Even the most successful digital services agencies occasionally have problems with negative cash flow. Negative cash flow occurs whenever a business pays more money in the form of expenses than it receives in the form of paid invoices.
This situation of negative cash flow may not cause a problem if it is corrected immediately; the ebbs and flows of business can usually handle the occasional month of negative cash flow. However, the financial instability this causes will eventually have a major impact on your business if left unchecked.
Negative cash flow can result in costly interest payments when you have to float the agency on credit or debt. It can grind your operation to a halt when you simply cannot make payroll or other expenses.
So how do you ensure that your cash flow is positive every month and predictable so that your agency functions smoothly? Here are Accelo's best tips for excellent invoicing practices to keep your cash flow management functional and positive.
Even strong business leaders can become a little bashful when it comes to conversations about payments, and it's clear that this is a widespread problem. According to a 2013 industry report, 62% of invoices take more than 60 days to get paid.
What your invoicing practices really amount to is protection to help you and your business ensure that you'll get paid on time. By having clear invoicing information available to your clients, and mutually understood consequences in the relationship when invoices aren't paid on time, you give yourself a clear guidebook for how to proceed.
You’ll also want to maintain strong client relationships even when errors like payment delays occur. However, it is equally important to avoid patterns of missed or late payments that string you and your company along, forcing you to float the expenses for those services without payment.
Being clear about when you'll invoice, your payment terms, and the consequences of late payments, such as late fees, is key to being able to enforce those terms later.
If clients have been very clearly informed of the terms of your relationship, and you follow through with clear, on-time invoices, you remove all the legitimate barriers to payment. Make it so that no client could claim they didn't know when payment was due.
These days, practices that overwhelmingly benefit clients, such as not invoicing for out-of-scope work or waiting to be paid anything until an entire project is done, have become common. In some cases, you'll still receive your payment, but there's a greater chance of never being paid, which can compromise your cash flow.
Building routine progress payments of a certain percentage into the contract with your client helps you keep the cash coming in throughout the course of a large project. When your client pays those routine progress payments, they are creating a trust relationship that says they will pay for the services they are receiving.
Your end of the deal, as always, is to create timely invoices and make them as convenient as possible to pay. Cloud-based tools give your clients payment reminders and a variety of convenient options for paying their invoices. The accountability and ease of use of cloud-based tools makes them hands down the best way to get great results from your clients.
Ready to find the tool that's right for your business' financial performance? Get started with a free trial of Accelo! Learn additional steps you can take to improve cash flow by downloading our eBook, Profitability Lessons for the Agency Owner: Book Two, today.