The Critical Role Cash Flow Plays in a Small Business

Businesses can be profitable and still fail. How? Cash flow. 

Cash flow is critical whatever the size of your business, but as a small business it can be the difference between trading one day and not trading the next. It’s serious stuff.

Controlling your outgoings is one aspect to this, but managing the income is often overlooked. There is a myth that you cannot influence how and when you get paid and I want to bust that myth right now. Getting paid is one of the most controllable aspects of your business… if you follow my three golden rules!

Three Golden Rules for Controlling the Cash

Here’s my three gold rules for controlling my income, that I NEVER break (no matter what):

1. Be Discerning

Choose your clients carefully. It can be really tempting to take ANY client especially when you are worried about your income, but one that doesn’t pay on time is not a blessing, it’s a curse. You’ll end up spending time doing a lot of work, which you could be spending on another client, and then resenting the one that pays late. You’ll hate the work you do.

Listen for clues when you are working with them and pay attention to how they talk around money. If they seem too cagey about prices and costs then listen to your gut. It’s ok for someone to ask you to explain your costs/pricing. It’s not ok for someone to expect a lot for very little. That’s a red flag. Also listen to how they talk about their relationships with their employees and other suppliers and contractors. There will be clues for you to find.

2. Payment Upfront

Always invoice in advance. Until you have a relationship with a client, all services should be billed upfront and you don’t start work until you are paid. You can be more flexible on this later, but trust me, you won’t need to because your client will always be happy to pay in advance because you will be doing your best work for them!

If it takes them three weeks to pay your first invoice, then you already have a problem and you should be very careful about moving forward. Certainly, I don’t go beyond three months of ‘chasing payments’ with anyone. I simply say we are clearly not meant for each other and move on. I don’t have the time or the energy for that amount of disrespect.

3. Be Strategic

For big projects that require you to contract other people or require a lot of your time and energy, always agree terms with your client and stage the payments. For example one third up front, one third at a certain stage of the project and the final payment upon completion.

Staged payments are a great way to manage cash flow for you, your client and anyone else that needs to be paid from the project. No one should be investing any time or money into a project without seeing some payment upfront. But no one should be paid for everything upfront.

The final stages of any project are always a bit painful as everyone wants the job ‘done’, but getting it ‘done exceptionally well’ is your goal! The huge advantage of holding the last payment back until completion is that it is a massive incentive to ensure any snags are taken care of, quickly. This will mean you hand over a project that is finished to an incredibly high quality, which is what you stake your reputation on.

If you follow these three golden rules then you’ll earn the respect of your clients and have better working relationships for it. You’ll also have a healthy bank balance at all times.

Paying is Respect

From the start, I decided to focus only on working with small businesses. This was not just because I love talking to the people that know and run their business. There was and still is a practical reason for it. Small business owners almost always pay quickly. Anytime I have worked with a bigger company, the complications of pitching for the business, the absurd requirements for reporting (for the sake of reporting) and then waiting for someone in accounts to approve an invoice and get paid 90 days (or longer) later is frustrating and soul destroying. I just don’t do it.

A client that pays on time is respectful and shows appreciation. It’s also greatly incentivising. When you feel appreciated, you work harder and give your best. It becomes a virtuous circle and everyone wins.

Pay it Forward

Getting paid quickly means you understand how important it is to get paid quickly! Right?! So, you should pay this forward to your employees, suppliers, freelancers and contractors too. Show them the same respect that you demand and pay them well and on time and they will give you their best work too. Be someone that everyone wants to work for. 

It all pays off in the end.