Cash flow in a small practice: how to stay solvent

Profit is not cash

A practice may have a full order book and still run short of money, because fees are earned over months but may be paid late, while salaries, rent and insurance fall due every month. Watching only profit can hide a cash problem.

Know your costs

List your fixed monthly costs: salaries, rent, insurance, software, utilities, loan repayments, tax, and professional fees. Add the irregular ones, such as annual insurance, subscriptions and equipment. Then know your break-even level of income. Many practices are surprised by how much they must earn to stand still.

List your fixed monthly costs: salaries, rent, insurance, software, utilities, loan repayments, tax, and professional fees.

Forecast

Make a simple cash forecast for the next six to twelve months. List expected income by project, with the dates payment is likely, and your outgoings. Update it regularly. A forecast shows tight months in time to act.

Invoice well

• Invoice on time. Delay in invoicing is delay in cash. Agree stage fees and dates in the appointment. See How to write an appointment agreement.
• Invoice accurately. Errors cause delays.
• Be clear on terms. Payment periods, interest on late payment and what happens if payment stops.
• Consider payments on account or regular monthly invoices.
• Chase promptly and politely. Follow up as soon as an invoice is late, and keep records.
• Know your rights. Many countries have rules on late payment and payment notices in construction contracts. Take advice.

Clients who pay late

Slow payment is the most common cash problem. Check a new client's ability to pay. Be wary of work that is allowed to continue without payment. Consider suspending services, within the terms of your agreement and with advice, if payment is seriously overdue. See What to do when a client is late paying.

Keep a reserve

A cushion of several months of fixed costs gives a practice time to deal with shocks, such as a project stopping, a client not paying, or a slow quarter.

Manage costs and growth

• Hire only when work justifies it. See Growing a small studio.
• Review subscriptions and equipment.
• Watch work in progress: are you giving away unpaid time?
• Do not overspend on premises or fashionable extras.

Tax and other obligations

Set aside money for taxes, such as VAT or its equivalents, and pay on time. Missed tax payments can be very costly.

Keep good records

Simple bookkeeping, up to date, lets you see where you are. An accountant or bookkeeper can help.

In short

Know your costs, forecast, invoice promptly, chase gently, keep a reserve, and take advice from an accountant.

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