We all know the famous adage, “cash is king.” What you probably don’t know is that this was coined by Pehr Gyllenhammar (say that five times, fast), the former CEO of Volvo, following the 1987 global stock market crash (feel free to use that factoid during your next trivia night).
I recall that ominous, windy day clearly. It was referred to as Black Monday. The architectural firm I was working for was across the street from a large stock market ticker display on the corner of Monroe and State in Chicago. Hundreds of us gathered against the windows with our noses pressed against the glass, looking out at that sign as the numbers plummeted nearly 23%. Even though we were mostly young graduates, we all sensed that our lives were about to change.As a direct result of the follow-on effect from that day, the firm I worked for ended up laying off hundreds of employees—nearly two-thirds of the staff. I survived, probably because I was cheap labor and highly productive.
Recently, we were treated to an even greater financial crisis due to instability around the coronavirus. Many of you are uncertain about what this means for the future. This takes me back to Pehr Gyllenhammar and his clear understanding that when times are tough, when credit is tightened, those with cash, rule the world.
Many firms believe that having three to six months of cash reserves is what’s required to ride out a difficult period. If your firm has less than that, you’re most likely in panic mode and not sleeping very well right now. In any case, I know each of us is looking at ways to tighten our wallets by reducing unnecessary expenses. Oddly, it takes times like these to make us focus.
Here are my five tips to help you improve and manage your cash flow.
Too many firms invoice their clients monthly at the end of each month. The tradition probably began because invoicing used to be a very difficult procedure requiring many hours of time from various people in the firm. It was very disruptive to the normal responsibilities of project managers and principals, and their unavailability (or lack of focus) would make matters worse and often delay invoicing.
Smart time and billing software solutions like BQE Core make the entire invoicing process a breeze. They also give you the opportunity to easily alter your invoicing cycle.
If you can’t break the cycle of invoicing your clients only once a month, I recommend you take half of your clients and invoice them in the middle of the month and the other half at the end of the month. We make this simple in BQE Core by providing users the option for Auto Billing. Simply set the frequency and date, and then Core will automatically generate the invoices and notify the appropriate person that a draft invoice is waiting to be reviewed and sent.
The benefit of sending out invoices twice a month is that it evens-out the cash flow. Most firms are paying their employees every two weeks yet have clients paying them only once per month. This puts a real strain on cash flow, and for those of you without cash reserves, you end up using a line of credit.
If you are borrowing money from a bank to fill the gap between invoicing and payment, you are giving your client something worse than an interest-free loan. You are paying the interest on a loan you provide them. Stop being so generous with money you don’t have.
Did you read that right? You have enough trouble getting your clients to pay on time. Why would they ever pay you early? If you provide the right incentive, people will pay early.
For those of you doing government contracting, you may already be taking advantage of this to manage your cash flow. In certain municipalities, simply providing even a modest discount on an invoice forces your client to accept it, by law.
So that 0.5% discount to pay within 15 days meant that you only gave up $50 on a $10,000 invoice, but got paid 15 to 90 days faster. $9,950 today is better than $10,000 in a few months. Simply putting that money in a modest, interest-bearing account means you’ll be making up the discount value in about two weeks.
We designed BQE Core, so firms can email their invoices instantly and give their clients the option to pay electronically via credit card. Any time you take the friction out of a burdensome process, you bring value. In a matter of literal seconds, that very same client is not only able to review your $10,000 invoice, click a button, and transfer money to your checking account, but they could be earning (for example) 10,000 points from their credit card provider. Whoo-hoo, for you two, too (say that out-loud)!
This tip is really for those firms that don’t have cash reserves or can’t wait for their clients to pay. Invoice factoring means you can sell your unpaid invoices to a company in exchange for immediate cash. While they will take a small cut of the balance, you don’t have to worry about waiting around for the payment.
There is another option referred to as Invoice Financing. However, this is quite different from factoring. Financing is really just a loan. You’re still responsible for collections of that invoice and paying back the lender.
With Invoice Factoring, you are selling the responsibility of collections to a third-party who pays you cash today. The problem is no longer yours to collect. Quick cash at a small cost.
This is an enormous opportunity that most professional service firms don’t think about when the economy is strong. This is because we aren’t “business thinkers”. Typically, we’re highly educated in our profession and merely look to provide the standard, customary services.
We fail to recognize the extent of the value our clients place on us. By understanding the needs of our clients and seeing other valuable services we can provide, we are more than halfway to taking on new business. It’s far more difficult to make a new client than it is to sell additional services to an existing one.
If you don’t have the ability to think outside of the box, take a look at the websites of your most successful competitors or those you aspire to. Look at all their offerings and consider if you’re equipped to expand these services to your existing clients. Look at untapped talent that you may already have in your firm.
Don’t limit yourself to traditional services. Think broader to manage your cash flow.
Managing your cash flow isn’t only about bringing in cash. It’s also about hanging on to it. Managing both income and expenses will result in better cash flow. The low hanging fruit here is to look over your business expenses and determine if they are necessary or if they can be purchased at a lower price.
My personal favorite is insurance. Many of us have been working with the same agent for years and have gotten complacent about the policies they offer. Keep them on their toes by going into the market and getting more competitive rates. People are always looking for new business and willing to go the extra distance to earn yours.
Another aspect to reevaluating your expenses is managing your business processes. Is your firm running as efficiently as it can? Focus not only on cutting costs, but also cutting time.
Remember, time is money. Implementing new software like BQE Core means you will be able to manage many of your firm's standard functions much more efficiently. This will not only free you up to spend more time on services that add value and revenue to the firm, but it will help you get those invoices out faster and paid earlier.
There are at least a dozen more things I can share to help you manage your cash flow, but these five tips are the place to start.
Understand that you shouldn’t expect any single item to fix the problem. You should focus on increasing your revenue and decreasing your expenses at the same time. Work both ends of the equation, and the result will be an improvement to your cash flow.
While we are living in unprecedented and uncertain times, this is also an amazing opportunity for each of us. Those of us who recognize where we can bring value to our clients, our firms, ourselves, and our community will reap the rewards.