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The challenge of cashflow in a small business

July 2, 2013

I love self employment, I really do.

But the one thing that could put me off it is the issue of cashflow.

Not turnover, not profit, but the pattern of how the money comes through the door and into my pocket.

Most people I know are salaried employees, and they get paid a fixed amount every month.  I don’t.

The type of consultancy that I do is project-based.  This means I sell a project (i.e. Evaluate Activity X) and I complete it over an agreed period of time as required by the client.  I cost it up based on how many days I expect it to take for me to complete it (i.e. the Evaluation of Activity X will take 12 days) but how this is delivered will vary according to client need.  The 12 days could be:

  • All worked all in a single month
  • Spread out evenly over the course of a year (1 day per month)
  • Spread out randomly over the course of a year (e.g. 5 days in January, 1 in March, 2 in June, 4 in December)

I then request payment for the work I do by submitting invoices at points agreed with clients, so based on the above I’m sure you can imagine this can be a bit variable, even though I usually have multiple projects on the go.  Here’s my actual invoicing for the financial year 2012/13.

Blog invoicing

Lumpy.  Which means my cashflow is difficult to manage.

But that is not the only complicating factor.  These days invoicing schedules in my line of work tend to be ‘outcomes based’.  This means that I can request payment upon the satisfactory completion of tasks.  Fair enough, the clients want to see something being done before they pay for it.  So they will set me an invoicing schedule with several fixed points, for example:

  • Upon submission of the interview schedule (early in project)
  • Upon completion of 10 depth interviews (mid point)
  • Upon submission of a draft report (end point)

In a short project this is great, as I will do the work and then invoice for it at the end of the month.  But in a longer project it is entirely possible that I will do some work towards a task but will not be able to invoice for it until the task is completed – often several months later.  This means that some months I am doing lots of work but will not be able to invoice, and in other months I am doing very little work but can put in a massive bill.  Which means my workload and cashflow are unrelated.

This is all the nature of my industry and sector, I accept this.

But it isn’t the end of my cashflow challenges.  Because the other thing I have to factor in is actually getting paid based on the invoices I have put in.  Now (touch wood) I have so far been paid in full for every invoice I have put in.  Phew.  But sometimes it can be like getting blood from a stone.  I have to be reasonable and give my clients a period to pay, so I give them a standard 30 days.  OK.  So I know from my business records that:

  • The average number of days between invoice and payment for 2012/13 was 24.5.
  • The  number of days between invoice and payment ranged from 0 to 58 days.
  • 61% of my invoices were paid within the 30 day terms.

Here’s my actual payment received for the financial year 2012/13.

Blog payment

Again, lumpy.  And completely unrelated to the pattern of invoicing you see above because when an invoice is paid is entirely at the whim of the client.  Some pay immediately, some pay very late, and others fall in between.  This means my cashflow is difficult to predict due to influences outside my control.

And yes, you read that correctly – last year 39% of my invoices were not paid within their 30 day terms.  This means I have to spend my own unpaid time frequently checking my bank account for payment and in almost half of cases chasing late payment.  Usually multiple times.  Dealing with multiple people.  By some combination of phone and email and letter.  And remember these invoices are not coming out of the blue.  I’m invoicing at fixed points agreed by clients after they have already seen my completed work and deemed it to be satisfactory.  Often many many months after I did the work, upon which the weeks or months of waiting for payment are added.

Now don’t get me wrong, I’m not getting at my clients here.  Most times it is not their fault. Maybe they have cashflow policies which mean that they always pay at the end of terms, or maybe they didn’t receive the funds themselves yet to pay out to me, or maybe the payment got stuck in a bureaucratic loop or occasional payment run.

And nationwide this situation is not unusual, but in a larger business the extended team would have sufficient projects on the go to iron out this lumpiness.  Alternatively, if my business was selling a larger number of lower value products (i.e. 20 pairs of Converse trainers to my 1 pair of Louboutin boots) I would be able to iron out this lumpiness.

But as a sole trader in my line of work I am stuck with the lumpiness.  And I am lucky that I have a husband with a more regular income so that we can pay the mortgage and eat.  Otherwise last autumn would have been pretty lean…  Look at October and November – I received very little money in my bank account, but I can assure you I was working and – as the first graph above shows – invoicing!  Others may not be so lucky.  And so others may have to give up self employment and go back to working for someone else (if there is a job available to them in this financial climate), even though their business is profitable and over the course of a year they make a salary equivalent.

I’m not asking for special treatment, but it would make a big difference to me – and I’m sure to many others like me – if invoices were paid promptly.

So please please please, wherever you can support small business by paying your bills on time.

7 Comments leave one →
  1. hollandstreet permalink
    August 2, 2013 1:25 am

    I am a medical market researcher UK based – I totally get you! Sometimes when you try and explain this to people they just don’t get how managing cash flow can be such a painful experience – they see you working all hours and think you must be consistently bringing in cash! I only ever get to enjoy and take pride in my earnings retrospectively when I see how much I made at the end of the previous year – the rest of the time I spend chasing invoices and balancing books and stressing about how the heck I will get the blood from those stones.

    Worth it though…


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