What is lumpy cash flow? Lumpy cash flow is a way to describe how income and expenses can fluctuate each month. All companies will have some fluctuations, but in general, project-based or seasonal businesses tend to have the lumpiest cash flow.
There are a variety of different things you can do to smooth out lumpy cash flow. In this article, I'll walk you through some of them.
Let's go.
Make Cash Flow Projections
A cash flow projection is a way to model your business' income and expenses so you can see how your cash balances will move up and down. Monthly cash flow projections are the most common, but some businesses that are more sensitive to cash fluctuations keep weekly cash flow projections.
Making a cash flow projection is easier to do if you have bookkeeping records that you can use. A cash flow model or projection is like building a budget, but you track your bank balance at the beginning and end of each month, not just the inflows and outflows. Your accountant or bookkeeper might be able to help you with creating a projection. If it's something you want to build yourself, download our cash flow projection template here.
A cash flow projection can help you see when your business will need to earn income or have a cash injection to keep it running in the black.
Cash flow projections are an excellent way for you to see if you genuinely have a cash flow problem, where the timing with income and expenses needs to be coordinated and organized or if you have an income problem. An income problem means you aren't earning enough to support your business' expenditures. Solving those two problems will require different things, so getting to the root cause of the issue is essential so you don't waste your time, energy, and resources on solving the wrong problem.
Have Access to Credit Before You Need It
It's a good idea to have access to credit before you need it so that when you need it, it's there. If you wait until you need credit, chances are you'll be stressed, and the process may not be as fast as you think it will be.
Applying for a line of credit with your bank can take days, if not weeks. You'll need to provide financial information, bank statements, and other details about your business. There is one faster alternative that I know of, Kabbage. Other online lenders might be able to process and fund your line of credit faster than a traditional bank. But it is still a good idea to apply in advance just in case. Applying for a credit card might only take a few minutes, but you might not get your card for days, if not weeks.
A line of credit has qualities like a credit card and a loan. It's like a credit card because you can use only what you need. If you only need to use $5,000, but you have a line of credit that's $20,000. You can borrow what you need for now. Borrowing money from your line of credit is called drawing from it. A line of credit is like a loan because, when you draw from it, you take cash from the line, and it goes into your account.
Hopefully you won't need to use your line of credit or credit card to cover cash shortages, but it happens especially with big projects like productions or events.
Make Payment Schedules Work For You
When you're running a freelance practice or small business, you have the freedom to set your payment terms and payment schedules with clients and customers. If cash flow is a problem, experiment with various payment schedules.
For a long-term project, try setting up more frequent payments, like a monthly retainer or a payment for every other month. Milestone payments are also another way to break up installments over the life of a project.
For smaller projects, consider increasing the initial down payments required to start the project. You can also offer discounts for clients who pay earlier. Offering a 3% discount for clients that pay within five days of the due date can incentivize early payers.
Staying on top of your invoicing is also really important. Make sure your clients understand how their payment schedules will work, so when they receive an invoice, there are no surprises. Send out your invoices on time, and don't forget to send friendly follow-ups if payments aren't coming in on time. If you make it a habit to send invoices on time and friendly follow-ups, it'll become less awkward over time. It's like learning how to play an "F" chord on the guitar or doing a hard yoga pose. At first, you might feel weird, but take each opportunity as a time to practice, and over time it will become more natural, and you'll feel more comfortable.
Change Due Dates for Bills and Vendors
If you use a business credit card for all your expenses and the bill comes due on the same day that payroll is due and around when rent is due, you can ask to move your payment due date.
You may also consider negotiating payment terms with your vendors. For example, if you have contractors that come on for projects, it might make sense for you to pay them more frequently, but over a more extended period.
Consider Additional Revenue Streams
Having more than one revenue stream is another great way to smooth out lumpy cash flow. Even if the additional revenue stream is not as lucrative at first, it could be something that grows over time.
Look for problems that you might already be solving or ways to expand the way you are already serving existing clients. For example, a photographer might offer prints or creating a photo book for their clients. An event company might offer a storage service for the production items until the day of the event. I originally started a financial consultancy but set up a bookkeeping agency shortly after noticing how frequently I referred clients to bookkeepers.
If your business has lumpy cash flow, smoothing it out can help you feel more control and autonomy over your business. Do the best you can to control what you can, and for everything else, it's good to learn how to ride the waves.