When you have a recurring problem how do you handle it?
Do you look for various bandaids that will mitigate it for a bit—maybe a day, or week, or month?
Or do you look for the root cause and then uproot it forever?
Clearly the forward thinking CEO or business owner should look for the root cause.
This is particularly critical when the problem is negative cash flow.
Your firm suffers from negative cash flow when your incoming cash is less than your current obligations to pay out to others.
There is ONE root cause of negative cash flow for professional and business services firms, and it can be uprooted to eliminate negative cash flow forever.
The cause is your Terms and Conditions.
Terms and Conditions (T&C) are part of every contract, agreement, or purchase order between the firm and its buyers.
T&C spell out the total price or fee agreed to.
T&C also describe how and when that fee is to be remitted to the seller.
Timing is everything
It’s the WHEN that makes the difference between negative and positive cash flow.
The only way to guarantee positive cash flow is for the WHEN to be in advance of any work being done.
Advance could be upon signing the agreement, or it could be at a future date before the work begins.
If suitable for the work, you can allow the buyer to make installment payments on a predetermined schedule—but every payment must be made before the work resumes each month or payment period.
Why is this hard?
The biggest barrier to payments in advance is not being able to tell the buyer what the fee is. You can’t set up positive cash flow without knowing what clients are paying.
That forces your firm to choose a pricing model that determines fees in advance of the acceptance.
I’ve been writing for years about my preferred pricing model, IMPACT Based Pricing. You may choose value based pricing or flat or fixed fees.
If you do not have a pricing model that sets fees in advance, you are doomed to negative cash flow. No bandaids will help.
But you do not have to settle for negative cash flow.
It’s your decision!
You might think “everyone” in your industry charges in arrears (after the work is done) but you’d be wrong.
I’ve worked with people in many professional and business services industries that use pricing models that set the fees in advance. (I’ll be happy to give you specific examples if you email me.)
My own story is like that.
In 2010 I was facing a stack of outgoing invoices and a bigger stack of bills to be paid. The invoices were based on charging by the hour, so by necessity I was invoicing clients in arrears.
Of course my mortgage, utilities, taxes, and other overhead, not to mention my own compensation, had to be paid currently.
The gap was huge, and I knew a bandaid wouldn’t close it.
I committed to IMPACT Based Pricing.
Were there some clients objections? Yes, of course.
Did they all come around? No, not all.
Did many? Yes.
In fact when I promised them I’d deliver the life changing differences they needed for a predetermined fee, including unlimited access to me, they mostly jumped at the offer.
I knew that those who did would be delighted and those who did not weren’t good fit clients for my firm.
My firm has never had a negative cash flow problem again.
Neither do the firms I’ve worked with.
They take 2-3 months to transition to a predetermined fee pricing model, which includes talking with clients about this change, and revising their terms and conditions.
Key components of the T&C include:
- Exact dates for payments.
- Exact amounts to be paid.
- Payment method. The vast majority set up electronic funds transfers from their bank to the provider’s bank. The rest use credit cards.
- If a payment is not received the work does not begin or continue. No exceptions.
- Payments are not contingent on meeting milestones, or progress, or any condition that the provider doesn’t have full control over.
This last point is key. Some clients want to make the last payment “upon completion.” Do not do this, for two reasons: 1) if ANY of the completion requires their participation, they can delay and obfuscate, and you’ll never get paid in full; and 2) it puts you right back in the negtive cash flow position by invoicing in arrears.
Positive cash flow begins with the first conversation.
Use my 6 Questions (which a newly updated) to find great fit clients. It includes the opportunity to talk about money and payments.
Do not hesitate to be up front about your Terms and Conditions.
When professional and business services firm’s owners and CEOs balk at this I ask “Where else can you buy something and not have to pay for it at the time of purchase?” There’s no comparable answer.
Also, unless you are in business to make a profit from lending/financing, allowing buyers to get your work before they pay is financing their purchase for free.
Leave financing to the banks and credit card companies, so you can focus on delivering life changing IMPACTs to your clients—and enjoy positive cash flow.
Think it might be time for a Virtual Coffee to discuss this? Text COFFEE to 703-801-0345
