Stop Acting Like a Bank: How to Avoid Cash Flow Problems in Your Small Business

Is your small business acting like a bank? If you’re struggling with cash flow problems, it may be. It’s a common problem for small businesses across all industries. Fortunately, there’s a solution.

Before we get into cash flow problems with small business operations, let’s talk a little bit about what cash flow is and what it means for your business.

Cash Flow for Small Business Meaning

Like most businesses, you have cash moving in and out all the time. The net balance of your incoming and outgoing cash is your cash flow.

A business can have positive or negative cash flow. Positive cash flow means that you have more money coming in than going out. Negative cash flow is the opposite: You’re spending more than you’re bringing in.

Of course, this is an oversimplified definition of cash flow, but essentially, it all comes down to whether or not your business is bringing in more money than its spending. For many small businesses, that answer is no.

How to Avoid Cash Flow Problems for Small Business: Stop Acting Like a Bank

Many small businesses wonder why they don’t have more cash in the bank. They have all these contracts, but they’re struggling to pay their bills. Cash flow problems are common for small businesses, and in many cases, a big part of the problem is that they’re acting like a bank.

What does that mean?

When signing a contract with a customer or client, it’s assumed that it’s common practice to break payments down into two phases: 50% due upon signing the contract, and 50% due upon completion.

But just because you think it’s a standard practice in most industries, that doesn’t mean that it’s the appropriate choice for your business. Here’s the problem with this arrangement:

• That initial 50% deposit gets things up and running, BUT
• It leaves you floating 20%-30% of the cost because that last 50% doesn’t come until after completion.

If you’re only requiring a 50% deposit at the start of the project, at some point, the client’s money is going to run out. That leaves you fronting the cost of production until you receive your final payment at the close of the project.

What you may not realize is that when you do business this way, you’re acting like a bank. The only difference is – you’re not earning any interest as a bank does.

The Solution: Add Progress Payments to Your Contracts

You run a business – not a bank. So, how do you increase cash flow and avoid floating that 20%-30%? Add progress payments to your contracts!

One simple way to do this is to add milestone payments for completing certain stages of the project. Once you complete a phase, the client is billed for 25% of the balance, or whatever arrangement works best for your business.

When building progress payments into your contracts, think about when you may need cash. At what stages do you normally run low on the client’s money and have to dip into your own cash? These may be the appropriate stages to ask for progress payments. Once you even out your incoming cash, you’ll see stabilization in your small business’s cash flow.

Don’t Be Afraid to Ask for Payments

Many small business owners are afraid to ask for payments. Maybe you don’t want to bother or annoy your clients. You may have other reasons why you’re bashful about asking for payment. But it’s important to remember that your client agreed to pay you. You are being paid for completed work and time.

If you struggle with asking for payments, read my previous post on Getting Paid.

It’s important to remember that you’re running a business – not a bank. So, stop acting like one. And if you’re struggling with cash flow and contracts, don’t be afraid to hire a professional bookkeeper that can help you deal with and overcome these issues.