Your studio is dynamic and producing high quality work; the team rocks, you collaborating with best-in-class specialists and your clients are happy.  The monthly report from your bookkeeper shows you made a decent profit last month.  So why are you losing sleep over your bank balance?

 

The bank balance is the heart beat of any small business.  Having vision on the ebbs and flows of your bank balance many months in advance is powerful.  Whether it’s a rosy prediction or a gloomy one, it allows you time to make strategic decisions regarding a plan of action.  Having your head stuck in the sand and being hit with an impending cash flow crunch is one of the worst challenges we can face as entrepreneurs.  Let’s look at some techniques that have worked well for our Business Design clients at Measure.

 

Maintain an Open Projects List

You probably have one running in your head at all times but our suggestion is to formally map out all projects that are open and currently being worked on.  There are several great workflow management tools but a simple spreadsheet works well too. Download our Sales Pipeline Tool which includes the following worksheet:

Project

$ Project Size

$ Collected

$ Outstanding

% Complete

Project Duration (Mths)

ABC Client

$20,000

$5,000

$15,000

25%

2

XYZ Client

$30,000

$15,000

$15,000

75%

4

Total

$50,000

$20,000

$30,000

50%

3

A quick glance shows this studio has $30,000 it can expect to collect over the next 1.5 months (50% of 3 Mths Project Duration).

This approach to an open projects list can help you determine what projects you’ll be collecting cash on in the coming weeks and months.

 

Maintain a Sales Pipeline

A sales pipeline, sometimes called a sales funnel, is a list of prospective projects you are hoping to win and a realistic probability of winning them.  While the Open Projects list helps you predict what you’ll be collecting over the short term, a sales pipeline tells you who’s likely to turn into your next clients and when.  Again, there are tools out there, but a simple worksheet will do fine for any company.  Keep this list to prospective clients we’ve engaged with in some capacity (you can keep the wishlist as motivation).  Here’s an example:

Prospect

Description

Project Size

Probability of Closing

Weighted $ Size

Time to Close

Project Duration (Mths)

ABC Co.

Full Service

$40,000

50%

$20,000

3

3

XYZ Co.

Digital

$15,000

80%

$12,000

5

2

Pipeline

 

$55,000

 

$32,000

4

2.5

 

A quick glance here shows us that this studio has a total of $55,000 of project work in their pipeline but only expects to win $32,000 worth of new business.  They expect to win this business over an average of 4 months and will take an average of 2.5 months to complete the work.

This tool, if you put the time and honesty into it, can be very accurate and powerful in terms of predicting revenue and cash in-flows. Equipped with this cash flow knowledge, you can make strategic decisions around either ramping up for the upcoming work or scale back and use contractors appropriately so you’re not blindsided. Review this sheet along with your open projects worksheet weekly at least – never monthly.

 

Bill Early, Bill Often

This simple strategy has a few benefits.  When you send your clients invoices in stages for project work, the increments will be smaller and will help with their own cash flow planning.  Secondly, many clients have a monthly payment schedule and if your invoice is received a day after their cutoff date, you may be waiting another full month before receiving payment for your work.  Billing often also means your clients will see your invoices more frequently and you’re more likely to be top of mind as they sort out their accounts payable for the month.  And lastly, by spreading out your invoices into smaller, more frequent increments, you minimize the risk of your client being unable to pay a large invoice, or pay in a timely manner.

Also, add a payment schedule to your intial contracts. This can be a great element to gain alignment on payment with your clients. Make sure to add the specific dates to each payment. You can align these dates with phases or deliverables or simply communicate them as progress payments.

 

Contingency bank balance

This is something we like to use with our Business Design clients.  A contingency bank balance is essentially running some scenario analysis on your predicted cash flows.  We might scale back revenue predictions by 25% to see the impact or delay the timing of predicted cash inflows by assuming projects get extended by a month with no opportunity to invoice the client until the project is complete.  Knowing the amount of tolerance in your bank balance can be one of the best ways an entrepreneur can sleep at night.

 

F*&k You Pay Me Attitude

This is a philosophy more than a strategy, but it can speak volumes of your character when communicating with your clients.  When you deliver an excellent project for your clients, you’ve fulfilled your commitment to the relationship and you shouldn’t accept being at the end of the line when the bills get paid.  You’ve done great work and this is how you support yourself, your family, your business partners and your employees. Never be embarrassed to ask for prompt payment for your work.  If there’s any embarrassment to be had, it should rest with the client who is unwilling or unable to manage their cash flows and accordingly pay you for the work you’ve completed.

 

The bank balance is the heart beat of your business and managing cash flows is one of the most challenging aspects of running a studio for many entrepreneurs.  Keeping your head in the sand on your cash flows is a sure way to sleepless nights.  Using the tips and tools outlined here will help you map your cash flows for the months ahead.  And remember, whether you’re predicting boatloads of cash or a tight squeeze over the upcoming months, having this knowledge well in advance offers you the time and perspective to make strategic moves and avoid reactionary, anxiety based decisions.