Unlike recurring revenue obtained at a software company or a maintenance company, project-based companies have unpredictable factors that affect both their cash inflows and outflows. Most projects are invoiced after completing certain milestones. At the same time, a company incurs the cost of the raw materials, salaries, and other services. So, there is a likelihood of running out of cash before the next check arrives - especially if a client has any delay in making payments. Cash flow control is essential for the business to survive. Here are a few tips to help manage cash flow successfully for project-based businesses.
It is important that the client pays for the work on time to keep the business cash flow positive. You would want to work with project owners or contractors that are prompt in processing your papers, signing off on the completion of work, and paying when an agreed milestone arrives. Again, it is important to determine the creditworthiness of your potential clients by reviewing business profiles (i.e., Dun & Bradstreet) or any other credit information available online.
Researching the client reassures you that the project owner is capable and willing to pay for his or her projects on time. In the contract, insert a clause for the duration of the payments and terms for the payment. Agree on what steps should be taken if the payment is delayed.
Once you sign the contract, be sure to keep to the terms and the original plan of the project. However, some changes may be necessary during the course of the project. Before implementing these changes, no matter how small they are, communicate your intentions to the owner so that there are no misunderstandings when it comes to paying for the work done.
Negotiate a payment schedule and terms that are favorable to the business. Consider the upfront costs that come with mobilizing the resources, workforce, and delivering the services. Select suppliers who are willing to wait for the payment until you are paid or time your payments to be a few days after you receive payments from the clients.
If you are working on a custom or a unique project (like a website design and development project), push the client to make a security deposit that is at least 30 percent of the total project price. Unique projects have a complex combination of factors, and anything might go wrong in the process which cannot be attributed to negligence or ignorance. Therefore, it is good to have some form of security in deposits.
If a customer’s history of paying contractors is not available or has been tainted at some point in the past, consider asking for an upfront payment. A deposit reduces your losses should things hit rock bottom. For large projects, the deposit gives you the boost that you need to put together a workforce, resources, and materials to start working on the project.
Milestone payments are ideal where the client refuses to make deposits before the work begins. You can have payments done when each phase of a project is completed. In this case, negotiate for payment values that parallel your costs or exceeds them. For example, you may ask for 15 percent pay once the material arrives on site, 10 percent when you are done with engineering work, and so forth.
On the other hand, negotiate with suppliers to allow you to pick your materials on credit. Vendors with who you have worked in the recent past might be willing to release the materials if you had a good working relationship with them.
A high number of accounts receivable is detrimental to your cash flow. Try as much as possible to keep your accounts receivable as low as possible. Furthermore, try to implement payment terms that are Net 30 or earlier. This will hopefully allow you to reduce days outstanding to less than 40 days. Here are a few tips to consider to help in collecting your accounts receivables:
Ensure that you have all the required documentation before the projected payday to cut down any delays. Ensure that the documents go to the right people who would be making payment decisions on behalf of the company. Follow up with the said individuals to address any concerns with the work done or the documentation accompanying the completion of the work.
Get a contact person who can help you push for payments or get any other information with ease. He or she can check if the project has been discussed and what the project management team concluded. The information helps you push for faster processing of your payments, especially where the client has a long, bureaucratic process of approving projects and releasing the payments.
Do not be shy to ask for payments once the project has been completed and signed off on. Send your invoices on time. Most companies have a payment cycle cut-off date where invoices that come beyond the date are paid in the next payment period. To be safe, send your invoices as soon as you complete the agreed milestones. Consider electronic invoices; they get to the intended person immediately and are easy to track.
Follow up on the invoices after some time. Most companies shy away from reminding the customer to pay when the payments are delayed. Send a short reminder message that the payments are due. Some invoices may have been forgotten if the project was not large.
It is imperative that you look for ways to maintain a healthy flow of cash and reduce the outflows beyond a set critical level. This will help you to complete projects on time and avoid looking for expensive credit to seal cash deficiencies.
Tristan Pelligrino is a lifelong entrepreneur who has founded several small companies. He started his career as an IT consultant working for large organizations like PwC, IBM, and Oracle. After an early career in consulting, Tristan branched out to create a leading regional video production company and digital marketing firm, and he is now focused on spearheading financial management with small businesses at Receivable.io.