Navigating Cash Flow Challenges: Stories of Success and Solutions

No business is 100% immune from cash flow issues.  There are some business models that are less prone to issues (ex. professional services) and others that have constant problems (ex. construction).  Cash flow issues can cause minor damage and may go unnoticed and then there are the catastrophic ones that can’t be recovered. The key is to know you will have some kind of cash issue and to catch the issues when they are minor and turn them around before the major one takes over. 

And then some are catastrophic and out of your control - but can be protected against- such as having a warehouse burn down and not having the cash or insurance to recover the business. 

The most common are the minor cash flow issues that can go on for a long time without too much pain but are causing a slow decay of your business health and need to be fixed.

Paying attention is the BEST place to start and something all business owners should be doing. The ones that make it through the cash issues, are the ones that pay attention. However, all cash flow issues have slightly different solutions based on the type of business and the specific circumstances.  I’m sharing a few stories of what has worked well for a few of my clients (and myself!) to keep the cash flowing. 

Story #1

Client: Speciality Construction

Major concern: No consistent salary for owners, unpaid final invoices

When I started working with this client, the two owners were not being paid consistently, they had clunky payment terms that were inconsistent and didn’t favor cash flow.  They had been working hard on their strategy to find the right clients at the right price and were getting close to reaping the benefits of that strategy. Even with the right clients that were paying them more money, they needed better payment terms to keep the cash coming in on time. 

When we first started working together, they were not requesting deposits so they would have to pay out of pocket for materials and then wait for total payment. This got them into a cycle of using the previous job’s payment to cover the next job's materials and then hoping there was enough to pay themselves. All they did to correct this was to have better payment terms, stay consistent with them, and keep on top of billing clients. Simple solution, often challenging to implement when you’re stuck in a cash-eating cycle. 

The new payment terms included: 10% of the total job cost as a deposit to hold the spot, 50% of the total build when the project was starting, Progress billing between the start and end of the job, and a final payment. The target for the final payment was to be less than 10% of the entire job. There are two components of that last payment to note 1) per the terms of their contract, any warranty offered was not in place until that final payment was received 2) the amount needed to be under 10% in the chance of non-payment if it doesn't break their cash flow rhythm. There’s something about that industry when customers simply choose not to pay (I find this confusing since it is essentially stealing!). Because of this shift, they were able to build up a significant amount of cash in their bank allowing them to start paying themselves regularly.

The second part was to make sure they could maintain paying themselves a regular salary.  We started them on a conservative base salary to keep the cash in the bank and then 6 months later adjusted it up by $2K per month per owner. Now they’re looking at another baseline salary increase because the bigger and higher-paying jobs are starting. 

These small changes have been a huge success for them. They’ve been able to keep that up for ~10 months and now the forecast and jobs are coming in consistently enough that they will keep their base salaries consistent and each receive bonus pay after a job is completed. 

Story #2

Client: Premium product, manufactured and wholesale

Cash issue: months of negative net income

This client manufactured and sold premium home goods. She had amazing & growing sales year after year and had her operations dialed in.  The big gap in their cash flow was caused by seasonality. On the “on-months,” the business would build up $300K - $400K in the bank, and then on the “off-months” that reserve would deplete to cover the dip in sales and taxes. 

Having negative net income every month, but not on a 12-month basis is beyond common. Often this is referred to as seasonality. And there are so many things business owners can do to protect their businesses from those downtimes. In this particular case, the owner was already adding new lines to cover the off-season that were even higher margins than their original products- which is fantastic- and solved one part of the issue. 

The second issue was that the owner didn’t have a plan in place for how much cash they needed to keep on hand for those dips, they lumped all their cash into one account without allocating a portion to taxes, bonuses, or owner distributions. This isn’t wrong, but can get muddy. The next step for them was to get a plan in place to hold all the cash in a way that they knew what to do with each part of it. My recommendation was to have a tax account, and a cash reserve account and to dive deep into their growing working capital needs and maintain a cash-on-hand balance. Over time, this strategy combined with the new products, will correct that “off-season” dip in net income. This type of solution is a long-term plan and may take up to 2 years to see the full results.

Story #3

Client: Venture-Backed SAAS

Major concern: extending cash runway, investment vs holding cash 

The practice of extending your runway (cash on hand / net income) is a helpful tool whether or not you’ve fundraised. The principles are the same and more businesses should do it regularly - even if they change nothing.  This particular client needed to go from 18 months to 24 months of runway and make sure everything in the business was working towards driving revenue. The goal was for him to sustain the business for 12 months without raising funds, which would provide an additional 12 months during the fundraising process. 

To make this work, we worked together to review all the current expenses. In this case, the primary expense was headcount. Headcount is tricky when you’re figuring out what’s driving revenue in an earlier-stage business or one that has just made a pivot. Typically, I work through all the expenses before getting to headcount.  Emotionally, it’s a lot easier to cut software than people and once an owner can start to see where expenses may not be contributing to revenue growth it’s easier to have that conversation around where headcount may or may not be driving revenue. 

For this client, the biggest expense we cut (outside of headcount) was in lead generation. The leads that were coming from the $5K+ / month expense were not closing. It was a no-brainer when we looked at the data. We started reviewing all the expenses, and the biggest shift we made was marketing lead generation which was not performing well. We cut one immediately and gave the other one another month before letting that go too. Then we reviewed all other expenses. This team was already running lean so there wasn’t much, but we still managed a few extra $$. 

Finally, we reviewed a few scenarios of what could be done on headcount. This client had an outsourced team where they were able to negotiate a better rate - which saved over $10K per month! For the main team, we looked at what the team needed vs what the team had and were able to make some strategic changes. With all these changes and an updated revenue forecast, we had a plan to extend current cash to 24 months and if sales increased we could see the breakeven point.  

Story #4: My business 

I could write one of these for all the clients I’ve ever had and easily have content for over 100 blog posts. And so maybe another one of these will come out later next year. I’ll leave you with a few strategies I’ve used in my business that sound simple but didn’t seem that way before I made the updates. 

1st Payment terms: When I first started, payment terms were pretty clunky and inconsistent, some were upfront and some were billed after work. I also was way too lenient for clients that paid late, leading to a few unpaid invoices, or getting paid a few months late and still completing work! It wasn’t great. 

2nd Payment system: I was using Quickbooks invoicing. I did request ACH and 99% of my clients complied, a few requested credit cards. ACH helped keep the fees low. Even with that, at scale, Quickbooks takes $10 for each ACH transaction and for credit cards, the fees are decently high. I also couldn’t automate it, I was manually sending invoices every month which ate up a lot of my time

I solved both of these issues with one big shift - a new payment system that allowed recurring payments. This forced me to update the contract terms. I moved all my clients to auto-debit on the 1st of each month. I had a few clients I let stay off the platform for a few additional months, but it was a pretty easy switch for most and after 4-5 months. I had all existing clients' payments coming in on the 1st. The system I used was https://www.plooto.com/ (not sponsored!). Their fees are inexpensive, they have an auto debit, and can be synced with QuickBooks. They’re very simple and it works great for my business. It also saved me a lot of time not manually sending invoices and waiting for payment. Not all businesses can set up automatic payments, but if you can and you’re not, you’re leaving money (and time) on the table.

Are you looking for more help correcting your minor cash flow issues? Check out this virtual retreat on December 8th hosted by Copper8 Strategies.