One of the most powerful lessons I learned early resulted from this statement by a business owner: “I don’t want them to think I need the money.”
This professional services provider, who was sales rich and cash poor, believed that asking for prompt payment was a weakness. You might not be surprised to learn that a couple of years later he closed his firm. He was always, always behind.
Negative cash flow is the beast that eats businesses.
I’m in the mood for a nitty gritty newsletter today. Here are the three choices that cause negative cash flow and the changes you need to make. And, if you find yourself objecting, read to the end.
1) Pricing model. On one side is the hourly billing model. You offer your products and services to clients and customers in 60 minute increments. On the other side is the value-based pricing model. You offer your products and services for a fixed fee commensurate with the value delivered to the buyer.
The hourly billing model causes negative cash flow. You provide your services, keep track of the hours, bill weekly or monthly and wait for the payment. While waiting, you are making payments to keep your business going. You are paying out before you take in what’s owed to you.
Fixed fees based on value delivered are billed upfront and payment is required upon acceptance or shortly after. No work is done until payment is received. This causes positive cash flow because your fees cover all expenses and include a profit.
2) Terms and conditions (T&C): The most important terms for both you and your buyer are payment terms. Spelling them out, upfront and in clear language, is critical for positive cash flow.
You must believe that your company has the right to expedited payment. It is not asking a favor, and it isn’t a weakness to expect this. Key to this confidence is remembering everything it takes to keep a company running: years of work, investments in innovation and infrastructure, and the expertise of your staff.
If you insist on hourly billing, T&C must be short and with no discounts for early payment. The fact that you’ve already delivered the work in advance of payment is in effect a discount the client has received.
T&C for value based pricing should require payment upon acceptance of the agreement/contract/sales document. If it is a long project your T&C can be structured for an upfront payment of 33%, a couple of installment payments 20 days apart and a final payment before the conclusion of the project.
3) Invoicing system: Your invoicing system must support your pricing model and terms and conditions. If you continue the hourly pricing model, your timesheets and invoicing must be intimately linked. The minute a time sheet is submitted to the system, an invoice must be produced and sent. This would be spelled out in your T&C, so the buyer expects quick invoicing and short payment terms. Your system must also produce daily or weekly cash flow reports which highlight any ARs that are past due. Work must be halted, and the AR collected.
For the value based pricing model, your invoicing system must be set up to generate an invoice immediately upon signing and produce an alert if payment is not received by the required payment date. No work begins until the payment is received.
Before You Object….
Look around you…there are strict payment terms everywhere. It is only private services firms that have a problem creating T&C that generate payments quickly and include stop-work provisions when payment is delayed. You cannot shop for groceries, a car, a home, a vacation, or medical services without paying in advance. All these industries moved from credit to payment upon delivery. It doesn’t seem that way, perhaps, because we use credit cards or mortgages.
Your services firm is not in the credit or lending business.
Every one of these creditors makes money from their lending. Your company will not make money—in fact, you will lose money—when you offer credit.
If any of this resonates with you: you’re experiencing negative cash flow, uncomfortable about using value based pricing and instant invoicing, or don’t have cash flow reports, you can comfortably call or text me at 703-801-0345. We’ll talk and see what we can do together. If you’d like, you can take a quick look at these two pages Money Matters and Services Options.
Do not let negative cash flow eat your business!