High Margins No Cash

I developed a new worksheet for a client and we were testing it so that I could also place it in my Socratic Framework.

We looked at three of his main services, put in the pricing, the labor hours to do the solutions, the labor total costs, and he came up with healthy Gross Margins of over 80% on all three.

Then we went through the fixed costs, and even after accounting for the big fixed operating costs, he still had healthy margins.

He was confused..

“With these margins why am I still scrambling for cash every month and feel like there is not much in the bank?”

Timing.

On a project basis all three of his services were very profitable.

However, on a cash flow / timing basis it was the opposite.

His customers would pay a 50% deposit and than the remainder upon completion of the project. The problem is that the project could take months, especially if my client was waiting for deliverables from his customer.

The delay effectively killed the margin because the staff allocated to the project were waiting around but still getting paid their salaries, etc. If it was just one or two projects, no big deal, but it was across many projects and so the cumulative effect was depleting his cash reserves.

So he needed to find a way to be paid for delays on the client side.

Several ways to address cash flow timing issues:

    1. Make it easy for customers to pay you immediately, via payment links, credit card processing, etc.
    2. Incentivise the customer to pay as fast as possible. You see this in software and other industries where 1 year plans might be at a 10% or 20% discount off standard monthly rates.
    3. Introduce or supplement your services (if project based and paid) with recurring contracts. In my client’s example, we came up with a creative and comprehensive recurring revenue model which he can test its viability and which will be more cash flow positive and profitable in the long run.

These take away the cash flow volatility and make it more predictable. This makes the business much more effective and easier to run.

And more valuable.

How about you? How is your cash flow timing?

 

2023 – How’s your Cash?

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