Tag Archives: accounts receivable

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A Strong Financial Foundation Is the Launchpad for Growth

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Here’s the scenario: business is good, and growing—sales revenue is up as compared to last year, clients are happy and their number is growing. So what’s the problem? For some reason, business is not making a profit. What’s wrong?

This puzzling and frustrating problem is more common than you think. It could be that expenses or debt payments are eating you alive, but there might be a less obvious problem—your financial management leaves something to be desired, so you’re unable to find and fix the money leaks. Let’s take a look at the usual suspects.

Do you invoice clients in a timely fashion, say, within 14 business days after completing a project? Are invoices paid within 30 days of receipt—or is 60 days the more likely payment timetable? Do you keep up with accounting/bookkeeping functions and complete the business financial statements—Income Statement, Cash-flow Statement and Balance Sheet—within 14 business days of the next month? Most of all, do you review the financial statements and analyze the info so that you are aware of the story your business financial data is telling you? Do you act on that information by making adjustments in how you operate—trimming expenses, adjusting prices, invoicing on time, for example? Beyond that, do you have a business budget and do you operate within it?

The moral of this story is that businesses do not always fail because of a product-market mismatch or an aggressive competitor who gobbles up market share. Sometimes a business can be a victim of its own success and grow faster than its financial foundation can support. The weak points are often either cash-flow deficiencies caused by late client payments, which may be a result of slow invoicing, unwieldy debt and expense payments, poor pricing strategy, or inadequate working capital. Fear not, my friend—with a bit of disciple, you can control most of these issues.

Money is the lifeblood of the business and along with sales revenue, you want to focus on building up enough working capital: that is, the amount of money that remains after business liabilities are subtracted from business assets (see your Balance Sheet). Working capital is liquid, meaning it’s available to float you now. You also want to promote good cash-flow, so that you can stay on top of accounts payable and, if applicable, payroll (whether for 1099NEC or W2 employees)—ideally, without dipping into the working capital fund. Your intentions to grow, expand and/or make capital improvements or upgrades to your business depend on the amount of available working capital, which is supported by revenue and cash-flow. If necessary, working capital can be used to pay operating costs while you’re waiting for the accounts receivable to be paid. That said, keep in mind that business growth plans cannot be viable unless adequate working capital is available to put things in motion. In other words, getting your financial house in order, step by step, is integral to facilitating the business growth that you envision. To that end, below are financial management practices that you may find effective.

Accounting–Staying on top of accounting/bookkeeping functions will keep you fully apprised of your company’s financial condition. You know that it’s not possible to effectively plan or manage the company without accurate financial records that provide information that you can review, analyze and use as decision-making guideposts. If your monthly revenue exceeds $2000, you might have the wherewithal to hire a bookkeeper or business accountant to prepare the monthly financial statements and the quarterly and annual tax filings. Personal referral is probably the best talent search method, but social media or NextDoor can also be helpful sources. However, don’t be afraid to do your own bookkeeping! Taking on the financial management of your company, even if only for a year or two, will give you numerous valuable insights that you would otherwise never obtain. You might investigate Quicken Simplifi to start the process.

  • Ensure that all transactions are recorded—every business lunch, every office equipment expense, each fee paid to attend a business networking meeting or professional development session, all client invoices. Document every spend, every month.
  • Ensure that transactions are correctly categorized.
  • Can every payment you receive be cross-referenced to an entry in the books?
  • Are monthly Profit & Loss and Cash-flow Statements and the Balance Sheet completed and closed out within 14 business days of the next month?

Accounts Receivable–A joint study conducted by SCORE, the Small Business Association mentoring program and the financial services company U.S. Bank revealed that as many as 82 percent of startups and small businesses fail due to poor cash-flow management. Sending an invoice is a wonderful feeling, but you hold your breath until payment is received. You need to get paid within 30 days in order to control and predict cash-flow. Business plans cannot be made until you can confirm the amount of available funds. Help yourself by invoicing in a timely fashion and also by discussing the invoicing schedule with every client and following it.

  • Is anticipated revenue (i.e., accounts receivable) linked to agreed-upon project milestone payments or, if you sell a product or service via subscription, are subscription renewals linked to accounts receivable? Are invoices promptly, perhaps automatically, sent according to contracted agreements?
  • Is the status of receivables updated once they are collected? Is there timely follow-up on unpaid invoices (e.g., reminders are sent on day 45)? Automated reminders will be a helpful method to implement a formal accounts receivable follow-up process.
  • If you have the type of business where extending credit to customers is the norm, have you developed a standard set of credit terms and customer credit limits?

Forecasting and budgeting–Planning, budgeting and forecasting are central to financing the company’s operations and short- and long-term goals. When forecasting and budgeting, you will be greatly assisted by software such as QuickBooks, Quicken, or other financial software solutions.

Forecasting is the process of making informed predictions about future business outcomes. The process can involve projections for specific business metrics, such as sales growth, or for industry changes, or recommending how you will be best positioned to navigate the economic landscape in which your company operates. Forecasting uses your company’s historical data and analyzes current market conditions to make predictions as to how much revenue your organization can expect to earn over the next few months or years. Companies use forecasting to support the development of business strategies. Historical company data is analyzed so that patterns can be recognized and used to predict future outcomes. While forecasting consists of estimates of future conditions and possible outcomes, the process can encourage you to consider a range of potential scenarios and in that way position the company to capitalize on potential outcomes that appear most likely to occur or prepare the company to adapt to potentially challenging conditions if they arise. Forecasts are usually updated as new information becomes available, to promote accuracy and relevance.

Budgeting details how the financial plan will be carried out each month and addresses items such as revenue, expenses, debts and anticipated cash-flow. A budget is a forecast of revenue and expenses over a specified future period, typically one year, and details how the financial plan will be implemented each month. The budgeting process can be challenging, particularly if clients don’t pay on time and undermine cash-flow, or if sales revenue is intermittent or your sales cycle is long. It is acceptable to adjust your budget to reflect the actual amount of revenue received or compare actual financial statements to determine how close they are to meeting or exceeding the budgeted revenue and expenses. Once the budget period has ended, it is essential that you compare the forecasts to the actual numbers. It is at this stage that you’ll discover whether the budget aligned with the expected expenses and revenue.

  • Operating Budget: The operating budget includes the expenses and revenue generated from the day-to-day business operations of the company. The operating budget also represents the overhead and administrative costs directly tied to producing the company products and services.
  • Cash-flow budget: A cash-flow budget helps determine the amount of cash generated by the company during a specific period. The company’s inflow and outflow of cash is critical because timely payment of expenses is dependent on cash that is both generated and available. Monitoring and encouraging the collection of accounts receivables helps you forecast the income that is due in a particular period.
  • Strategic Forecast: A spark of inspiration may strike like lightening and you might be amazed by your own creativity. If you’re serious about bringing your brilliant idea into reality, you’ll test its potential viability with strategic forecasting; the goals you pursue be both realistic and most likely attainable. Strategic forecasting is integral to making that determination. In Step I, you’ll determine whether your goal should be a primary or secondary target and whether it is short-term (e.g., one year) or long-term (e.g., three years) initiative and address the question of what the business aspires to achieve by pursuing this goal. Next, you’ll define the market conditions that the company operates in, to further evaluate the capabilities and resources needed to take on the goal. In Step 2, you may find it helpful to categorize the strategies you’ll use to pursue your goal into functional strategies and operational strategies. Functional strategies refer to the action plans and tactics you’ll use to implement the strategies; operational strategies focus on resource allocation used to achieve the goal. If your goal passes muster in Step 3, you can then develop your strategy roadmap. A successful strategy will anticipate challenges that are endemic in today’s fast-moving economic environment and will integrate risk management and an agile approach that bakes in the ability to adjust your strategies as new trends, opportunities and—to be realistic—obstacles appear.

Pricing–how you price your products or services is based on factors such as market demand, customer behavior, competitors and market position. Identifying a pricing strategy capable of driving revenue and maximizing profit without alienating customers is critical; identifying the pricing sweet spot your service or product can be challenging. Begin your pricing strategy by determining your pricing objectives, e.g., maximizing profit, increasing market share, or stimulating client acquisition. 

Remember that pricing influences your ability to pursue, and achieve, business goals because it determines the sales revenue and is, in most cases the primary, if not sole, contributor to working capital and profit—the engine that keeps your entity solvent and sustainable. When evaluating potential business goals, examine and, when necessary, adjust your pricing to enable the company to generate sales revenue that’s capable of providing the financial foundation that will facilitate your ability to achieve the growth, scale or expansion goals that you envision.

Give yourself reliable data and insights that enable informed pricing decisions, rather than relying on intuition or outdated market info when determining prices. Avoid methods inclined to produce ineffective pricing strategies that are unlikely to access the full revenue generation possibilities of your services and products.

Finally, be aware that clients may be willing to pay a premium for services or products that possess what they feel is a desirable differentiating characteristic. A unique characteristic may be perceived as a competitive advantage that sets your service or product apart from what is offered by other vendors—sustainability, for instance. Furthermore, clients are not infrequently willing to pay a premium to do business with a brand they consider trustworthy or prestigious. Below are pricing strategies and factors to keep in mind.

  • Cost-plus pricing is based on the cost and value of the time and effort (talent) required to develop your B2B solutions, or source/manufacture B2B or B2C products. From there, a profit margin that target clients will presumably accept is added, to create the selling price.
  • Value-based pricing is particularly attractive in that it reflects the maximum amount clients are willing to pay, and minimizes the focus on service or product production or acquisition coat, which might be difficult to calculate when developing B2B solutions.
  • Tiered pricing targets different customer segments and may produce additional revenue from those willing to pay a premium for upgrades and add-on features, or offer volume discounts to attract clients who have higher consumption rates.

Thanks for reading,

Kim

Image: Quentin Metsys (Flemish, 1465/1466-1530) The Money Changer and his Wife (1514) courtesy of the Louvre Museum in Paris, France.

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On Avoiding A Cash-Flow Crisis

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On any given day, a Freelancer or small business owner might find him/herself in the suffocating grip of a possibly game-changing marketplace challenge. Anything from flood-producing rains to a wily competitor can cause customers to vanish and profit margins to shrink. It’s a nightmare scenario and, obviously, you must do whatever possible to avoid the problem. Stepping up your marketing with a clever campaign and catchy message, to nurture customer relationships and promote your brand, may be an effective response but be aware that money has a role that goes beyond the well known advantage of being a defense against disaster. 

An effective defensive strategy is about more than simply having enough money to outrun your problem. The key to handling money is to treat it as an asset and take steps to manage your cash by following its flow through your business. Do that by studying your sales revenues and accounts receivables, that is, money that flows into your business and also your accounts payable, meaning, the money spent on business expenses such as rent, utilities, payroll and inventory. 

The benefits of vigilant cash-flow management practices are not to be underestimated. According to 2023 data produced by Minneapolis, MN based U.S. Bank, poor cash management and insufficient cash-flow are implicated in 82% of business failures. Poor cash-flow shows its teeth in several ways, including:

  • Cash-flow gaps A cash-flow gap is a frightening emergency that occurs when a business pays expenses, for example, inventory or supplies, but does not receive the expected inflow of money within a reasonable time-frame. A shortfall is a warning that the business needs more cash, in a hurry. Maybe you’re waiting for a customer or two to pay invoices? Consistently expanding cash-flow gaps undermine working capital that can leave your business strapped financially, potentially putting it in a dangerous position if not addressed.
  • Managing seasonal revenue fluctuations  Seasonal businesses frequently face significant cash-flow challenges. A typical example is that of restaurants that operate in summer resort locations. During the peak season of Memorial Day (last week in May) through Labor Day (first week in September), these restaurants welcome an endless stream of customers, who pack the premises and overwhelm staff. Revenues are robust while the peak season lasts but in the off-season, greatly diminished revenues can trigger cash-flow gaps that cause the business struggle to maintain financial stability.
  • Opportunities beyond reach Expecting the unexpected, being agile and ready to act, is among the most valuable leadership qualities of a business owner, whether it’s the owner of a neighborhood dry cleaner to the CEO of a multi-national conglomerate. A business needs to be in a strong financial position to take advantage of interesting opportunities as they arise, whether that’s buying out a competitor, opening a new location, or launching a new product—the ability to act quickly usually makes all the difference. Without sufficient available cash, your growth and expansion plans will be hobbled, causing you to miss the boat on potentially lucrative opportunities.

Loans and credit cards are not the only options

When looking to resolve a cash shortfall, many business owners think of contacting their bank to discuss options for a business loan or credit card. Your business banker is there to support you in many ways but finding a solution to your cash crunch might more logically begin with your bookkeeper or accountant. S/he may not warm to the idea of you taking on debt associated with a loan or an increased line of credit; s/he may be more inclined to recommend that you become more vigilant about your entity’s cash management and make a modest investment in a cash management software package instead.

The power of cash management: cash-flow and forecasting

The purpose of cash management is to ensure that your business is able to pay expenses (accounts payable). Cash-flow management tracks how much money enters the business bank account—e.g., through sales revenue, accounts receivable payments, interest from investments—and leaves the business bank account for accounts payable. Cash management procedures position your business to both monitor expenses (and minimize or eliminate unnecessary expenses), make prudent financial decisions and, hallelujah, create and maintain a healthy cash reserve that will insulate your business from the financial instability. You’ll get your financial house in order and attain the means to pursue business opportunities that can further enhance financial stability.

Cash management software works by shining a light on money problems so that you can take corrective action in a hurry. Cash management software enables the user (you and/or your bookkeeper) to quickly and accurately monitor, analyze and pinpoint cash-flow problems. So, persistently late payments of customer invoices that cripple business cash-flow will be brought to your attention and signal that steps to speed up accounts receivables should be taken. Other cash-flow optimization benefits will likewise be made clear from the data that emerges from your cash management software, including the ability to accurately determine the amount of cash needed to cover accounts payable obligations and create a reasonable forecast of your entity’s future financial health.

Good cash management software will also have cash-flow forecasting capabilities to help you manage cash in the future, by creating “what-if” scenarios that let you evaluate various potential outcomes simultaneously. You’ll also be able to calculate expenses and ensure there is enough incoming cash to pay up. The best cash-flow management software will also have cash-flow forecasting capabilities to help you manage cash in the future and make the future of your business entity bright. Click link to learn how you can get started. https://www.trustradius.com/cash-flow-management

Thanks for reading,

Kim

Image: Mother Counting Money, by Johann Georg Mayer von Bremen (Germany, 1813-1886)

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Making Cash Flow

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We’ve just passed the deadline for filing annual taxes. Are you feeling a little cash-poor? Should we talk about how to put a little extra $$ into the revenue column? I suspect that landing a big client will have the most positive impact on your earnings, but counting your pennies and smart planning are always a plus. You just need to discipline yourself to adopt those good habits. Once you do, they’ll become part of your regular routine, the standard way that you do things.

Price right

Don’t be afraid to request adequate payment for the valuable services you provide. Low-balling never got anyone anywhere. I understand that when the cupboard is bare you just want to get a project in-house, fast, and it may seem as though a bargain price will entice prospects to quickly hire you. The problem is, prospects inclined toward cheap labor tend not to respect those whom they hire. You could find yourself in the mix with a difficult client who’s not only a low-revenue client, but also a slow payer. Respect yourself and your abilities and don’t go there.

Pricing B2B services is tricky, though, and benchmarking your price range is difficult. You can’t go online and research what competitors charge for a similar service. Who you know and who knows you, along with work experience in your area of specialty, number of years in business, university degrees and professional certifications and your client list are among factors that potentially impact how you can price. Your unique way of packaging and selling your skills and experience can be another determining factor. You might refer to the March 15, 2022 post Is It Time for a Price Increase for more thoughts on pricing B2B services.

Invoice on time

Freelancers don’t get paid to invoice, but you don’t get paid until you invoice. You must get serious about collecting accounts receivable. Get into the habit of preparing your more detailed invoices a little at a time throughout the month and consider sending invoices during a certain week—like the first or last week of the month. On all invoices, state that payment is due upon receipt. In general, payment is due within 30 days, but a 15 day grace period is typically extended, meaning clients legally have 45 days to pay. If you haven’t received payment by day 48, resend the invoice.

Furthermore, track the time that you spend on projects billed hourly. It’s very easy to underestimate how may hours that you work. I recently reviewed the amount of time that I spend on a recurring hourly project and was shocked (and embarrassed) to realize that I’ve been billing slightly more than half of the time that I should be billing. Corrective action will be gradually taken. I don’t want to give my client sticker shock, but I will discreetly align my invoices with the time spent working.

When discussing the work agreement with a client, ask for a 15% – 20% upfront payment on projects that you’ll bill at $1000 or more. Schedule payments to align with project milestones and leave no more than 30% outstanding for the final payment. On your invoice, indicate how you would like the check made out. If you accept credit and debit cards, electronic checks , direct deposits , or PayPal, include those options on your invoice as well.

Anticipate expenses and set money aside

Create a spreadsheet to help yourself anticipate and plan how to pay predictable expenses, fixed (e.g., quarterly tax payments, utility bills, health insurance) and variable (business association dues, professional development courses you’d like to attend), to minimize the arrival of unpleasant surprises landing in accounts payable. Next, calculate your expected accounts receivable. The document you’ll create is called a cash-flow forecast and is used to predict and plan ahead for 12 months.

Are you coming up short now and again? Figure out how to fix the problem. There are near term and long- term remedies that may be feasible for you. I recommend that you look to money raising opportunities that are related to what you do. But if you must tend bar, for example, do so if the money is good and you won’t run into clients.

  • Are you qualified to teach? Becoming an adjunct professor at a local college pays fairly well and it’s an excellent addition to a Freelancer’s CV. Teaching implies expertise and will enhance your brand and perceived value. Most schools will require that you have a master’s degree, but it doesn’t necessarily have to be related to subjects that you teach. Entrepreneurial incubators also hire instructors to teach subjects such as finance, tech and marketing. Do some investigation. Your real world experience can be leveraged.
  • Do you have good writing skills? If so, there are a number of money- making avenues to explore, including blog or newsletter ghost writing and marketing content for websites. Writing social media posts is another possibility. Join and browse writing and editing Freelance gig work on sites such as Fiverr and Upwork.
  • Align the payment due dates of your significant accounts payable with the part of the month when you usually have the most money. If you have a payroll to meet, W2 or 1099, time your accounts receivable payments to paydays you must guarantee
  • Call the companies you must pay and ask to change the due dates to stagger them or schedule your payments to that sweet spot in the month when you have the most money. You can also apply for a business credit card that can be used to pay certain expenses, but do keep an eye on the balance because credit card interest rates are exorbitant.
  • As a long-term tactic, review your inbound marketing tactics and amplify that which is not bringing in good prospects. For example, do you have two good client testimonials on your website? If not, consider who might be willing to go on record to sing your praises. Re:outbound marketing, consider dropping into your local chamber of commerce to see if those you’d like to meet are known to attend events. If possible, join for a year and see who you meet and what you learn, Buy a small ad in the chamber newsletter to raise your profile and maybe get the opportunity to speak or present a one hour course.
  • The best move is to build up a rainy day fund when your cash finally starts flowing. My fund saw me through the barren early months of the pandemic shutdown. I was still skimping, but I made it. Aim to save for a 6 month cushion.

Thanks for reading,

Kim

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Cash-Flow Cures

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Cash-flow is the beating heart of every for-profit (and also not-for-profit) enterprise and it is imperative that business owners keep a finger on the pulse of revenues that flow in and expenses that flow out of the coffers and constantly monitor the venture’s fiscal health. Your ability to pay recurring bills, invest in the business and maintain operations depend on it.

There are several Key Performance Indicator metrics that reveal the strength (or weakness) of aspects of the business—the number of active clients, the number of subscribers to your blog and/or newsletter, the conversion rate of sales leads and the percentage of clients who give you repeat business, for example, and each tells an important story. But in the end it’s about the money, how much comes into the business (accounts receivable and whatever additional income) and how much goes out (accounts payable, plus interest payments and taxes).

Follow your cash-flow

If you send only a few invoices each month and generate them yourself, why not create an Excel spreadsheet and enter your receivables and payables data there, at no charge? You can monitor invoices (accounts receivable) and update as payments are received. Each month, you can easily calculate revenue. Monthly bank and credit card statements, PayPal emails and updates from online payments, made or received, will verify your accounts payable activity and confirm receiveables that are paid.

You can record it all in Excel (and label it your Profit & Lost Statement) and understand whether you’re making money, breaking even, or losing money when you view the bottom line. With that knowledge, you can create strategies to capitalize on your financial situation or correct it.

If you’d rather pay for an invoicing and accounting service, there are several good options available, including Fresh Books, HoneyBook, Invoice2Go, Oracle’s NetSuite, QuickBooks, VCita, ZarMoney and Zoho Books. The platforms make it easier to send invoices, reconcile accounts, generate reports , track time spent on project work and more.

Evaluate expenses

Examine your company’s recurring monthly, quarterly, or annual expenses. Can you trim the cost of utilities, renegotiate commercial space rent or insurance payments? Why not terminate premium services or other subscriptions that don’t deliver as you anticipated? Ditto for organization memberships that you can’t find the time to utilize.

The work from home phenomenon should help you lower your rent for office or other commercial space. If your landlord balks at dropping the price, consider asking for more space, if you’ll find it helpful, or ask for perks such as a discounted maintenance fee.

If you have a history of paying bills on time, call your insurance, credit card and loan companies and ask for a lower interest or premium rate.

Demand a deposit

When a project fee reaches a mid 4-figure sum, request a 10% – 20% up-front payment at the contract signing. Link subsequent payments to the completion of project milestones. Aim to leave no more than 25% of the fee payable at project completion. In other words, help your monthly cash-flow and revenue by scheduling most payments before the client has what s/he wants. If the client is unethical and “forgets” to make the final payment, you’ll have most of the money in your pocket.

Invoice on time

The thing about being a Freelance consultant is that unless you are a big-league player, invoicing, proposal preparation and other administrative tasks are done on your time. Remember that when negotiating project fees and try to roll it in.

I find invoicing to be a chore, but that’s how I get paid. Within two weeks of the completion of whatever client work you’ve done, train yourself to invoice. On your invoice, state that payment is due upon its receipt.

No-problem payments

If you sell products or provide services at your clients’ homes or offices, enable on-the-spot invoice payments with mobile apps that use your smartphone or tablet to accept credit or debit cards. Investigate mobile payment platforms such as Helcim, Payment Depot, Square, Stax and Stripe.

Credit cushion

A business line of credit is a good insurance policy against cash-flow droughts. Talk to the manager at your bank and s/he will be happy to discuss options with you. Most likely, you’ll receive a business credit card, which will be very helpful as you track business expenses, whether you take a prospect out to breakfast, attend a professional development or networking event, or buy a new computer.

As well, if your credit score is good you may be able to more quickly collect receivables from good clients who are, unfortunately, slow payers, by applying for a NOWaccount. Both your company and the client’s company must be approved. You invoice the client as usual and NOWaccount pays you within 30 days, minus a fee. Client checks are made out to you, but mailed to a post office box belonging to NOWaccount. If you have a good client who is a 60 + day payer, you can be well-served with this option.

Thanks for reading,

Kim

Image: Leonardo DiCaprio in Catch Me if You Can (2002) directed by Stephen Spielberg

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Business Failure: Autopsy and Recovery

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Failure and setbacks in a business venture can take many forms, from a botched new product or service launch, to cash-flow insufficiency, losing the lease on the perfect storefront or office location, to the appearance of an aggressive new competitor. Business failure is painful and humiliating.

Even if the pre-launch planning and start-up capital are inadequate, significant research and planning and usually a large sum of money (that may have been borrowed) are nevertheless invested with the hopeful intention of bringing a new product, service, or company to life. If things don’t pan out, it’s inevitable that those involved feel crushed and demoralized.

The intricacies of launching and operating a business can cause any venture to falter, even if the founder is not directly responsible for the downfall. The many moving parts of a new venture can cause the founder to overlook essential factors, resulting in a failed launch.

Yet, in some cases,  it’s possible to recover and relaunch after an autopsy has been performed and you and your team (if there is one!) have figured out why things unraveled and how to avoid that problem and maybe others, too, in a second attempt. Common stumbling blocks include insufficient operating capital, an ill- conceived business model, an inadequate assessment of what target customers value and improper pricing.

Many Freelancers and entrepreneurs, after allowing themselves to grieve the loss, are able to move forward with determination and a better plan (and additional resources, most likely) to do much better in the next iteration. Take a look at these common causes of business failure and make note of the lessons to learn:

Unanticipated start-up costs and low sales revenue

Whether you self-financed and bootstrapped your business or borrowed from a bank or investors, you can find yourself in financial quicksand if your projections of start-up costs were underestimated and expectations for customer acquisition were blue-sky optimistic. It’s very easy to rack up big credit card debt and then succumb to panic that leads to making reckless decisions, such as second- mortgaging your home or borrowing from friends and family, as you struggle to successfully launch and create adequate business revenue. Unfortunately, you might find yourself unable to repay as expenses mount and customers are slow to arrive.

THE LESSON IS, do your homework. Thoroughly research the amount of money that will be required to launch your new business, or new product/ service, and make a rational plan for how to acquire the funds, whether you go to the bank, self-finance, ask to borrow from selected family and friends, or take on partners.

Regarding target customers, your first task is to figure out who will buy what you propose to sell, whether products or services. Is there a viable and growing market? Moreover, can you access those prospective customers, something that can be a challenge in the B2B sector.  Realistic financial projections will protect you, especially a Break-Even Analysis, which helps you predict when customer sales can be expected to pull into profit-making territory.

Finally, develop a profit-making business model. You must anticipate the start-up costs, be able to access the targeted customers, you must have the right method of delivering the products or services and pricing must be acceptable to the customers and profitable for the company.

Receivables collection problem

“They’d take sometimes 3 – 4 months to pay and it was killing my cash flow,” she said. “I couldn’t pay my suppliers without difficulty. (The company) refused to pay with a credit card. I was trying to get paid.” Lara O’Connor Hodgson, Co-Founder of the NOWaccount

As counter-intuitive as it seems, a business owner can have orders flying out the door and be totally broke. The problem, as described above by Lara O’Connor Hodgson, is that customers can be slow pay and the difficulty in collecting accounts receivable has put many businesses under.

THE LESSON IS, healthy cash-flow is essential to sustaining a viable business. Investigate the NOWaccount, which guarantees that invoices will be paid on time and in full (both you and the customer must have good credit). Those in a service business (me!) are advised to ask clients who contract to pay a project fee for an assignment to pay 15 % – 20 % of the total fee at the contract signing and link additional payments to project milestones or specific dates (at 30 day intervals, for example). The final payment owed should be no more than 25 % – 35 % of the total fee. In this way, you will receive regular infusions of cash and be much less vulnerable to a payment default by ghosting.

Powerful competitor

Facing a big new competitor is scary, but take a couple of deep breaths and take heart. If you’ve been in business for at least a year and managed to attract customers and deliver your products and services adequately, then you have a chance to hang on and continue with a growth trajectory. Just don’t panic; shift your adrenaline to market analysis instead. In reality, your competitor probably does not offer better quality products or services but rather has resources (like a generous advertising budget) that your organization lacks.

THE LESSON IS to 1.) analyze your competitor’s operation and determine the obstacles you need to overcome or what you need to do differently, i.e. smarter; 2.) refresh your customer knowledge to learn how their expectations and concerns may have changed to make them susceptible to switching their business to the competition; and 3.) avoid competing on price, which is usually an unwise strategy for smaller operations.

Larger companies have more money to work with and that allows them to hire more employees, offer a wider range of products and services, roll-out splashy marketing campaigns, stock more inventory and more flavors or colors and also offer lower prices because they can afford to buy in volume from the wholesalers.

Your defense is to brand your business well and customers reasons to think twice about opting for the competitor. Because no two businesses are alike, you must define for current and prospective customers why they’ll do better by doing business with you.

The heart of branding is defining and constantly communicating a company’s unique selling points, so you must 1.) understand the competition’s unique selling points and 2.) learn to clearly define and articulate your organization’s unique selling points so that you can build on the attributes that set your company apart and potentially make you valuable to customers.

When you understand your competition’s unique selling points and update your customer knowledge to learn as many specifics as possible about what resonates with them, at least theoretically, about the competitor’s unique selling points, you’ll see how to tweak your offerings in ways that reflect your company’s “house style.”

New and small businesses should definitely put an emphasis on excellent customer service. The digital revolution has not meant that customer interactions aren’t essential, even though face-to-face communication has become more limited for many.  To the contrary, customer service is even more vital in today’s business world.  Present a customer first attitude and create a pleasing customer experience. Go the extra mile to surprise and delight and your business will quickly become trusted and loved.

If you have employees, you also want to ensure you are the best employer in the industry. Having motivated and skilled staff will provide benefits for your customers and that will translate into benefits for your ability to successfully compete.

Some of the most successful entrepreneurs have suffered the frustrating experience of a business failure. For Scott Adams, creator of the world-famous Dilbert cartoons, life’s path wound through many jobs, failed startups, useless patents he applied for and countless other indignities. In his memoir, Adams shares lessons learned about keeping himself motivated, healthy and happy while racking up the failures that ultimately led to his success.

“It’s fine to celebrate success, but it is more important to heed the lessons of failure.”  Bill Gates, Co-Founder and former Chairman and CEO of Microsoft Corporation

Thanks for reading,

Kim

Image: American Gothic (1930) by Grant Wood (1891 – 1942 Anamosa, Iowa, USA) courtesy of the Art Institute of Chicago. The painting depicts an Iowa farmer and his daughter.

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Who Gets the 1099?

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The year is drawing to a close and we’re crossing into the 11th month. Before you become enmeshed in the celebrations and obligations that the holidays demand of us, do yourself a favor and commence your tax planning. Create an accounts receivable and  invoicing strategy once you’ve decided when it would be most advantageous to receive payment for services rendered in this calendar/ tax year or the next. IRS Form 1099-MISC will be at the center of the action; understanding when you’ll need it and when you might avoid it is your goal.

The payment in question is $600, whether it was paid or received by your organization. Review the accounts receivable history of clients for whom you performed small jobs earlier in the year.  If a client paid you less than $600 in this calendar year, you will not receive or need to file a Form 1099-MISC for the money earned on that assignment.

Start with the easy stuff.  If you find yourself in mid-contract with a client as December approaches and the project isn’t urgent, might it be possible to work until just before Christmas and then resume work in the first week of January, if it appears that will allow you to cap your billable amount at less than $600 for the client in this calendar/ tax year?  That can be one less 1099-MISC to file and a little more money added to your P & L.

If the client has a deadline don’t even think of such a thing but if there is no urgency, why not ask the client if s/he might find it more convenient to take a “holiday break” starting in mid or late December? Many employees take vacation days at the end of the year in a “use it or lose it” strategy and offices can be short-handed just before Christmas and through the end of the year.  I suggest that you refrain from mentioning the tax implications.  Frame your suggestion as a way of being sensitive to what may be going on in the client’s office, i.e., customer service.

Similarly, might you be able to defer until the New Year certain invoices, as a way to keep a lid on this year’s income and taxes and wait until the first week of January to send accounts receivable for work that was performed in December? Let a couple of hours work spill over into January and make your New Year invoice legal.

Now let’s consider the 1099-MISC forms that you will generate and send.  Did you hire any sub-contractors to help you fulfill the terms of a project? Have you hired a part-time bookkeeper or social media expert or editor for your newsletter? If you paid $600 or more to anyone for business services or rents in this calendar/ tax year, then you must send that individual/ company a Form 1099-MISC no later than January 31 of the upcoming year.

So that you will have the information to complete the Form 1099-MISC, it will be necessary to request that all of your vendors and other business services providers complete a Form W-9, ideally before the work they perform commences.  Download Form W-9

Among the important pieces of information that the W-9 will surface is if your service provider’s business is incorporated as a chapter C or S entity, or an LLC or partnership that is taxed as a C or S corporation.  Along with commercial rent paid to or through a property management company (instead of the property owner), a 1099-MISC will not be required for those types of entities when payments for services rendered meet or surpass $600.

Payments for services rendered made by gift card, debit, or credit card are not to be included in the 1099-MISC tally.  Instead, the card issuers will send a Form 1099-K to your subcontractors, vendors, or you when the amount paid for business services rendered meets or surpasses $600.

Obtaining the 1099-MISC is an adventure. You must order forms from the IRS, or visit an IRS service center and pick up a few. The form is not available for downloading.  Click here to order Form 1099-MISC.

Thanks for reading,

Kim

Image: The Tax Collector, 1542   Marinus van Reymerswaele (1490 – 1546)                  Courtesy of Alte Pinakothek Museum in Munich, Germany

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Negotiate Your Way into Healthy Cash-Flow

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Lovely summer is here, generously rewarding us with warm breezes, long days and abundant sunshine.  Summer gives us many gifts but unfortunately, a generous amount of billable hours may not be one of them.  Two possible solutions to the impasse are to step up your networking activity starting in early spring, to help yourself meet and connect with potential clients who are in hiring mode and to let family, friends and referral sources know that you’re looking for projects.  Don’t be shy!

As a self-employed professional, you are the captain of your ship and it is your responsibility to take all reasonable measures to improve your financial position.  Your survival depends on it.  Smart marketing and prudent financial management are the foundation of a successful enterprise.

The most critical aspect of financial management for Freelance consultants and small business owners is to collect accounts receivable as quickly as possible, so that adequate cash-flow is maintained and accounts payable, employees and subcontractors can be paid on time.  Regarding your accounts receivable, I recommend that you take the following actions to encourage on-time payments:

  1. During the project specs discussion propose a payment schedule, perhaps tied to the timing and achievement of certain project milestones.
  2. Request a down payment of 20% – 35% of the total project fee and unless you’ve previously worked with the client, don’t start the project work until it is in hand.
  3. Invoice according to the agreed-upon payment schedule.

I cannot overstate the importance of these three actions.  Accountants estimate that in a given year, 5% – 10% of professional services providers’ invoices will be uncollectible.  The client is not always entirely at fault.  Freelancers must demonstrate that we intend to get paid and that’s done by being serious about the project payment schedule, requiring a project fee down payment and on-time invoicing.

Another helpful tactic is to make money by saving money.  Examining your accounts payable might help you gain a few dollars each month.  The number one accounts payable tactic is to avoid paying late fees by any means necessary.  Several years ago, many companies recognized that late payment fees are a very lucrative passive revenue stream and so they doubled, or even tripled, their penalties.  Some also shortened the length of their grace period window, when a late fee could be avoided.  Defend yourself from this predatory practice by flagging all accounts payable with their due dates as they arrive and make every effort to pay on time.

Another reason to pay on time is that a good payment record can sometimes be used to negotiate a lower credit card interest rate or request that certain fees might be waived or reduced at your bank.  While you’re on the phone and in the mood to negotiate, call your cell phone company and internet service provider and see what they can do to lower your monthly bill.

Adequate cash-flow is the life blood of every business, required to finance all business operations, including marketing campaigns, technological upgrades, professional development and other activities that support the venture.  No business can function effectively, much less grow and thrive, without healthy cash-flow.  Your diligence and negotiation skills can contribute substantively to its maintenance.

Thanks for reading,

Kim

Image: The Fruit and Vegetable Seller (1631) by Louise Moillon (France, 1610 – 1696) Courtesy of La Musee du Louvre, Paris

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Cash-Flow Therapy

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So many businesses in the U.S. are undercapitalized; insufficient cash-flow is a factor in the demise of many ventures that might otherwise succeed.  Cash is king, it is often said, and the wise business owner will do what is necessary to maintain adequate cash-flow in his/her organization.

Make friends with the basic three financial documents and learn to use them as analytical tools.  They exist to enable your success and they will signal you when corrective action must be taken.

Monitor the top line of your company’s Income Statement (sales revenue/ billable hours).  Observe the ebb and flow of the accounts receivable (who owes your business money) and payable (to whom you owe money) on your Balance Sheet.  Make note of the beginning and ending cash balances on your Cash-Flow Statement.  Also on the Cash-Flow Statement, notice the cash sales (representing billable hours payments received as checks, for example) and the operating expenses.

Seasonal variations in billable hours/ sales can potentially exacerbate cash-flow problems if that is an issue in your business (the Christmas to New Year’s slowdown, for example) and pop-up emergency expenses can do the same.  Unfortunately, the outcome for Freelance consultants or other business owners can be a cash deficit, an especially unwelcome state of affairs in a month that involves holiday expenses.

But the primary cause of cash-flow woes is usually a result of persistently insufficient billable hours for services rendered or product sales, perhaps secondary to an anemic client list.

Former Wall Street Journal Assistant Editor Serenity Gibbons points out that if you  struggle to generate enough at the top line, you’re probably facing one of the following challenges:

  • The optimum target clients have not been reached by your marketing campaigns, or the message doesn’t address their priorities or aspirations.
  • The product/ service has limited value to the target clients, or your offerings are overwhelmed by dominant competitors.
  • The product/ service is perceived as too expensive for the value delivered.

It’s time to take control and consider what can be done over the short and long-term to correct the problem.  Do some homework and discover the basic challenges, concerns and goals (as defined by their respective industries) that would motivate your prospective clients and guide their decisions.  Determine why they’re doing business with your competitors and not you.  Moreover, make sure that you are pursuing the best target markets for your products/ services.

A second issue is an administrative one that plagues many Freelancers—-we fail to invoice in a timely and regularly scheduled fashion.  Help your clients to take you seriously and treat you like a “real” business by invoicing when promised. Take measures to improve the odds of getting paid on time and in full.  I’ve lived through this challenge and can report that with a small amount of discipline, it can be overcome.

Third, watch your operating (fixed) and sales related (variable) expenses.  How much are you spending to generate sales revenues/ billable hours? Limit what must get dropped into accounts payable and expand what drops into accounts receivable.

There are usually ways to stem the tide of cash-flow problems, that is, if you take action early enough.  You might start with revisiting your pricing strategy.  Ensure that your pricing reflects the value of your product/ service; that your prices are comparable to what competitors in your area charge for similar services/ products; and that you charge close to the maximum of what clients expect to pay for what you offer. Do some in-depth pricing research, using GSA MOBIS, the federal contract system, as a benchmark.  http://gsa.federalschedules.com/industries/gsa-mobis-consulting-pss-874/

Another useful tactic that serves as a band-aid for cash-flow glitches that are more inconvenient than problematic is your business credit line.  While you’re still able to pay bills on time and have a respectable credit score, investigate obtaining a business credit card through your bank.

Resist the temptation to charge business expenses to your personal credit cards!  Keep business and personal expenses separate and get your arms around the spending in each sector.  Furthermore, a business credit card usually has a much higher credit limit than a personal line and that allows you to more easily make investments in your business and earn cash back and points as you do.

Finally, if inflated business expenses, whether fixed or variable, play a major role in your cash-flow problems, then you will have some decisions to make (re: the selling expenses) and negotiating to do (re: the operating).  If you regularly pay on time expenses for inventory purchases, credit cards, or insurance, for example, get on the phone and ask for lower interest rates or a lower premium.  If variable expenses seem high, reconsider how much you must spend on marketing, advertising, sales and client entertaining.

Thanks for reading,

Kim

Photograph: Baccarat at the Sands Hotel in Las Vegas, NV, with Frank Sinatra (in black tie) as the card dealer (1959)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thanks for reading,

Kim

Photograph: Baccarat at the Sands Hotel in Las Vegas, NV with Frank Sinatra (in bow tie) dealing the cards (1959)

Administrative , Leave a comment

Invoicing Inertia: The Cure

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Freelance consultants are no strangers to cash-flow crunches and as quiet as it’s kept, the problem can be of our own doing, or not doing.  The reason for our cash-flow problem could be a slow-paying or, horrors, a non-paying client (an acquaintance who is a business accountant estimates that 5-10 % of professional services providers’ receivables will be uncollectible in a given year).  But we can be our own worse enemy in these matters and it is time to tame our invoicing inertia.

As example last week, I sent an invoice to a client that was worth four figures and was four months late.  Why was I so negligent, when I had important accounts payable to resolve? Why is it so hard for so many small business owners and self-employed professionals to stay on top of our accounts receivable and send out invoices on time?

In my consultancy, and I imagine this is true for most, client work, both performing it and networking to bring more of it in, are the priorities.  Billable hours are the name of the game. Then there is content marketing activity (this blog!) to send to my preferred social media platform (LinkedIn) and my website.  Other revenue streams—teaching twice /week, which entails responsibilities to my students, and producing a monthly post for the online magazine for women entrepreneurs where I am a staff writer—claim another chunk of time and creative energy.  Being in business requires considerable mental and physical stamina.

The invoice was for hourly work, rather than a project fee, meaning that detailed information was expected (and not unreasonably so).  The very thought of generating the thing nearly made me nauseous, so I found several avoidance-behavior activities that on the surface appeared to be ambitious, but in reality served mostly to enable my procrastination.  Then the client asked me about the invoice.  I was so embarrassed!

As I worked on the detailed, multi-page invoice, I thought about what I might do to simplify the process, so that I could easily generate scheduled invoices and would be motivated to do so.  Invoicing for a project fee is much easier than the hourly rate version and it was project fee invoices plus the job income  that sustained me while I neglected the hourly invoice.  Here’s what I recommend (my business accountant friend approves):

Collect in advance

Whether the assignment is paid by hourly rate or project fee, collect a percentage at the contract signing or email-documented agreement (20 % – 35 % of the project fee, or an estimate of the first months’ billable hours).  Discuss with the client a mutually agreeable invoicing schedule and honor it.

Create two all-purpose invoice templates

In the top left of a Word document, type in your name and/or DBA as the vendor, tax I.D. and contact info. This will become the permanent part of your template.  Below that, type in separate lines  for the client name, date, project deliverables, total amount of the project fee and the amount of the invoice.  All you’ll need to do is copy the template, drop in the specifics and presto! You’ll have an invoice to send.

The hourly rate template will have a cover sheet that is similar to the project fee template, but with the lines for rate (the dollar amount you’re charging/hour) and hours (total billable for this invoice) substituted for the project fee info.  A second page of the hourly rate template will have lines for four “week of” headings, ready for you to insert the dates and specifics of your weekly client work.

Either invoice can be used for retainer contracts.  If you are brought in to work a standard number of hours per month for a particular client, or you’re asked to perform predictable functions as needed throughout the year and you can reasonably estimate how often you’ll be asked to perform those services and your cost to provide them, then you can calculate invoice amounts in advance and determine a retainer fee.  If this is the case, then suggest a retainer arrangement at the next contract signing and bolster your income security.

BTW, it is not unusual to invite a client to pay the year’s (or quarter’s) retainer in advance. Offer some attractive incentives for yearly or quarterly advance payments, like a good discount or service add-ons.

On all invoice templates, indicate how the check should be made out (your name or DBA) and indicate that the invoice is due immediately (although it is accepted practice to pay invoices within 30 days). Finally, state that it is a pleasure doing business with your client.

Invoice on time

Whatever the agreed-upon payment schedule, be sure to follow it (not more than one week late). When you honor the invoicing schedule, you communicate to clients that getting paid within 30 days, if not sooner, is what you expect and deserve.  Timely invoicing also benefits your clients, who will be able to better manage their own accounts payable and cash-flow.  If you start to bring in more lucrative assignments, investigate the process of accepting credit card payments.  You’ll be paid faster, but a small processing fee will be deducted.

Invoice as marketing collateral

To date, my invoices are created on an unembellished Word document, but that is about to change.  I plan to align my invoice design with my other marketing collaterals.  Very soon, I’ll design an invoice PDF that contains a scan of my (lovely) business card, that will appear at center top.  All the other info will be written as described here.  You can also investigate free invoice templates in an online search.

In our hyper-competitive business environment, where clients hold the keys and seem to be looking for reasons to cancel projects that Freelance consultants depend upon, it is imperative that we project professionalism.  All interactions with clients, from the first meeting, to the excellence of our work and concluding with an accurate and timely invoice, must reflect well on our brand.

Thanks for reading,

Kim

 

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Cash-Flow Woes and Antidotes

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Lucky you.  Your sales pitch to prospects is working and clients are stacked up like planes landing at O’Hare.  Receivables are numerous and the balance sheet rocks.  So how can it be that you almost didn’t make payroll  (again)?  How can you come up short on cash,  with all the business you’ve created?

Like so many business owners,  especially those who are new or who suddenly acquire a competitive advantage that creates a tidal wave of business,  you did not recognize the signs that a cash-flow crash was impending,  regardless of how much money was scheduled to flow into your coffers.  You placed your primary focus on creating business (which is vital),  but neglected to monitor the ebb and flow of revenues and expenses (which are vital).  Every business owner must keep an eye on the money ball and take corrective actions as needed,  if we want to keep the business alive and thriving because quite perversely,  as sales go up,  cash can go down.

Here is one example of how a cash-flow crash might happen.   As business expands,  staying on top of accounts receivable becomes more time-consuming.  Those in service businesses  (like website design or public relations) may find that clients,  oftentimes larger businesses whose names we crave for our client list,  may unilaterally decide to pay receivables in 60 days,  instead of 30 days.   Meanwhile,  you have payroll,  office rent,  phone bills,  auto insurance and numerous other operating expenses that are due somewhere between right now and 30 days.

Another cause of cash-flow crashes is improper pricing.  You may sell a ton of T-shirts but if the profit margin is too thin,  you’ll find that excellent sales volume as demonstrated by number of items sold does not overcome an inadequate mark-up.  Revenues generated will not cover expenses.  It will be necessary to either acquire the product less expensively,  or raise the price.

A growing business brings up still more issues that keep its owner awake at night: capital expenditures.  You will need to decide whether or not and when  (or not)  to upgrade office equipment,  open a new office or move to larger quarters,  or hire more workers to keep up with the growing number of customers.

Fail to invest in capacity and you leave money on the table,  plus dissatisfied customers who are likely to kill you on social media.  Get fooled by the romantic delusion of further growth,  invest in demand that never materializes and you are stuck with potentially crippling debt that can bankrupt the business.

That is quite the dilemma and only the best fortune-teller can give the right answer.  John Terry,  of Churchill Terry business advisers in Dallas, TX,  recommends that the business owner focus on one question only when evaluating the possibility of making large capital investments:  will it bring money in the door?  If not,  find a less expensive alternative or learn to make do without it.  Successful business owners learn to preserve and protect liquidity.  Here is an effective antidote:

  • Hire a savvy bookkeeper or accountant to function as the business controller ( full or part-time)
  • Each week,  collect the data on key financial indicators: accounts payable,  accounts receivable,  available cash and the quick ratio (cash + receivables / current liabilities + payables) to monitor that all-important liquidity
  • Each month,  collect the data on these indicators: accounts receivable turnover ratio (how long does it take to get paid?),  the operating cash-flow ratio (cash-flow from operations / current liabilities)  and the pre-tax net profit margin

It is imperative that you are able to pay obligations when they are due and for that you need cash in hand.  Analyze the above indicators weekly and monthly and learn what is really happening behind the scenes of your business.  Track the available cash trends over time.

Seasonal variations may become evident.   You may have to step up collections of receivables or approach certain clients about speeding up payments.  You may have to request more money up-front before taking on certain projects,  so money will come in faster.  You may need to trim expenses.  You may need to raise prices.  The decision of whether to invest in capital upgrades will become clearer.

There are software programs that will track important data and help business owners resolve problems and set priorities.  Accounts receivable,  cash,  inventory and liquidity can be monitored,  along with confirmation on whether the business is on target to meet budget and revenue goals.  For those businesses that get a lot of repeat business,  it is also possible to track the profitability margins of key clients.

Thanks for reading,

Kim