as easy as selling something over the counter. Each project has a lengthy start-up period. You need to write the proposal, negotiate the contract, and organize the project, all before you can start to track your time. So when the work begins, expenses are already piling up. Month-end passes swiftly and you may be so busy with start-up you haven’t thought about sending your first invoice. However, you will need cash soon or the word bankruptcy may take on a whole new meaning. But this war is meant to be won, so how can you survive the cash-flow battles ahead? Here are a few suggestions.

Accounts Receivable:

1.     Bill in monthly installments. Try to avoid a lump sum payment at the end of the project. Provide your client with a short monthly status report. If this is not acceptable, plan for milestone billing and structure several interim deliverables, each with a price tag attached.

2.     Use your accounting software to generate a month-endcash flow statement. Are any invoices now overdue? Start polite inquiries about late payments immediately. Often we are embarrassed by all this talk about money. Get over it! If you think about the success—or failure—of your business, it becomes easy to ask for what you need. There is probably a simple explanation for the delay in payment, but both you and your client need to know what it is. See it as a joint problem-solving activity.

3.     Become familiar with your client’s accounting processes. How many approvals and signatures are required? How long does this usually take? Is anyone going to be on holidays? Can you plan ahead? Suggest setting up a direct deposit arrangement.

4.     Keep your projects at different stages of development so that some are new, some are at mid-point, and some are just finishing. That way the cash generated by projects with predictable payment schedules can support the costs of projects in start-up mode.

5.     Bill your clients on time. Each day that you delay sending out your invoice has a big impact on how long you will have to wait for payment.

Accounts Payable:

1.     Pay your bills but only when they are due. It is better to have the money is in your bank account, not your vendor’s. On the other hand, you don’t want to pay overdue charges so you need to monitor due dates closely. Get your checks ready in a batch and stick mailing reminders on the envelopes. Better yet, post-date your payables on line.

2.     Never start a project without a contract. This is a no-brainer but consultants are so anxious to please that they make too many exceptions. It’s your business. Be sure the contract specifies the number of days per task, who is going to do them, and when they are to be completed. Expand this task analysis in your work plan.

3.     Track the time spent on the project. Use a time management software program. Check the status of planned to actual task completion regularly. Avoid delays, re-work, and scope creep.

4.     Control your inventory and keep your business lean. You don’t need that giant box of envelopes. Paying more for smaller quantities actually works in your favor in terms of cash flow.

5.     Compare expenses from month to month and from last year to this. Costs tend to increase without your noticing. Re-negotiate with your vendor, find alternatives, or learn to do it yourself.

Managing your Money:

1.     Develop financial systems for your business and keep them up to date. If you are too busy, hire someone to help you.

2.     Invest extra cash. Save 10% of each incoming check for that inevitable rainy day.

3.     Set goals and measure them. How much profit do you expect to make this year? Next? In five years?

4.     Focus on productivity. How can you do things smarter, faster and better? Use your analytical skills on your own business.

5.     Get a line of credit to manage cash flow variation. Note that this is my last suggestion, not my first, because cash-flow is really about good business management. A line of credit is a short-term solution and gives you a false sense of security. That money is not yours—it’s a loan, so pay it off.

Remember: Manage your cash flow as part of your daily routine and keep your powder dry!

Resources:

Barrington, G. V. (2012). Chapter 12 Managing Money. Consulting Start-up and Management: A Guide for Evaluators and Applied Researchers. Los Angeles: SAGE. pp. 76-86.

Next up: The Contract Blues

Photo: iStock