The timing issues of cash flow management have put some companies into bankruptcy even though their overall revenues were respectable.
My undergrad degree was in finance and I remember discussing this topic more than a few times in my various classes. We saw several case studies of companies whose growth rates were awesome, but ended up going bankrupt or failing because of lack of spendable cash. Unfortunately these case studies were hard for me to relate to once I started my own business because I am a small fish. I don't have an accounts receivable department until I open my QuickBooks program :)
However, having done this for 6 years now I have figured out a few things that might prove helpful...
1. Keep your expenses pauper low at
ALL times, even when that next pile of cash comes in from projects. This one is a tough one as well, many of us, including me, fall prey to the thought that the good times will keep rolling forever so you should ramp up by getting staff, buying the new car, whatever. If you think this, trust me you are wrong.
2. Hoard cash during high times because it needs to last during the low times. This one has saved my skin more than a few times.
3. Cultivate some credit sources besides credit cards. I have set up a business line of credit with my bank and when I draw down the line I only have to make interest payments on the loan, which I only do for a couple of months at most. If you are smart about when and what you draw the line down for this can be a great tool to help against those timing issues on cash.
Word of caution on this, if you borrow for the wrong reasons or can't pay it off quickly with a chunk of expected cash from projects you could put yourself in a real bad spot very quickly. For example, borrowing to pay living expenses and then spending the next batch of project money on living expenses as well instead of just paying off the note. Now days I do everything in my power to only use this to fix time gaps in cash flow or invest in new projects I think will make me money.
4. Every time I get a big chunk of cash in addition to hoarding a bunch of it I try to take a serious bite out of any debt I have and buy the deferred purchases I might need. This has taken some practice as coming from a steady paycheck every two week check to the roller coaster of freelance or small business cash flow can be a bit challenging at first, but the good news is over time you get better at riding the waves on this, at least I did.
5. Cultivate multiple streams of income or profit centers. I have heard this from a lot of people and this one technique has helped me immensely over time. It takes a bit of work to build and manage these, but now I get income, sometimes very small amounts, from a variety of sources like affiliates, hosting, maintenance, web sites I own, etc. Each one by itself won't make me rich, but tie them all together and it does a great job of leveling out my monthly income stream plus making me a lot less vulnerable to having to starve when clients don't pay on time or projects are trickling in a little slower than I want.
6. Decent book I found is called "Small Business Cash Flow" by Denise O'Berry. It is targeted to small businesses and freelancers and has a variety of useful tips in it. Worth the read.
7. Keep a great marketing program going at
ALL times, I have fallen down on this one many times. Things get busy and stop marketing and enviably things get slow and I have no new stuff coming in. Now I try to find just 2 marketing activities I will do every single month in both busy months and slow months, but I do it
consistently which I think is key to making this work so that you don't have too many slow months.
