Cash Flow Power-Up - 5 Winning Moves for Service Businesses

[Listen to the podcast version here]

Cash flow is the life blood of all businesses, but cash flow management is not a one-size-fits-all type of solution.

In today’s article, I’m going to break down 3 cash flow challenges for service businesses and how you can proactively address them to achieve success.

Let’s jump right in!

Service-based businesses are harder to forecast because your products are intangible services with somewhat unpredictable demand patterns, usually tailored to specific client needs.

To further complicate the issue, there are a number of different ways to charge for services, each with its own challenges.

Cash flow is often erratic for service-based businesses because services are time based.

• Hourly: Income will fluctuate based on the number of billable hours
• Project based: Income will fluctuate based on the size and payment milestones for completion of specific projects or contracts
• Commission based: Income will fluctuate based on the timing and size of successful sales.
• Subscriptions & renewals: subscriptions can provide recurring revenue to stabilize cash flow, but it can be hard to predict growth as clients join and leave your subscription at will.

Another factor affecting cash flow for your service business is managing upfront costs and delayed payments.

Unless you negotiate an up-front retainer or deposit for the project, you have to cover all of the costs ahead of time to complete the work – labor, materials, office overhead, travel, etc.

Then there’s the issue of collecting payment.

It’s rare that your client will swipe a credit card the minute you’re done providing the service, so there’s still more time to wait until the cash comes in – even for your good payers.

It’s all part of the cash cycle: how long it takes from the time you start working on a project and incurring costs + the time it takes to collect money owed + the time it takes for you to pay your vendors.

Lastly, there’s a huge risk because your business is entirely dependent on client relationships.

If your clients aren’t raving fans, you’ll be vulnerable to cost cutting initiatives and competition wooing them away from you.

If you lose a couple of key clients through competition or shifting market conditions, you could be in serious trouble if your client base is too concentrated.

The good news is that these don’t have to be challenges for your service business!

You can implement an effective cash flow management system that works to minimize these challenges and keep your business running smoothly.

This is part of the Cultivated Success Blueprint that I help my clients create to fast-track their business goals and reach success faster.

Here are 5 strategies to get you started:

#1 – Service stacking to stabilize cash flow

With cash flow, timing is everything.

Think about the different revenue streams in your business.

• When do you collect payment for each and how do they work together to stabilize your cash flow?
• If you have a subscription model, what are you doing to increase retention while growing new subscriptions?
• Can you tweak your pricing models to increase your cash flow and expand your client base?
• If you’re heavily focused on project revenue, what can you do to bridge the gap between milestone payments?

Instead of thinking about each revenue stream separately, weave them together to provide predictable cash flow. If one stumbles a bit, the others should be able to pick up the slack in the short term.

#2 – Proactive invoicing and payment policies

You want to make it as easy as possible for your clients to pay you.

This sounds simple, but it is an often-overlooked part of the process.

You must be very clear with your clients what your expectations are, but you must also understand what they need to get you paid, especially if you have corporate or government clients.

• Do they need a PO number, project number, etc. referenced on your invoice?
• Are there specific documents or approvals that need to be submitted?
• Who should you send the invoice to?

If possible, automate your invoicing process to meet these requirements.

To assist with payment, give them options.

Can they pay by wire or ACH? If so, make sure you are set up at your bank and with your client’s accounting department to get paid.

If credit cards are convenient for payment, set up an agreement with your client to sign off on deliverables and keep a credit card on file to process payment.

Map out ways you can apply this to your business so you can get paid faster!

#3 – Proactive budgeting and forecasting

Just because budgeting and forecasting can be more challenging for service businesses doesn’t mean it’s impossible.

You can easily plug in cash flows for existing projects, recurring revenue, and fixed costs. Then, you can work on accounting for your variable costs and further refine your projections based on real-time payment data.

Forecasting may be a little tricky depending on how you’ve set up your revenue streams, but with the right data, you can create some reasonable expectations and refine them over time.

The key piece here is that your budget and forecast are living documents – they aren’t something you do at the beginning of the year and ignore until the next annual planning meeting. They are key cash flow tools to measure your revenue and expenses and make sure you have ample cash to take advantage of opportunities when they come.

#4 – Maintain strong client relationships

Service businesses are all about relationships, so building your Cultivated Success Blueprint to support relationships is critical.

It’s not enough to provide excellent service. That’s the bare minimum.

Think about ways to improve every touch point your client has with you:

• Do you and the client share the same expectations?
• Is there a clear communication path when issues arise?
• Are you timely and responsive when your client has an issue?
• Do you proactively communicate potential challenges and address them before they become a problem?
• Is your client’s experience personalized so they feel like you understand and appreciate them?
• Do you actively seek feedback and use it to improve your processes?
• Are you communicating often or just when there’s an issue or you want to make another sale?

You can take the ideas that come from answering these questions to incorporate client-focused activities into your strategic plan so it becomes second nature for your business.

#5 – Build adequate cash reserves

Part of your long-term strategy needs to be building a cash reserve to fall back on when cash flow issues pop up – and replenishing it as quickly as possible once the issue has been resolved.

There’s a lot of debate out there on how much you should have saved – if you don’t save enough, you could be in serious trouble, but if you keep too much in reserve, you could miss out on opportunities to grow. Plus, you have to consider your industry’s volatility and your client’s demand patterns.

Three to six months is a good place to start. This will ensure you can continue operations through short-term lean times while you are working to improve cash flow in the long term.

Build the savings into your budget as part of your cash management plan. If your bank has the option, set up automatic transfers so you don’t use the funds for operations.

Strategies like these are key components of the Cultivated Success Blueprint that my clients and I develop to scale their businesses.

Take away the guesswork with a simple, holistic cash flow management system that’s tailored to your specific goals and doesn’t take tons of time to manage. It’s easy to update and pivot as business needs change.

The Cultivated Success Blueprint is one of the three pillars of my Cash Flow Ignition Methodology.

The other two pillars - the Decisive CEO Mindset and the Cohesive Cash Flow System – work together with the Cultivated Success Blueprint to build a business that can generate sustainable cash flow long term and change course as needed to achieve your goals. 

With the Decisive CEO Mindset, you’re in control – you’re confidently calling the shots, making decisions that pave the way for growth and success.

Analysis paralysis?

Gone.

Feeling isolated and overwhelmed?

A thing of the past.

You know exactly what you need to make critical decisions and have a support team in place to help you manage the stress of being a CEO and make taking care of yourself a priority.

With your Cohesive Cash Flow System, your operations are optimized to generate consistent cash flow, increase profits, and remove the kindling that’s causing all the fires you spend so much time putting out every day.

• Fewer meetings
• Fewer headaches
• More time for you to spend how you please

Your Cultivated Success Blueprint is the roadmap to achieving your success.

You intentionally map out how you will achieve your goals and implement tools and measurements to support your growth and success.

No more wondering what the next steps are or finding out too late that you’ve veered off course.

It’s all laid out in your Cultivated Success Blueprint, so you know what to do and when to fast-track your success.

If you’re interested in learning how my Cash Flow Ignition Methodology can ignite your cash flow engine, I invite you to book your Cash Flow Optimization call with me today. On this call, we’ll tackle your immediate cash flow concerns and outline actionable steps for quick improvement. I'll walk you through the Cash Flow Ignition Methodology, explaining how it accelerates results. If it resonates with you, I’ll share some options post-call on how we can work together so you can achieve success faster.