Managing cash-flow is at the heart of any service-based business, and it can be a huge challenge when you’re first starting out. We’ve all experienced the feast-or-famine cycle and I think it’s the number one thing that contributes to entrepreneurs flaming out and giving up.
It has taken me years to get a better handle on my cash-flow and even now, it can still be a struggle. Unfortunately, there is no one single solution to cash-flow problems, but I have found some success by examining and changing how I manage clients and their expectations.
1. Always get a deposit
Always, always, always get a deposit. You may not think it’s a big deal, but it is. The reason it’s such a big deal is because of client expectations, which you are solely responsible for setting.
There’s an old anecdote about a man who won the lottery. He decided that he wanted to help his neighbor, so every week he walked next door and handed his neighbor a $100 bill. The first week the neighbor was blown away by the man’s kindness and thanked him profusely. The second week was the same. But over time, the neighbor grew accustomed to receiving these $100 bills. He even began to feel he was owed this money. One day the man had no more $100 bills to give, so he stopped visiting his neighbor. To his great surprise, the neighbor was furious. “Where is my money?!” he demanded.
That’s a bit of a ridiculous analogy, but it shows how people respond to the expectations we set.
If you are willing to start working before you receive a deposit, you’re telling your client that they can walk all over you, and they will if given the opportunity. It’s not because they’re jerks, it’s because of the expectations you set at the beginning of the relationship.
2. Send regular invoices for smaller amounts
When I first started, I split payments into two equal parts: deposit and final payment. This can work with small projects (less than one month), but in general it’s a terrible idea.
Once my average project size grew to about three months, I found myself with large periods of no money. Maybe you’re the kind of person who can manage large sums of money every third month with nothing in between. I certainly am not and my guess is, most freelancers aren’t either.
So, what did I do? I decided to break up my billing into smaller, more frequent invoices. It looked something like this:
- First payment when project starts
- Second payment when design is complete
- Third payment when development is complete
- Fourth payment when project launches
This was a step in the right direction, but I still had a major problem; my billing was tied to deliverables. Which leads me to the next (and most important) point.
3. Don’t tie payments to deliverables
I’m sure the problem here is obvious. When billing is tied to deliverables, you are at your client’s mercy. Every time there is an extra round of revisions or a change to the project scope, your payment timeline will fluctuate.
One solution that I have found very successful is monthly billing. I create a timeline for the project and then divide the invoicing by the number of months. So if the project is three months long, the client will receive three equal invoices that are due upon receipt and not tied to any deliverables.
Now, you’re much better prepared to manage cash-flow because you can expect a certain amount of money every month. It also lowers the chances that you will get screwed if a client decides not to pay. If you don’t receive a payment, you stop work. This is so important. You’re not a bank. You don’t offer financing. What do you think would happen if you went to the grocery store and said, “Can I go ahead and take this gallon of milk and send you a check in about three weeks”?
I’ll tell you what would happen; you wouldn’t be getting any milk. With smaller, more frequent payments, your work-to-payment ratio is more in line and you’re chances of getting screwed are lower.
4. Be firm, but don’t be a jerk
Setting expectations is hard because we don’t want to sound like jerks. Contracts, invoices, and deposits are all difficult discussions because it sounds like we don’t trust our clients. Being nice is critical. You can set expectations in a way that feels cold and impersonal, or warm and inviting. It’s up to how you deliver it.
Never compromise your values, but don’t be a jerk either. I once had a client who was haggling with me on the price of a project addition. It was a very small thing, but they were trying to get my estimate down by countering with a lower amount.
I called the client and explained that my estimate wasn’t negotiable, but that I valued and cared about them as a customer, so I would do this one for free.
If I had accepted the lower amount, I would have sent the message that my price is arbitrary and that I didn’t really believe in my value. Instead, the client walked away with an immense amount of trust in me. They knew I took my business seriously, but I also really wanted them to succeed. The next time, they didn’t haggle. They trusted me and knew I had their best interest at heart.
Cash-flow management is foundational to the success of your business. The problem with a foundation is that if it’s weak, the whole house can collapse. Build a solid foundation by properly setting your client’s expectations, billing in smaller more frequent chunks and being nice. These steps will go a long way.
For even more tips on better cash-flow, check out this article by Allan Branch.