One of the reasons so many small businesses fail is because they are not good enough at managing their cash flow. That does not mean that they were not making money, but that they spent more than they had or could not raise funds in time to pay their debts. If you want to avoid this happening to you, you will need to learn everything about managing your small business cash flow effectively.
The first thing you need to keep in mind is that in the B2B world invoices may take longer to get paid than you would think. Delays of one or several weeks are sadly too frequent, and if you are working with a big organization with multiple departments, chasing that missing invoice can take much longer than you would have expected. However, it is not likely that your providers give you the same benefit, and staying up to date on your bill payments can cause you to end up owing money to your bank.
Plan Your Payments
To prevent cash flow problems, start by accurately planning your payments, or at least as accurately as possible. If you dislike doing numbers, you should hire the help of an accountant who will be able to produce at least a monthly report and an estimate of your business tax liability so you can save for it in advance. Regular small business expenses such as utility bills or payments to providers should also be estimated, giving you a clear idea of how much disposable money you have at a certain point of time.
Good practice says that you should schedule payments as soon as you know they will be a possibility, but only write down income when it reaches your bank. Worst case scenario, you will be too conservative and have more money than expected at the end of the month.
Have a Contingency Plan Ready
It is important to always have a contingency plan ready in case things do not work out as well as expected, clients are scarce or a payment gets delayed more than your cash flow can deal with. Depending on your niche and business style you should have some ideas about how to make money ready to be implemented when required. Having your contingency plan ready in advance will help you prepare for a worst case scenario, and will not require you to take important decisions when you are under stress.
You can turn your marketing efforts into a passive revenue source by writing about them and offering it as a service to others, or creating a monetized website that can bring income even when your clients seem to be missing in action. If you outsource services such as copywriting for SEO make sure you know enough about them to take over if, due to lack of cash, you cannot continue paying your provider but you do not want your marketing machine to grind to a halt.
Any business transaction has some risk involved: somebody gives you their money in the hopes that you will do a good job, and you give them your time or services hoping that the payment will not be a fraud. What does not make sense are freelancers taking 100% of the risk on their shoulders by doing the work before getting any money from it, just to find out later that the client changed his mind and disappeared without paying.
What this means is: do not do a lot of work without being paid for it, even if it means more invoices for the same amount of work. Once you and your client have developed a degree of trust you can move on towards upfront payments or weekly invoices, but do not spend 80 hours working for a new client unless you have some guarantee that he will pay you. In any case, be prepared to deal with late invoice payments.
Learning how to prevent cash flow problems as a freelancer is key to establishing a successful small business that can deal with unforeseen circumstances and delays.