If you use an invoicing system in your business, you know how important it is to get paid on time. But did you know that simple payment delays could cost you more than just a few dollars?
Payment delays can happen at any time, often out of anyone’s control.
Nonchalantly regarding your receivables as “better late than never” could mean life or death to your business. Picture this:
Your company lands a large contract that will keep you going for the remainder of the fiscal year. Their first payment is a significant retainer that will allow you to hire additional staff to deal with the workload, purchase new equipment and an office expansion to accommodate both. There is also an agreement for regular monthly payments to clear the remainder of the contract.
After the third month of the contract, suddenly your client has a flood at their location, and they must pause payments until their insurance repairs the damage and they can get back to normal operations. They can’t pay you unless their business is running!
One month turns into two, and you still don’t know for sure when the contract will resume. Delays in repairs to your client’s business, something you have no control over, are causing a financial stand-still for your company.
Because you were banking on this contract into the next fiscal year, you didn’t place as much effort into garnering new business. Now you have extra staff, equipment and space not being used, and the money is flowing out at an alarming rate but isn’t being replaced.
A delay in payment can occur for many reasons, often out of your control. It can be as simple as someone being on holiday and you need their approval to proceed or more complicated such as a change in direction for the overall plan. Big or small, the impact on you as a service provider can be large.
From your perspective, the reason for the delay does not change how your business reacts. Some of your staff may be sitting idle or have reduced work flowing in, but their pay checks stay the same, your utility bill still arrives like clockwork, everything you routinely pay for on a weekly, or monthly basis is still due.
So in a service business, you need to have cash reserves. It’s also critical to know that the cash balance you have in your bank account today can be misleading. If you don’t account for payments that will be withdrawn in the coming days and weeks from checks clearing, auto-payments and regular expenses, you may believe you have much more cash on hand to work with then you actually do.
The Importance of Cash Flow Projections
It’s critical that you build and maintain accurate cash flow projections. Map out the expected inflow and outflow of money into your business in the coming weeks and months. What expenses are on the horizon? When are you expecting payments to your business from customers and for how much?
All sorts of issues can change the dates and amounts of payments. Unexpected expenses can pop up and things can simply be missed so make sure that you’re updating your projections on a weekly basis.
Why Cash Flow Projections are Critical:
. See what money is going in and out of your business
. View your current and planned sales for the year
. Determine how much you plan to spend this year
. See exactly when money will enter and exit your bank account
Timing is important and if your business is hit with an unexpected delay in the inflow of money, you may have to make tough decisions on how to delay the outflow.
The reserves you have that previously seemed bloated, large and too conservative, may be the very thing that protects your business from closing up shop. Money that trickles in weeks or months after you are forced to close your doors will not bring your business back to life.
Reducing the Risk to Your Business
Once you have a handle on these important aspects of your business you can start asking the following questions:
. Should I look to extend my bank loan while my business is profitable to protect my company?
. Is it a good time to hire more staff based on cash flow and work flow?
. Can I branch out sales to different markets, different countries?
. Is my current office space sufficient for my business needs?
. Should we consider exploring new services or products to offer our customers?
. Could we hire contractors to complete tasks?
. When is a good time to reinvest money from my business?
The list of questions can and should seem endless. The good news is that you don’t need to have all the answers. The benefit of posing those questions to yourself is to get the wheels turning, the options brewing.
When opportunities arise it is more likely you will recognize their true potential when you have taken the time to know the current state of your business, the flexibility you have and the financial backing that you require.
By maintaining up-to-date cash flow projections you will be better prepared to identify shortfalls and give yourself time to react. With a little preplanning in place, you can have cash reserves ready so that you can take action and continue to grow your business.
Dryrun is a simple way to forecast your cash flow, build budgets and track sales projections.