Increasing positive cash flow typically entails accelerating cash inflows, decelerating cash outflows, and/or minimizing your expenses. After determining the sales cycle and better understanding how to accurately project cash flows, a small business gains a clear understanding of its monthly sales goals and working capital needs.
CNSLT.us focuses on providing services for small businesses. As previously stated, one method used by small businesses to improve cash flow is to delay cash outflows. CNSLT.us realized during its sales cycle that a large percentage of potential customers were not converting once the Proposal was Presented. After analyzing the variables that determined the percent that moved on to Approve the Paperwork and those who did not, there was an indication that payment terms had the greatest effect.
In an A/B test, CNSLT.us worked with 10 prospective clients and presented similar proposals – only varying the payment terms. Five were outlined as a standard initial payment with the remainder of the contract balance to be remitted at the conclusion of the work, while the other five were presented as penalty free financing for 12 months, regardless of project completion date.
After formalizing atypical payment terms as a service provider, CNSLT.us grew its accounts receivables by 50% month-over-month for the next three months. While our clients appreciated the ability to pay nominal monthly payments over a longer period of time, CNSLT.us was able to delay cash inflows and remain cash flow positive as a result of the growth in sales.
CNSLT.us was able to provide penalty free financing for its clients due to both the industry in which it operates and the services it provides. This strategy does not work in all verticals and requires the provider to take a number of precautions. Brian O’Kelly shared his experience after allowing a client to remit similar monthly payments for a freelance contract. “[The client] had the disk with the software… Why would he ever pay us any more?”
As a precaution, CNSLT.us only allows clients the option of financing for projects that it can retain ownership of. That way in case of a default in payment, CNSLT.us has a shut off valve.
When working with small businesses, allowing for delayed payments may result in an increase in customer-base – thereby alleviating any cash inflow challenges. I would highly suggest exploring the viability of this strategy for your business and determining if the increase in accounts receivables will allow for you to finance equipment, make additional hires, and spend against your future cash flows.
How have you controlled your cash flow?