How to Manage Cash Flow in a Project-Based Business Model
Managing cash flow effectively is crucial for the success of any project-based business. Many service businesses such as marketing and recruitment agencies work on different projects each month. With fluctuating income and expenses tied to project lifecycles, maintaining a healthy cash flow can be challenging. Here are some key strategies to help you navigate the financial waters of a project-based business model.
1. Understand Your Cash Flow Cycle
The first step is understanding the cash flow cycle specific to your business by identifying when money comes in, and when it goes out.
Initial phase: Minimal cash inflow, often limited to deposits or advance payments (to cover expenses for planning, design, job adverts)
Active project phase: Periodic inflows based on project milestones (Outflows for materials, labour, subcontractors / equipment). Note: this is the phase that needs to be considered very carefully when sending the initial proposal to the client – staged payments can significantly improve cashflow and take away those crunch points.
Completion phase: Final payments upon project completion and client acceptance.
2. Create Accurate Cash Flow Projections
Cash flow forecasting is crucial in a project-based business where income isn’t always consistent.
Estimate Income and Outflows: Focus on expected revenue from each project and align them with expected expenses.
Plan for Contingencies: Factor in potential delays in project completion, scope changes, and client payments. Always add a buffer for unexpected costs!
Regularly reviewing and adjusting this forecast helps you anticipate cash shortages and discrepancies, allowing you to take proactive measures.
3. Establish Clear Payment Schedule
Negotiating favourable payment terms can significantly improve your cash flow.
Request Deposits: Aim to receive an upfront deposit to cover initial costs, this could be 20-30% upfront to reduce the burden on cash reserves.
Milestone Billing: Structure payments based on project milestones or phases. This ensures a steady flow of income throughout the project lifecycle, allowing you to cover ongoing expenses.
Offer Early Payment Incentives: Encourage clients to pay early by offering discounts or benefits, reducing the need to chase payments and keeping cash flow steady.
Request payment before completion: If you are delivering a piece of work, it is sensible to await the final payment before making the project live (always allowing for good client relationships, of course).
4. Prioritise Expense Management
Maintaining tight control over expenses is essential!
Track Variable and Fixed Costs: Understanding your fixed costs (e.g., salaries, rent) and variable costs (e.g., materials, subcontractors) will help you determine which expenses can be adjusted during lean periods.
Delay Non-Essential Purchases: Only make necessary purchases and delay non-essential expenses when cash is tight.
Negotiate with Vendors: Just as you negotiate payment terms with clients, seek favourable terms with vendors. Extending vendor payment terms, when possible, can reduce short-term cash outflows.
Make sure to track expenses in real-time, comparing actual costs to the budget and identifying areas for cost reduction.
5. Maintain a Cash Reserve
Having a cash reserve is one of the most effective ways to protect against unpredictable cash flow. Aim to set aside a portion of profits as a buffer for lean periods or emergencies. This reserve can help you cover operational expenses without needing to seek external funding.
It is also sensible to set aside your money for VAT and Corporation tax as you receive money in. I often advise my clients to set aside 30% of all income received to the bank account to cover the tax liabilities – it saves nasty surprises when the tax bill arrives!
6. Utilise Technology for Better Cash Flow Management
Software can provide valuable insights into your cash flow. Many tools allow you to track expenses, monitor invoices, and analyse profitability per project. These insights can help you make informed decisions about which projects are the most financially beneficial, allowing for more accurate forecasting and timely decision-making.
Final Thoughts
Managing cash flow in a project-based business requires a combination of strategic planning, proactive forecasting, and disciplined expense control. By implementing these practices, you can mitigate cash flow issues and build a more financially resilient business model.
Our clients at Nutshell Accounts comfortable in the knowledge that they know their upcoming payments and we often assist in helping them navigate times of heavy
