Episode 4: The Dangers of Low Cash Flow Pressure

Cash really is the lifeblood of any business. If you have good, strong, healthy blood pressure you will be resilient and alert. But if it suddenly drops you might completely pass out. Similarly, if your cash flow is strong you’ll be able to withstand the winds and waves that all businesses face from time to time—and you’ll be able to pursue opportunities to grow and build your creative business.  
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Are you ready to take the struggle out of finding new clients?

Have you ever had a season of working so hard, for so many hours, and yet still being chronically late on paying your expenses? Those kinds of experiences are perplexing, and extremely discouraging. Living with negative cash flow is no fun at all. It forces you to work long hours, all the while putting off paying yourself for all that hard work. You might start using credit cards as a cushion, or consider opening a line-of-credit to cover your expenses.

Unwise financial decisions are not the only way low cash flow impacts your business. It leads to questionable new-business decisions. When you’re desperate for cash you’re far more likely to accept any work at all—to get that initial deposit check in the bank. And so you ignore the low budget, and the tell tale signs of a demanding client that won’t respect your professional expertise.

But what if your cash flow problem is not merely circumstantial? What if it’s due to a fundamental lack of profitability in the first place?

More often than not cash flow pressures are reflective of profitability problems more than about collections, or new business droughts. And if that’s the case with you, then borrowing money will only deepen your problems. Kicking and the inevitable crash just a bit further down the road.

But you can get yourself out from under a cash flow crisis. But not by ignoring it. First, you need to get a handle on the full extent of your problem. And the best way to do that is to layout your receivables alongside the expenses that you will incur as you work on your projects over time. A simple spreadsheet can be used for this purpose, and I have a sample Google Sheet you can download from the resources page at ericholter.com.

Once you get your expenses and receivables in place you’ll be able to see the problems more clearly. And then perhaps begin to make adjustments to your expenses as necessary.

But there are other things you need to be able to see in your cash flow forecast.

You see, not all invoices in your receivables are equal. For example, your cash flow pressures might be exacerbated by an earned versus unearned revenue problem. Ask yourself, for each receivable you’re waiting on—or have recently deposited—whether or not that money has already been fully earned? Or do you still have a lot of work to do in order to fulfill the milestones that those payments represent?” If most of your payments are unearned, rather than earned, you may have an even deeper problem than you thought.

It’s never easy to face the roots of your financial problems. But until you can see the causes clearly, you can’t solve them. You have to face them head on and begin to implement fixes. Such as breaking up your payments into greater multiples than half on start and half upon completion. Or dividing your expenses into regular monthly hard costs, from the more fluid, infrequent, or optional expenses such as savings categories and or costs associated with professional development.

Of course bad cash flow is ultimately about your overall profitability—and solving that issue will take more than just managing expenses and receivables more competently. And in the coming weeks we’ll learn more about not just identifying problems, but how to solve them for good.

So until next week: don’t let the business of creativity overwhelm your creative business.