The Cash Flow Blog

While  access to commercial loans is difficult, an alternative to consider in your search for capital is an angel investor.  And while angel investors are non institutionalized, they’re far from unsophisticated.  In fact, some angels are more sticklers for detail than their VC cousins — after all, it’s their money.

Fobes.com offers Ten Ways to Attract Angel Funding.  I’d like to highlight #8 for you:  Finalize Your Financial Model.   In fact, I’d really like to highlight one aspect of your financial model — revenue forecast.

Here’s the deal

You should know everything about your first year projection.  I mean everything.  If you can’t answer these questions, the odds of hitting your number are slim.  And if you can’t hit the first number, how are we to believe you’ll hit the second, third or fourth number in your plan?

We won’t.  That’s the rub.

Invoicing a customer is merely a step in the getting paid process.  When you think about it, invoicing is nothing more than a formatted message from vendor to customer saying the vendor thinks it’s time the customer paid for whatever good or service has been or is about to be delivered.  It’s a request for money.

If you’re a customer, when should you pay an invoice?

For many invoices this is made perfectly clear by displaying an easy to read and understand date.  But that’s not the case for all invoices.

Here are some common problems I’ve seen with invoices relative to a customer deciding when to pay:

• No payment due date – Believe it or not, this is not uncommon.  I’ve seen and received invoices with no stated date when payment is due.  So, when do you pay an invoice with no due date?  Most won’t pay on receipt, many won’t pay within two weeks, and some won’t pay at all.  It’s hard to be late paying an invoice that’s never due.
• NET terms – This too is common, payment on NETx terms (x= 15, 20, 30, etc. days).  The problem is many customers don’t know when the clock starts.  You may think the clock started when you sent the invoice, using the invoice date as Day 0, but what does your customer think?  Differing views of Day 0 can cause delay of payment by weeks or more, depending on your agreed terms.  In a cash flow crisis, a few days delayed getting paid can mean a lot and have negative consequences.
• Due at project completion – I love this one.  What constitutes a project and when is it complete?  Who decides when it’s complete and by what criteria?  These are all things that should be decided before you begin a project with such terms.

Getting paid in a timely manner is critical to good cash flow management.  You and your customer need to have a common understanding of when you should expect to receive payment.  Be sure your payment terms and expectations are crystal clear.  The best practice is to list a date when payment is due – dates are hard to misinterpret.

What invoicing terms have you seen as a problem?  What best practices would you recommend to timely getting paid.

Here is a great reminder for all of us:  If there’s one monumentally frustrating and easy to overcome aspect of a cash flow problem it’s timely invoicing customers.  In many cash flow crunches, you can look back a few weeks in time and find regret in not getting customer payment activities underway sooner – if you invoiced sooner, you might have the money now.

I’ve worked with more than one company where this simple and seemingly obvious business function gets ignored.

Here are several comments I’ve heard as excuses for not timely invoicing customers:

• I don’t have enough time.
• It’s too hard.
• It takes too long.
• We can do it next week.  We need to keep working on the project right now.
• I don’t like paperwork.

The list can go on and on, but you’ll never find a valid excuse.

You have to invoice customers on a regular and routine basis – the best time being immediately after a project is complete.  At a minimum, you should prepare and send invoices once a week.

No matter your circumstance, invoicing customers can never be viewed as a hassle.  Timely invoicing customers is nothing less than a necessary function of survival.

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Update: Here is the tool I use to timely invoice customers.

At a high level there are only two ways to fix a cash flow problem – bring more money into your business or cut the amount of money leaving.  Of these two options, cutting expenses has some real limitations.  You can cut once, sometimes twice, but you can’t continue to cut expenses month-after-month – eventually you’ll cut yourself to non-existence.  There is a reason cost cutting is commonly referred to as death by a 1000s cuts.

That’s not to say businesses shouldn’t cut expenses, they should.  Prudent managers, business leaders, investors, and stakeholders expect operations to run lean.  Expense management maximizes profitability.

Expense cutting is a stopgap action that can have an immediate positive effect on cash flow, but can cause some serious problems in the future and compound a cash flow problem.  You should minimize expenses as a normal course of ongoing business and cut them judiciously in response to a cash flow crisis.  I’ll address this topic in a later post in this series.

Assuming ongoing and effective expense management, cash flow problems are best fixed with revenue increases and the escalation of account receivables.  For most people this means a sense of urgency to get more new customers.  But it shouldn’t – it should mean something much more.

Boosting revenue to address a cash flow problem is best thought of from the perspective of where new money can come from.  There are only three ways a business can increase revenue:

• Get more new customers
• Increase the value of your average sale
• Increase the rate and frequency of repeat buyers

There are countless books written on how to find new customers.  If fact, there are so many books, websites, and authorities speaking to identifying, attracting, and winning new customers that I’m not going to add much to it in this series.  Instead, I’d like to offer a different thought on wining new customers to fix a cash flow problem – viability.

While there’s no argument against the need for new customers to solve a cash flow problem, there are realities to factor into the discussion:

Root cause of cash flow problem – Are you sure your volume of new customers is the root problem of your cash flow woes?  For many companies, it isn’t.  I’ve worked with more than one company who approached me in desperate need of a lead generation campaign to boost sales only to discover the rate and volume of new business is good, but churn is unacceptably high -or- the average transaction size and margins are unnecessarily low.  A good analogy is asking for a larger pipe to pump water into a holding tank to fill it faster than the hole that’s draining it.  For many companies, a better long term solution is to plug the hole that’s draining the tank.

Time to cash – It’s one thing to make a sale, it’s another to have money available to spend.  When looking at new customers to solve a cash flow problem, be sure to factor in time for lead generation, your sales cycle, your customer’s purchase cycle, production, delivery (if applicable), accounts payable, and your customer’s payment process.

Looking at every element necessary to find a new customer, sell them something, deliver, and receive payment, you may conclude finding new customers won’t help in the time-frame you’re dealing with.
It may be best to look at new customers strictly as a long term solution to avoid future cash crunches.

Cost of sale – What is it going to cost to quickly get a new customer?  Cost in this case doesn’t mean the cost of sale built into your pricing, but the incentives you may have to offer to encourage a buyer to act quickly – discounts, 2 for 1, etc.  If your underlying cash flow problem is low margins, financial incentives aren’t a good idea.

When using financial incentives to motivate a new customer to purchase, be sure to include a reason for the offer and set a deadline to act.  Reasons may include:

• Celebration
• Anniversary
• Product or service launch
• New release of a product or service

You want to offer a reason for your incentive to protect yourself later.  For example, if you offer a discount because of an anniversary, there’s an expectation the discount will disappear after a period of time.  The deadline to act is further leverage to create urgency.

Consistency – What is special about a special that is offered every month?  Nothing. Yet this is what some companies do month after month in attempt to increase revenue.  What results is prospective customers learn your list price is artificial and there’s no urgency to act – they can get the discount any time they want it.  What happens over time is your ability to motivate new business and create a spike in revenue is diminished.

Risk- Discounting your product or service to drive new sales can be effective in creating a spike in revenue, easing a near-term cash flow problem.  But you you need to weigh the risk to future revenue.  For example, if you discount a year’s worth of service to get cash now, be sure you understand how doing so will affect future revenue and cash flow.  You don’t want to create a bigger problem in the future – reducing margins for a year and not having a customer you can effectively sell to for months – due to an incentive you offered to spike revenue.

Be sure you understand how a financial incentive affects your business months down the road before you offer one.

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Solving a cash flow problem with a strategy to get more new customers is prudent, but possibly foolish at the same time.  The prudent part is an abundant,  steady, and predictable supply of new customers is the ultimate fix to a cash flow problem.  The foolish part is if you don’t already have an abundant,  steady, and predictable supply of customers sufficient to avoid a cash flow problem, the odds are against you quickly creating that supply.  Worse, it may lead you to offer discounts, giveaways, and act in desperate ways that compound your cash flow problems.

A better strategy for many companies to fix a cash flow problem via a revenue increase is to pursue repeat business or an increase in their average transaction value.

What say you?

It amazes me I don’t receive more coupons or gift certificates when receiving goods and services I’ve purchased. It’s the perfect time to offer an add-on, upgrade, or cross-sell to a new product. Stuffing a few offers in the envelope alongside your invoice can result in considerable money to your business. And your cost of sale is effectively nothing; you already absorbed the cost of getting the new customer.

And don’t think for a second offers like this don’t work in B2B markets.  B2B sales is wonderful place to creatively offer customers the opportunity to up and cross purchase additional products and services you offer.

Here’s how it works:

Someone just purchased from you, they’ve made a decision to be a customer. They made a purchase and are waiting for its delivery. They’re in the euphoria of the purchase. What better time to make an offer?

Will every customer take you up on the additional offer? Of course not. But looking at the cost to make the offer, not many have to to make it a highly profitable addition to your business.

Maybe one exists, but I can’t think of a business where this tactic doesn’t work.

Here are some ideas:

• Position the offer as a one time deal. Make the offer a celebration of them becoming a new customer. Remember, if you consistently give something away, it’s not special, it’s now part of your offering.
• Make it a time limited offer. Create a little urgency to make a purchase decision. Don’t make the offer open ended, give a cut off date of 2-4 weeks.
• Offer an even greater bonus if they act quickly. If someone acts within a set number of days, offer a bonus – an extra something to further entice and reward your customer’s action.
• Whenever you can, make three offers. Offer an upgrade, add-on, and cross-sell. Give the customer the ability to purchase one or all three.
• Partner. This is a great time to try joint ventures on a product that compliments your core offering. Get creative. Whether you make it or not, what goes great with what you just sold? Find someone who provides that perfect whatever and offer it. Be careful to maintain control over the customer relationship.
• Be creative. You don’t have to give the farm away or offer huge discounts. In many cases, you don’t have to offer a discount at all. The point is to put an offer in front of your new customer that compliments and somehow rewards them for joining your team. I really like the idea of offering something that’s not on the price list, something only offered new customers.
• Partner again. Something to consider is who offers a product or service you can compliment? Seek opportunities to include your offer alongside the other company’s invoice. As with all partnerships, only seek win-win-win opportunities – you , your partner, and customer.

Before you close the box or lick the envelope, don’t forget to add those offers!

What creative and enticing offers have you received to up-grade or add-on to a purchase you just made?  What offers would you have been interested in receiving?