Business Owners Toolbox Blog Discussions and articles to help the small business owner solve the challenges they face as they grow their business.

September 6, 2012

How to Build Consistent Revenue and Cash Flow

Filed under: Finances — Tags: , , , , — Mike Van Horn @ 10:27 pm

Question on LinkedIn by Sandy McMahon

A: Revenue and cash flow inconsistent? How many of these will work for you?

  • Counter-cyclical revenue sources. If you have a down season, what could you add that would bring in revenue at that time? Could you offer sales or specials to incentivize customers to buy during the off season?
  • Different size jobs or customers. Suppose you have big projects with big gaps between them. Could you add some medium-size or small jobs to fill in the gaps between the large ones? Assign these to your junior staffers.
  • Make sure you’re billing for all the work you do, billing on time, and collecting what’s due you. I can’t believe how often I discover that cash-poor clients are billing only after 30 days . . . and not collecting for 60!
  • Revolving line of credit. Are your revenue cycles predictable or not? If predictable–say, you know that every Q1 and Q3 are slower–then you need to manage your Q2 and Q4 cash to bridge the slow periods. Or have a revolving line of credit that you draw down then repay as the cycle turns up.
  • Fatten up, then hibernate. If you are a sole consultant, and you suffer from a couple of slow months every year, then do your cash flow planning based on a 10-month year. Make sure those 10 months give you what you need for 12 months. Then take two months vacation each year! Better than stewing about no business. Don’t tell me your clients can’t get along without you. They’re not doing any work during the holiday period either.
  • Change the way you price. Change from hourly billing to monthly, or even annual rates. Most of my clients pay us a set monthly fee, and this greatly eases my cash flow worries.
  • Raise your prices. If you have cash gaps, you are under-pricing. Your clients want you to be available when they need you. This requires that you stay healthy even when they don’t need you. That overhead needs to be built into your pricing.

Wildly fluctuating revenue? If your cash cycles are just not very predictable, then what? The less certainty in cash flow…

  • …The bigger cash cushion you need. You need enough cash + line of credit to carry you through 2x your biggest swings–from peak to trough, and from peak to peak.
  • …The lower your overhead should be. Unpredictable, highly-variable businesses need to be low overhead, high margin. You need fast payback capital investments. Nimble and flexible. This includes your work force. They’ve got to know that they work only when there’s work to be done.
  • Innovate! How can you reinvent your business to get out of such a stress-inducing model?

Bad marketing = cash crunch. Inconsistent revenue may follow from mediocre marketing. You may need to tune up your marketing. For example:

  • You need better customers. You’re going after the wrong ones. You want customers that give you the level of business you need, pay your price, pay you on time, and are so happy they refer others to you. This requires knowing the value of what you sell, and being able to communicate this to those who value it. And of course delivering it well.
  • Cross-sell and up-sell to your customers, and ask for more business. Have a higher-price premium offering.
  • Change your offering so that it commands a higher price point. Make sure you’re not perceived as a commodity, and thus subject to being bid down.
  • Offer add-on services that bring in a steady revenue stream. For example, a maintenance or management contract after the initial job.

Growth sucks up your cash. Everything I said assumes a steady-state business. If your company is growing, all these dynamics are exacerbated. Growing companies are often strapped for cash, despite increasing sales, due to the gap between sales, paying cost of goods sold, and collections. In addition to smoother cash flow, you need an infusion of permanent working capital to cover the cost of your growth until it can be recouped through increased profit.

What other good ideas would you add to my list? Add ’em in the comments below.

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