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Managing cash flow while you’re running a service-based business is a special kind of challenge.
Cash flow is the lifeblood of any business, but it is especially crucial for service-based businesses where inventory management and physical products don’t come into play. In these types of businesses, where services are rendered before or after payment, keeping a consistent cash flow can be tricky. Managing it effectively ensures that your business remains solvent and has enough funds for growth, operational expenses, and unforeseen events.
Understand Your Cash Flow Cycle
In a service-based business, cash flow can be unpredictable because revenue is often dependent on the completion of work or project milestones. Understanding your cash flow cycle means knowing when your business typically incurs expenses (like payroll, rent, and utilities) and when you receive payments. Keep a record of your average payment periods and know which clients tend to pay late.
Solution: To get a clear view of your cash flow cycle, create a cash flow forecast. This projection of your expected inflows and outflows for the next 3 to 6 months can help identify potential shortages and prepare for them in advance.
Invoice Promptly and Clearly
Many service-based businesses face cash flow issues due to delayed invoicing or unclear billing terms. If you’re slow to send invoices, your clients may be slow to pay. Also, unclear terms or itemized invoices may lead to disputes, delaying payments even further.
Solution: Develop a process to send out invoices promptly once services are rendered. Use invoicing software to automate reminders and ensure every invoice includes clear payment terms, deadlines, and penalties for late payments. For example, offering discounts for early payment can encourage prompt settlement of invoices.
Establish Clear Payment Terms
The terms you set with clients significantly impact your cash flow. Common issues arise when businesses allow long payment terms, such as 60 or 90 days. The longer the terms, the more extended the gap between service delivery and payment, which can strain your business.
Solution: Set shorter payment terms, such as net-15 or net-30, for clients. If longer terms are non-negotiable, consider requiring an upfront deposit or milestone payments, especially for large projects. Upfront payments help cover the initial costs of providing the service and reduce the risk of bad debt.
Create a Cash Reserve
Even with good cash flow management practices, unexpected expenses or revenue delays can occur. Having a cash reserve or buffer can help your business survive through slow periods or unexpected downturns without resorting to credit.
Solution: Aim to set aside at least three to six months’ worth of operating expenses. Contributing a small percentage of your monthly income toward this reserve ensures your business can handle emergencies, slow months, or unexpected large expenses.
Follow Up on Payments
Delinquent accounts are a common problem for service-based businesses. If you don’t follow up with clients who owe you money, those unpaid invoices can drag down your cash flow. It’s important to keep communication lines open and address overdue payments before they become a bigger issue.
Solution: Develop a systematic follow-up process for late payments. Start with friendly reminders and escalate to more formal collection methods if necessary. Offering flexible payment plans for clients who are struggling can also be helpful. If non-payment becomes a persistent problem, consider using a collection agency or legal route to recover debts.
Trust the Professionals at the Harding Group
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Are you interested in business advising, tax preparation, bookkeeping and accounting, payroll services, training + support for QuickBooks, or retirement planning? We have the necessary expertise and years of proven results to help.
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