Cash flow and the posture of your business

One of the many things I've learned over the past few years is the importance of cash flow, (h/t Ryan)  and that understanding how it affects your business can have a dramatic affect on it's health.

It used to be that when I would hear about or think about cash flow, I simply thought it meant having money in a bank account.  And since I knew having money in my business account was good, I felt like the concept of "cashflow" was synonymous with "having money in the bank".

I realize now that I completely misunderstood the concept of cashflow, and my guess is that a lot of other small businesses and freelancers do as well.

Instead of thinking about cashflow in terms of the amount of money coming into your business, and how frequently it's coming in; you have to think about it in terms of when that money comes in - pinned to a moment in time, and an activity that you will be doing for that money.

Before I understood how important cash flow was to a business, whenever I was engaged on a project I would do the work, and then get paid for doing the work.  I'd do this whether I was running a project, building a website, making an app, or pretty much anything else.

The problem with this is that you're constantly flat footed because you're always loaning something out (usually your time) before you get something in return.

Instead, I now charge 50% up front for fixed bid work, and then bill the remaining 50% when it's completed.  This of course is not unique and a lot of folks do this - but I never fully understood how big of an impact it can have until I saw the affect on my business.

Likewise, for ongoing services, I now try as much as possible to get paid before the service is provided - instead of after.

Billing this way allows you to invest customer payments into your business more quickly, and it can set you up so that if you bring on additional help - you already have money in the bank to pay for them.

Compare this with putting money into hiring someone before a customer pays you and you start to see the ramifications pretty quickly.

The result of getting paid at least something up front is a very forward leaning posture that allows you to grow and invest in your business in ways that you can't do if you only get paid once the work is completed.  There are also a host of other positive affects such as knowing who is serious, working with people that have shown they can pay on time, etc.

Essentially, it's a way to pre-screen potential clients.

Those of us that work in service businesses are often eager to help people, and tend to be quite generous with our time.  For anyone that's currently billing only once your work is entirely complete, I'd encourage you to start billing a bit up front.

You'll find you have better customers, more money in the bank, and a posture that allows you to invest more time and money into your own business.