Six Ways to Smooth Out Uneven Cash Flow
How one small-business owner made strategic changes when finances became unpredictable.
Opinions expressed by Entrepreneur contributors are their own.
Four years ago I began to notice that my business's cash flow would, like clockwork, experience two rough periods during the year. The first was between December and February and the second from July to the beginning of September. Specializing in producing short promotional videos known as "sizzle reels," we had plenty of client work in-house during those periods but were lacking the funds to fuel our overhead. The problem was that many of our clients were taking up to 60 days to complete payment on their invoices.
I began working with my team to come up with creative ways to help avoid these financial ruts. Here are the six steps we took to correct our cash-flow woes without losing personnel or productivity:
1. Adjust customer-credit and payment terms. Initially, we requested that clients pay a 25 percent down payment for projects. But projects for smaller clients often took longer and so final payments for these were longer in coming. To remedy this, we increased the initial down payment for first- and second-time clients to 50 percent. We also increased the down payment percentage on our longer-term clients by a few points.
Related: Working Capital Analysis
2. Offer discounts for early-payers. As a fledgling company, the last thing we wanted to do was start harassing late-paying clients or demanding high interest rates on outstanding invoices. It's not exactly the path to winning future business. Instead, we began rewarding clients a 3 percent discount if they paid within 10 days of the billing date and a 5 percent discount if they paid within five days. This tactic encouraged more than 20 percent of our clients to pay faster.
3. Establish "milestone payments" for longer projects. We had always collected two payments -- one upfront and the other on completion, but never in the middle of an active project. Yet with production work sometimes spanning 30 days or more, the lag between our down payment collection and our final payment could span more than two months.
The solution was to add a "milestone payment" to projects lasting longer than 25 business days. This payment would be due directly after our clients approved the second rough cut of their sizzle reel, or the midway point in the project. If it wasn't paid, we'd put a pause on production. Clients rarely took issue with this new installment and it helped cut down on the waiting time between payments.
Related: Four Ways to Get Paid Faster
4. Create new revenue streams by expanding existing service packages. For example, we began offering a service to store client assets and project files for long periods of time, providing clients the ability to re-edit their sizzle reel on site while saving them money in the process. For such add-ons, we requested that clients pay in full upfront, allowing us to increase our immediate transaction income.
5. Retain control of the final product until it's paid for. Prior to our cash-flow dilemma, we would give clients their final deliverables when they approved them -- not after the final payment. We realized that by releasing control of the product, we were also losing some leverage in requesting speedy payment.
We began watermarking all of our products or offering select customers low-resolution videos for limited use until final payments were collected. This encouraged our clients to make a prompt final payment. In some cases, with this new policy in mind, they would pay us before we completed the project.
6. Renegotiate vendor and freelancer contracts. In the video-production business, many companies complement their internal creative team with a core group of freelancers. My company was no exception. For our extended team members, I negotiated longer payment plans, offering the incentive of additional interest on their payment. This allowed us to keep them working on projects even though they waited a little longer to get paid.
In regard to our vendors, I decided to put all the services we needed up for re-bidding, including new service providers into the mix. We renegotiated several less-expensive contracts. In one case, a new vendor offered us better services at half the price than our previous vendor.