, we discussed the preparation of a short-term cash flow projection. It's smart to update this projection every week before you make any disbursements. Most design firms try to prepare the majority of their checks in one weekly batch because it's a more efficient approach than writing checks in dribs and drabs. If your short-term projection shows that cash will go negative during any of the upcoming 15-day periods, you need a plan for dealing with that temporary shortfall. Your options include the following:
1. Speed up receipts
It's difficult to get clients to pay early, but you can definitely speak with any clients who are habitually late. Negotiate with them to bring their payments up to date.
2.Slow down payables
Some business expenses, such as payroll, rent, and taxes, must be paid on specific dates. However, you may have more leeway in scheduling payments to vendors. If you're facing a cash shortage, it may be possible to negotiate with some vendors to slow down your payments, perhaps by breaking large invoices into a series of partial payments. On a related note, many design firms pay vendors for project-related expenses only after client money has been received. Be cautious about this, however. It's important to be fair to your suppliers. If you happen to be late in billing a client, or are in a dispute with the client over an unrelated matter, the vendor should not suffer for it.
If you're facing an immediate deadline such as payroll, you might consider short-term borrowing. Many design firms have a line of credit available from the bank. If you exercise a line of credit, be sure to repay the funds promptly to minimize the total interest expense.
4. Obtain additional investments from owners
It may be possible to arrange additional cash inflow from the owners of the firm. That is to say, owners might use personal funds to increase their equity stakes in the company.
Maintaining healthy cash flow is crucial to the success of your design firm. You need to have enough cash available to pay creditors, employees, and others on time. There are several basic business practices that will make this easier for you:
- Always ask for an up-front deposit before commencing a new project.
- On large projects, don't wait to bill everything at the very end. Instead, submit a series of progress billings. These should be at least monthly.
- Make sure that your invoices are self-explanatory. Include complete reference information (requisition number, purchase order number, contact name, et cetera) so that invoices are very easy for large client organizations to process.
- Follow up on unpaid invoices by sending month-end statements, providing additional copies if needed, and phoning on due dates to inquire about payment status.
- Collect the full amount of each invoice. This is sometimes a challenge for recent grads and small firms. If you have a fixed-fee agreement in place with your client and you've provided everything that you promised, don't let the client get away with paying you less. The time for the client to negotiate pricing is before the work is done, not after.
Next time, we'll look at two more tools for managing cash: the long-term cash flow projection and the cash flow statement.
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