What is a ‘lumpy’ cashflow?
Many creative businesses have irregular income, with ups and downs as different projects come in. This is called a ‘lumpy’ cashflow. The solutions for resolving lumpy cashflow can vary depending on your business model – but it always helps to keep accurate records so you can plan and forecast. Managing cashflow effectively is essential for any creative business that wants to be better than the rest. Here are some tips that can help.
Create a cashflow forecast
A cashflow forecast is a projection of the money entering and leaving your business over a specific period. It will give you a clearer understanding of where your cash is going and help you identify potential issues well in advance.
Many creative businesses with lumpy cashflow struggle with this, with money not tending to come in and out in a regular manner. Structured payments are not commonplace; contract work and lump sum payments are much more normal. By creating a cashflow forecast, you’re getting ahead of any issues before they actually surface.
Set payment terms
Ensure you have clear payment terms with your clients and suppliers. This can help you receive payments on time, avoid any delays and reduce the risk of lumpy cashflow. Having a professional on your side – like an accountant – will help you ensure you’re not getting fleeced by other businesses. Creative companies are often stereotyped as disinterested in the financial side of their business. We know that’s not true, but there’s a chance others might try to take advantage of that. In other cases, your customers might have just forgotten to make their payment on time, or might be facing cashflow difficulties themselves. By setting clear terms, you’ll always know where you stand.
Invoice promptly
Send out invoices as soon as the work is completed. Delaying invoicing can lead to delays in payment and ultimately affect your cash flow.
One great solution: offer incentives for early payment. This will encourage clients to pay early by offering perks such as discounts or free consultations. This obviously depends on the type of work you do, but there aren’t many situations where this won’t apply.
Negotiate payment terms with suppliers
Negotiate favourable payment terms with suppliers, such as longer payment periods or discounts for early payment.
If you know you’re working in a project format (where project accounting is applicable), you’ll want payment terms that suit you. It’s no good agreeing to pay a supplier upfront when you simply don’t have the cash to do so. Most suppliers are flexible if you give them enough notice.
Manage inventory
Keep track of your inventory levels to avoid overstocking, which ties up your cash, or understocking, which can lead to missed sales opportunities. Whatever the situation, properly managing your inventory will make sure you’re always aware of what you’ve actually got in your business.
Cut unnecessary expenses
Review your expenses regularly and cut out any unnecessary costs. This could even include your office if your team prefers to work remotely and has no real need for a dedicated physical space. Or maybe you’ve got gear you’re not using, which takes up space in a storage unit somewhere. You’d make money for the business by selling it, and you’d save on rent on the unit itself. If you’ve got a load of equipment – say, high-resolution digital film cameras – that you’re not using, you could loan these out and gain a new source of income.
Consider financing options
Explore financing options such as loans, invoice finance (factoring) or lines of credit to help manage cashflow during slow periods. For some projects, you’ll need to have cash upfront. Obviously, there’s an element of risk involved, but that shouldn’t deter you from exploring what’s available. If you’re worried about how it could financially impact your business, speak to a professional – they’ll be able to point you in the right direction.
Talk to a pro
That leads us nicely to our last point – for any of the tips raised in this post, speaking to a professional is the best way to know you won’t make the wrong decision.
Managing cashflow is a vital part of running a successful creative business. Take your time and assess your options properly.
Get in touch with us today to find out how we can help you with your business cashflow.
