Being in a negative cash flow position is typical in the design profession, where the majority of expenses must be paid on a current basis (payroll, rent, phone, insurance, etc.), but very few sales are paid in cash or prepaid by the clients.
Most sales are invoiced and paid by clients in a few months, as the time span to bill clients and collect invoice payments is typically 90 to 120 days. To compensate for these cash-flow mismatches firms must establish lines of credit with banks or other lending institutions to provide funds for day-to-day cash needs.
The size of the financial commitment that lending institutions are willing to make to a firm is known as the bank credit line (as a percentage of net revenues). Establishing a line of credit with a bank does not necessarily mean that a firm actually borrows the funds. Rather, these funds are available to a firm if needed. This establishes the limit for borrowing working capital funds for the ongoing cash flow needs of the business.
Maximixing cash flow. In the mean time, take a look at the following cash-generating techniques. These six tactics may be simple, but they’re extremely powerful ways to improve cash flow.
1. Pursue accounts receivable. Phone clients who don’t pay and schedule a sit-down meeting to discuss outstanding invoices and establish a payment plan.
2. Attack work in process. Don’t hesitate to bill clients—-even if their projects aren’t going well. Tie payment to a prearranged monthly schedule, not project cost accounting or percent of work complete.
3. Get paid for changes. Prepare a change form, require authorization of every change, and bill the client right away.
4. Get paid in advance. Ask every client to pay in advance on all new contracts, or on phases of existing ones. At a minimum, ask for payment in advance for all expenses.
5. Stop work on losing projects. Assign principals to rapidly finish losing projects. And don’t make changes to them unless you know you’ll be paid.
6. Separate invoices for reimbursables and fees. Consider using three invoices instead of including reimbursables in the monthly payment agreement. Generate an invoice for subconsultants, an invoice for reimbursables, and an invoice for your regular monthly payment.
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