Small Business Cash Flow Strategies
If you are a start-up or early stage small business, don’t wait for financing possibilities. Whether you are spending weeks perfecting your copious small business plan in order to then fill out more reams of paper for SBA submission and approval, OR you are preparing your executive summary for venture capital, OR spending inordinate amounts of your precious time at angel investor meetings, OR even flying to Vegas for the weekend to get a ‘high interest’ loan, you are initially wasting your best chance to get your small business started by acting. Successful entrepreneurs act first; plan as they go. As an entrepreneur, small business coach and small business consultant , I have seen that cash flow and cash strategies become critical to early stage small business longevity and survival.
Acting is doing; it’s testing your product or service; it’s quickly validating (more likely disprove) the hypothetical projections you have been forced to do, often better served by using a Ouija board. It is challenging at best, but certainly possible to Act first, AND build your company at the same time, by self financing strategies. It’s known in entrepreneurial circles as bootstrapping (symbolic of pulling yourself up by your own bootstraps). Cash Flow goes hand in hand with the concept of bootstrapping, and is my subject of discussion today. Bootstrapping is focusing on cash as a priority.
Total cash, including cash on hand (including monies received) divided by your burn rate (cost of operation) determines how many months your business can exist without folding or without receiving an outside cash injection. Your focus must be on cash flow at this point in your business - cash is king.
Since the likelihood of a cash injection is not as likely, focus on creating an environment where cash is in the bank AND cash is more than reasonably expected to be received based on actual billing, i.e., creating cash flow. At CBS , my professional services company, I quickly prioritized cash flow strategies to create billing and payment terms favorable to us , not the client. Here is how I started:
We implemented short payment terms as a condition of doing business – by negotiating price or rate discounts in return for terms of net 15; this way you are assured at least you can pay your bills with monies received in a 30 day cycle.
With every project or service we performed, we secured a recurring revenue contract for support and maintenance. At American Airlines, in addition to delivering my first small project to deliver an Applicant Tracking application, as part of the proposal, I inserted a support and maintenance agreement for twelve months, renewable automatically annually upon review by the client, in which I offered several hours of 24/7 phone (and in some cases on site) support for a set fee, payable upon acceptance of the contract, in monthly installments. This greatly assisted us in paying our recurring expenses, including payroll.
We included a request for retainer before initiating the actual service – We asked for 10% down on projects (which enabled us to receive steady in flows of cash). You can justify this if you can convince your client that they can delay the last payment of the contract until everything is accepted. This way, both parties put ‘skin in the game’. We also offered a 2% discount for early payment. Approximately 25% of our clients saw an advantage to this.
Try these strategies and tweak them to your requirements.
Next week: More Bootstrapping strategies
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