5 Ways To Avoid The Cash Flow Crunch3:00 PM EST Fri. Oct. 18, 2013
As solution providers transition their business to managed services, they could find themselves in a cash-flow crunch if their legacy business dries up before the recurring revenue grows fast enough to cover the company's costs. Here are five tips for managing cash flow.
Also, read the rest of CRN's special report on cash flow, available exclusively on the CRN Tech News App.
Whether it's with a bank or a financial services company such as GE Capital, solution providers should establish a line of credit that they can tap into when cash flows don't meet expenses. But never wait until you need the money. Bankers hate loaning money to businesses just when they need it.
Most solution provider entrepreneurs are focused on developing technology or selling their wares. Managing cash flow often isn't in their DNA. Solution providers, especially those transitioning to a recurring revenue model, should get some serious financial expertise. That can mean hiring someone full-time or contracting with an outside expert.
Sounds simple, right? But it's amazing how many business owners neglect the basics such as forecasting sales and expenses, setting up a cash reserve, accelerating receivables, slowing down payments, and so on. Using financial management applications to integrate sales and expense forecasts with cash flow is critical. The Score Association (score.org) offers cash flow statement templates and other resources for small businesses.
If your company does professional services, try to fill the pipeline with projects that will keep the cash coming in while your recurring revenue builds up. But keep an eye on the resources you need to carry out that work. Overcommitting could mean ballooning costs and/or unhappy clients.
Several solution providers interviewed by CRN presell service hours at a discount to customers. The more hours they buy, the bigger the discount. That brings in cash up front and can help with a transition to a services-based business model. But be aware that selling those hours is a commitment to provide a customer with services when they need them. And that can keep staff costs up during the transition.