“Cash flow” is the most neglected aspect of doing business.
That is also why high-empathy personalities face the abyss of bankruptcy more often than those with low empathy. They don’t have the guts to ask for early payment because they fear rejection.
This does not show at the beginning. People who start a business usually know that they are good at what they do. They have done their homework and their product or service will solve real needs in the market. But successful entrepreneurship is about a lot more than just “knowing the ropes”.
Cash flow needs to be one of the major influencing factors in developing an effective business model, and that must start in the early stages of any company.
Here come my ten (10) remedies for small businesses that receive regular calls from their bank with respect to their bank accounts.
Here are five (5) measures that you can start today. This will immediately help you to improve your cash flow.
#1 – Invoice Timing
Invoice your customers as early as possible. You can start by charging your customers every month for the work you did the previous month. That is an easy task, right? You can also crank this up and begin invoicing your customers before you even start the work — and that will buy you more than 30 or 60 days of extra cash flow.
Question: did you have to read the sentence “that will buy you more than 30 or 60 days of extra cash flow” twice or more before you understood what it means? That shows you that this article has been written for you. Yes, for you!
And don’t negotiate the payment terms. You vill set the payment terms, and your customers vill accept them. And if the customers go late, you vill cut them off. (German accent to be used here)
A non-paying customer is more costly than no customer at all. Let that sink in.
That insight separates the boys from the men.
#2 – Invoice more often
Charge your customers more often. But be predictable: make sure that the total amount that the customer pays is in a cost range that they perceive as acceptable.
#3 – Payment Options and Convenience
Any move to make it more convenient, or to provide more options for your customers to pay you, will help your cash flow. Your customers should never be given a chance to think about any inconvenience associated with paying you.
Have bank accounts in several countries. Offer Paypal, Bitcoin, or credit card payments.
#4 – Lean Inventory
Inventory on your shelves – similar to unbilled work time in your files – is cash that is missing in your bank account.
If you work with goods then pushing inventory – or unbilled work time if you provide services – either up or down your supply chain will help your cash flow.
#5 – Shift Your Expenses From Fixed Costs To Variable Costs
Fixed costs make it difficult to improve your cash flow effectively. The key is to build your business around variable costs and to push to rely more on them.
Again, what is important is to stay afloat. Cash flow is more important than profit.
And here are three (3) measures that you can start today but they will only help in the long run to improve your cash flow.
#6 – Focus on Customers And On Their Needs, And Not On What You Like To Do
I have seen that often, both with start-up founders and inventors as well as with service providers, such as lawyers.
They fell all in love with their product or their service, and they even refuse to understand and therefore fail to solve the customers’ real problems.
Any marketing book out there starts with a sentence like this or similar: “Do not ask ‘What do you want to sell?’ Ask instead: ‘What does the customer want to buy?’”
Move your mindset toward what customers want to buy. That will result in something that is easier to sell and to invoice and this will result in positive cash flow.
Not immediately but sooner than you think.
#7 – Master The Art Of Marketing
That is what is utterly neglected: people think that marketing is a “common sense” activity.
Most entrepreneurs that I know have not even read one single marketing book in their lifetime.
But no, marketing is nothing that you do without properly learning it.
You can study marketing, for example by reading books. You can find a number of marketing book reviews in my Q&A forum for “Marketing” (click here). And I have started to put a FREE Marketing & Sales Bootcamp online (click here).
Learning marketing is not something that comes easily, overnight. Becoming a master of anything takes time and experience. The same applies to marketing. Marketing is all about questioning, testing, and trying different things until the most effective methods are found. And then start again, after some time. Because that marketing has become dull.
That is also a problem with marketing: marketing chews up vital cash flow before anyone realizes the money is being wasted. That is why I always recommend measuring what sales come back because of what marketing activity: marketing must always generate more cash flow than what you invest, and not just use up the cash you started with.
#8 – Maximize Cost-per-Acquisition
That is a long shot for most companies that I am aware of. Most companies measure whether specific marketing activities bring in more profit than they cost. But they never measure the “cost per acquisition”: the amount of money it costs you to acquire a new customer.
If you reach that state as a lawyer you will probably not need my advice anymore but help others to become more successful.
Fact is that if you can reduce the Cost-per-Acquisition that will help your cash flow and contribute toward growth capital as well.
There are strategic measures for improving your cash flow that you cannot start today and that will not help you immediately to improve your cash flow. You will need wisdom to find them in your trade and to make them work for you.
The quest for wisdom is a subject that interests me more than almost anything. This is my own experience: to achieve a higher level of insight, you need to understand the differences between knowledge and wisdom. Knowledge tries to game the system. Wisdom cooperates with the principles of the system. Knowledge is interested in what you can get from an innovative idea. Wisdom cares about what seed you sow in order to derive income from it.
Here come two (2) strategic measures that I am recommending to pursue:
#9 – Subscription Structure
In order to pursue that measure, you need to find out what is the lifetime value of a customer for your business, and what you can do to enhance it.
Then bill those customers in installments over their lifetime. Look at what your copy machine supplier does and do the same with your own customers.
This is what I found out: business models with recurring and subscription-type pricing generate the most short-term and long-term cash for any business.
And the good news is that almost every business can convert at least some of its products and services to a subscription-pricing model.
And the second good news is that banks and investors prefer to give money to steady-cash-flow businesses instead of businesses that have large fluctuations in their revenues.
Do you need more of that input?
Here you go:
#10 – Recurring Contracts
Recurring contracts is like a subscription-based business model on steroids.
Moving customers toward contractual obligations to use your products and services for some time will drive the valuation of your business to its highest peak. The steady, predictable cash flow that comes from these contracts is the most attractive type of business to a potential financial or strategic buyer.
The above are a few insights and ideas that I have seen working in practice.
The root cause of poor cash flow is that the solution for this issue cannot be easily perceived. Our nature is programmed such that we tend to work more and offer our goods and services for a lower price if we face a low bank account. Only very few people keep a cool head and a warm heart when such a situation arises.
Now you know more.
Look for opportunities to implement the above ten (10) cash-flow-enhancing measures in your own practice.
And start reading those marketing books here today. Download them now. Start with that Jay Abraham book.
Martin “Cash” Schweiger