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Cash Flow Management Tips for Service-Based Businesses

Cash Flow Management Tips for Service-Based Businesses

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Back to all posts
Cash Flow Management Tips for Service-Based Businesses

Cash Flow Management Tips for Service-Based Businesses

You're in business because you have marketable assets, skills, knowledge and experience for which other people are willing to pay.

Often structured around a project or service, this business model is widely applicable too many.

In-general, project-based businesses include:

• Creative and design

• Maintenance

• Manufacturing

• Construction

• Information or technology-based

• Personal services

Whether your business is on this list or just outside it, adapt what you read here to your business' wants, needs and circumstances as well as your offerings and deliverables.

Here are some fundamental areas that often have a major impact on the cash flow for project-based businesses and some tactics for avoiding these core issues:

The Discovery

Before the work begins, allow plenty of time for a thorough discovery process (read: long client meeting) where both parties can work together to define the scope and parameters of the project.

Look at the discovery process as a time investment in making sure that pricing and milestones are accurate for the rest of the project.

This meeting is the ideal opportunity to clearly define the project parameters and therefore nip scope-creep before it gets started. As well, a detail-oriented meeting at this stage can greatly increase the odds that you’ll get paid on time.

The outcome of the discovery phase should be a rough draft of a proposal and the eventual contract. Before you're able to create an on-point proposal that leads to a finalized the contract, make sure the size of the project, length of the project, and what you’re actually going to be handing over are clearly stated.

As every project is context sensitive, your goal is to obtain as much information as possible in order to be as accurate as possible.

Often, business owners who are gaining valuable experience with contract and payment negotiations are concerned that they’ll lose the client if they become too assertive or picky. Look at the discussion as a fact-finding mission in which you need to come out with the size of the project, the overall length of the project and the length of each phase, and what you're actually going to be handing over upon completion.

Contrary to your fears, clients often prefer this type of communication because it shows that you're diligent in making every aspect of the project clear.

The Contract

Your contract should have a timeline of milestones toward project completion - including this information means that it's easy to tie payment to goals and deliverables which incentivizes both parties to honour the agreement.

Don't be too flexible in your discussions or contract terms. By being concrete and deliberate, it's easier to align parts of the contract to positively impact your cash flow, how they will affect the customer, and what makes the most sense to the project.

Also consider the materials and cash flow you need to start the project, specific arrangements that work for you and your business, and what specific situational and budgetary scenarios lower your risk on the project. In short, come prepared to discuss sunny day and rainy day 'what if' scenarios.

After clearly defining each deliverable in the contract, consider adding one of the following phrases to your contract to combat unpaid scope creep:

1. Additional work will be charged at a rate of $X

2. Additional work requested will be quoted

3. Additional hours up to X hours will be at $X rate and then additional will be quoted

Project is Green-Lighted

If you’re in talks with a new or infrequent client, structure the conversation to make it clear that you require partial payment due as the project starts. This is also an effective strategy for a client who has been problematic in the past, either by their demands or in paying invoices late.

An up-front payment agreement gives you operating capital to deal with problems as they arise, without choking the project’s operating budget. Understand that individuals who aren’t willing to put up partial payment for a project start or material purchase are not in your ideal client.

Steps should be taken to educate them, or to scope work from other clients in the future.

The Deliverables

Prepare yourself for the deliverables phase by building lots of stages built into the contract at the outset.

While this process might seem unnecessary and tedious to create, it’s best to regard small stages as extra opportunities to keep client payment up to date.

Frequent milestones, progress goals and deliverables also help keep scope creep in check. A dangerous issue for project-based businesses, scope creep affects both cash flow and profitability. By tying scope creep to deliverables, everyone maintains communication about the project and payment for ‘extras’ that were originally undefined.

Together, you and your client will have a channel of communication about whether the scope creep forms a necessary or extra part of the project and can act accordingly.

Remember that the scope of a project tends to creep when processes and deliverables aren't defined clearly enough in the initial discovery; your client's assumption of what they are paying for can be significantly different than your idea of a deliverable (consider a 'website' as deliverable - how many pages should it have?

If poorly defined during the discovery, an extra two pages could eat profit rapidly.)Scope creep can also be internal - clearly defining the scope and parameters with your team, then checking in regularly, ensures that you deliver great work without sacrificing profitability on 'extras' that consume billable hours.

Withholding deliverables may be something you have to consider - the key phrase is to very nicely ask to have payment prior to the next deliverable released. Practice saying it now in an assertive, but non-threatening voice: “I need this invoice to be paid prior to releasing next step of the development plan".

The Payment Structure Every Business Should Use

When structuring milestones and invoicing at intervals, create a very small final payment for final delivery. In this way, last minute delays by either party keep the contract viable and useful.

A common payment structure consists of equal parts, but this structure can cause cash flow problems for your business.

Consider changing your payment to including a small final payment with the intent to get as much money as you can before the client loses incentive to pay final invoices.

If a disagreement occurs, the best outcome is that there will only be ~5% of the payment in dispute instead of a larger portion that could really affect cash flow.

Instead of invoicing like this:

25%, 25%, 25%, 25%

Consider structuring your invoices like this:

25%, 25%, 25%, 20% and 5%

With the final deliverable handed over after the second to last invoice is paid, position the 5% invoice as a method for the client to double-check any last minute tweaks or niggling details before signing off on the project.

Follow Up

Making time to touch base with former clients is another 'unbillable' but important part of the project-based business model to help build your value and tailor your services to clients' changing needs.

By checking in to make sure that everything works well on your deliverable, not only will you appear conscientious, but you'll stay tuned in to upcoming business developments. Following up also ensures payment and makes sure that you stay front-of-mind for future projects.

With these cash flow management tips for service based businesses, you're well on your way to identifying key client and capacity issues that affect your business, making sure that your customer base is right for you, and getting paid on time, every time.


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