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Small business cash flow crisis: Psychology, not economics, is to blame
You may find it a little hard to believe — at least I did in the beginning — that one of the biggest challenges faced by small business owners is not lack of demand or depressed sales but a poor choice of where you source capital and where you deploy it.
Nearly 84% entrepreneurs don’t make smart choices about their funding source. That’s the finding of recent survey done by UK-based Bibby Factors Northwest.
The outcome is that nearly half these ventures fizzle out within the first three years of operation. Just imagine — what a colossal waste of someone’s time, money and dreams!
After a careful analysis of this situation, I came to the conclusion that at the root of this problem is not economics but psychology.
At the first sign of trouble, a typical response of a small entrepreneur is either to get his bank overdraft extended, or dip into his savings. Both are big mistakes, yet 84% businessmen respond to a cash crisis in this knee-jerk fashion according to the Bibby researchers.
As I understand it, this happens because, a small entrepreneur, who often has a lot of his personal savings at stake in the venture is typically inward-looking and averse to taking big exposure, usually to his own detriment. Unfortunately, this kind of “tunnel vision” on capital issues does not help him in the long run. Instead of insulating him from risk, it turns out to be a costly decision.
“Let me tide over this crisis” seems to be the response as opposed to tackling more permanent funding source of deployment issues.
Cash flow crisis is typically caused not because of lack of funds but because of incorrect way of:
- Where the funds came from
- How the capital was deployed
Short term source of capital puts pressure on your cash position
Bank overdraft is short term capital. If you dip into savings, they last only for a short time. If you buy machinery by taking a short term loan, the machinery will only pay you back in a few months if not years. But the bank overdraft will not wait until so many months. It has to be paid off immediately. Similarly, if you buy the machinery by dipping into your savings, that cash will get locked in.
In both cases, if you change the underlying business economics, you don’t have to dip into your savings or draw from bank overdraft.
To understand the business dynamics and to figure out which source of funding is more appropriate for your business, I would suggest the following resources to small business owners:
- Turn to accounting and
financial professionals. A quick review of financial statements by a trained eye can help detect slow collections, poor financial management, overextended accounts payable or other warning signs, early before the house gets on fire
- Financial institutions. Visit a bank for assistance with a line of credit, an accounts receivable loan, or factoring or other such vehicle to ease the cash crunch
- Join Business groups. They are the best source for peer consultation. Get peer consultation.
Track your cash flows to get early signals
How many aspiring entrepreneurs venture into a business without so much as a primer course in business accounting?
Yet proper financial management is crucial to your business’ survival. Do your Receivables and Payables play nice with each other? Are expenses rising faster than profits? Is one skill more in demand than the other? How much do you need to meet your monthly expenses? Can you take a paycheck this month? All the answers lie in the numbers.
Let’s face it — as businesses grows; cash difficulties are bound to arise. This is especially true of start-ups, during sudden growth spurts, or during shaky economic times.
The real danger lies in failing to plan for such crisis, which can result in over-trading.
Other key causes of cash flow problems could be inadequate budgeting of income and expenses, not watching receivables, not setting goals, and trying to handle the company’s financial management single-handedly. Whatever be the reason, companies that are cash flow negative are simply spending more than their earnings.
Here are a few practical tips to avoid cash flow issues
Negotiate better terms with your customers
When taking on longer-term projects or clients, negotiate in advance for regular payments. Ask for payment at the beginning of projects and ‘front load’ invoices rather than ‘back loading’ them. Offer discounts for quick payment. Bill promptly and avoid slow pay/no pay customers. And finally, exceed customer expectations so they don’t have any reason to withhold payment!
If your customer does not pay on time, consider penal interest and implement it. It saves a lot of time and hassles, if all business terms, especially payment terms are discussed well in advance with a partner, especially an overseas partner, with whom disputes are harder to settle due to the distance issue.
Renegotiate or postpone payments
Check out if you can postpone your payments by either part paying the amount or by postponing it all together. If you have good relations with your vendors, and if you had helped them before, they will be willing to help you by allowing you to pay later.
Some of your payments can be brought down into monthly cash installments instead of a large cash payout.
Do background search and reference checks on new customers
Look before you leap. Perform credit checks on every customer you acquire. Ask for — and check out — credit references from past clients. This is quite an acceptable practice and no one minds it. Call other businesses that have had a relationship with the client. Keep your ears tuned in for any discordant note, a moment’s hesitation, and reluctance to speak about the client. These could be dead giveaways on the client’s past conduct in the marketplace.
Refinance your loans if it makes sense
Lookout for cheaper funding sources. Suppose you took loans on different interest rates from various sources. If your credit limit permits it, club these into one account on the lowest rate of interest with one lender. Or, you may be able to consolidate two or more loans into a lower-interest account and improve your cash flow. Explore these options.
Profit does not mean cash flow
Remember that you may be profitable – accounting wise. But if the invoice you raised is sitting with the customer, then your cash flow gets affected. In a bad situation, you may be unable to pay all the bills or salaries on time. Profits are important, but every decision has to be carefully weighed against its effect on cash flow.
Hold on to cash
Spending is easy. Earning is difficult. When you have cash, don’t take that easy decision. If you are spending a lot on expenses that are not necessary you can save on your cash. Are you spending on office décor, on full page color ads, on a color laser printer when an ordinary one would suffice? Don’t. You might trip and fall on the other side of the gorge. Hold on to enough cash reserves so that you can fight unforeseen cash flow issues.
Opt for credit insurance
Credit insurance can help mitigate the risks by protecting your bottom line against nonpayment–or even slow payment–of invoices, especially while dealing with overseas partners. These days, there are unit linked plans (cheaper than the usual insurance instruments) for every risk. However negotiate for better terms with at least two three insurance providers to cut the most cost-effective deal.
Try barter
You could reduce the strain on your immediate cash if you need goods or services from someone and can barter goods or services in return. Supposing there is a copywriting project posted by a team of website developers. They are looking for someone to write content for their site. Since they are
professionals like yourself, instead of cash payment for your services, you could opt for services in kind — get them to do some good graphics for your website that would boast your business. Of course, this option can be used only in limited circumstances.
The ideal situation for you would be to not even hear about a cash flow crisis. But that is not how real world is. You will run into cash flow issues. You have to think about strategic cash reserve so you can never run into crisis. Remember, when things get tough, the tough ones get going. If you have to become tough, plan for it.
Picture credits crazyneighborlady Amagill
Building a Winner’s Online Profile on p2w2
Picture credit: Lauren Manning
Among all the marketing tools available to a freelancer, a profile is by far the most important. Done carefully and with forethought, it can be the main engine of your business growth.
Profiles are like short, vivid biographies. Like a piece of art, a profile must capture the essence of your personality and your
expertise.
The role of a profile is to convince the buyer to call you
When buyers look at your profile, they must want to engage you. To understand that, you must know what goes through an employer’s mind the content in which she goes through your profile. An employer looks at your profile on two occasions.
First, when you bid on a project, the buyer looks at the bid, thinks it’s interesting and then would like to confirm what she has seen in the bid through your profile. It can be through your own description, feedback from other buyers, or samples. In this scenario, the profile works to convince the buyer that you have the required credentials.
Second, when a buyer searches for a professional with a specific requirement, and the search results show your profile. The buyer goes through it and finds it interesting. In this case, your profile works to convince the buyer that you must be among the shortlist of candidates who can do her job.
In either case, the main challenge before you is to write a profile that is convincing that a buyer’s instant response is to pick up the phone and call you.
A good profile gives a glimpse of you, shows your expertise and sounds sincere
A freelancer’s work is more likely to be judged by:
A. Experience in the industry or the number of similar projects executed in the past, and/or
B. Feedback posted on p2w2, or references that can vouch for your work.
Where neither is available, i.e., where you are absolutely raw and new to the market, your best fallback is again your profile. That’s why you need to turn it into a first-rate, marketing tool. You have to do everything possible to make it:
- Show your skills and who you are
- Sound sincere
- Read gripping, and
- Look attractive and free of all grammatical errors
The key here is to invest the time required to bring your profile up to the cut required by your buyers.
All right! That’s easier said than done. Here are a few tips on how to give a face lift to your profile:
Put yourself in buyer’s shoes when you write an online profile on p2w2
What does a buyer want? Take an example. Imagine you are looking for a freelancer to write blog posts for you. What would you look for in that person?
“Can this person deliver the project?” is the question you want answered.
The first thing that you’d look for is demonstrated expertise. And buyers look at the Description, your samples, and the feedback to answer that question.
Further, in almost all cases, domain expertise is important. For instance, if you want an article to be targeted at insurance professionals, you would want that person to have knowledge of the insurance industry.
To simplify putting yourself in buyer’s shoes, understand what your potential buyers want and then start working to deliver on all those areas. I am not saying that you must fulfill all the requirements at the beginning itself. But it is necessary that you at least begin to think along those lines and are able to bring out strengths in your profile that the buyer/employer is looking for.
Make the best use of the marketing tools available on p2w2
Check out these two profiles as a sample – www.p2w2.com/chaitanya_sagar or www.p2w2.com/srkvasu (Yes! www.p2w2.com/Username shows your profile without your contact information)
When you are building your profile on p2w2, you will find an important field titled “Description.” This is the face of your profile. Leaving it blank is as good as having no face for your profile. Make an expert use of all the tools available on p2w2 to sell your skills.
Use Skills section wisely. The 5 you enter should be your core skills where you are the master of the trade. There’s no point entering skills that you won’t win projects for!
In addition, indicate work type and domain preferences, projects that you are extremely good at handling.
Also, mention the time zone that you operate in and what is the best time to reach you.
In your contact details, especially phone numbers, give complete details, including country and area codes. Your data is confidential. It will only be revealed to buyers who want to talk to you.
This is also the field, where you must mention, your payment terms, expectations from the buyer, if any.
Also if you have any reservations relating to signing a ‘non disclosure agreement’ (NDA) or a “work for hire” clause, declare those beforehand in your profile.
Use relevant and recent samples
Post most relevant samples. Think of categories when you post samples.
“Which category of projects am I looking for? Will these samples convince a buyer that I am capable of delivering this type of work?” If your answer is yes, go right ahead.
Don’t make the mistake of pointing out a link, where a buyer can view your entire portfolio. You have to be specific. Four or five samples is a good number. If need be, you can post up to 10 samples. But more is not necessarily better. If you show your best work and if the samples cover all categories of work you are capable of, that is good enough.
Show passion; show commitment
A project is like a baby to a buyer. She wants to trust only with a caring nanny and a nice person. Demonstrate your interest and involvement in the project with solid proofs of your expertise. Tell the buyer just what excites you about her project and how you fit the bill.
Offer add-ons
Offers of basic design work on a writing project, insertion of royalty-free visuals etc., probably won’t cost you an extra dime, but it could go a long way in establishing trust and building rapport with a new customer. You discover value by offering something that does not cost you, but costs buyer a lot.
Firm up your track record
This cannot be overstated. The first thing that a service provider checks about a buyer is his past payment record. And, the first thing that a buyer checks about a service provider is other people’s opinion of his/her services. One bad review can delay your progress on p2w2. In order to have a positive rating from all your buyers, be willing to go that extra mile, stay true to your commitments and deliver on time. Satisfied buyers will always be willing to endorse your work to someone else.
SEO your profile
Search Engine Optimisation (SEO) is a technique used for ensuring that your profile comes up in the top couple of pages in random Internet searches. For instance, a buyer does not visit www.p2w2.com. Instead she just inserts ‘freelancing graphic designer” in the Google search bar. If your profile is search engine optimized, it will come up in the first few result pages.
Use these tips in how you write your profile and you will see better results.
p2w2-SBL: How twitter can help your small business
Welcome to this week’s p2w2 Small Business Links (p2w2-SBL) post. In p2w2-SBL we bring you the best resources available on the Internet on this topic. Today, I focus on how twitter can help your business.
Create unbelievably valuable network, meet potential collaborators and find extraordinary business leads
“Just by way of writing, reading and responding to each other’s tweets, unbelievably valuable networking contacts have become familiar workday presences. I’ve met and hired 3 subcontractors for my business, met numerous potential collaborators and even found extraordinary new business leads. I’ve been to numerous networking and social events (lifesavers for a WAHM in a new city!). Interesting, creative, challenging, thoughtful and very deeply caring people have come into my life. New ones seem to appear every week. Twitter has served up answers, opinions and inspiration.” (Laura Fitton: Ode to twitter)
“Do you have a brick and mortar business? Connect with your local clientele by using TwitterMap.com or TwitterLocal.net. These sites will show you all the Twitter updates happening in any given geographic area. Sign into your Twitter account and enter “L: city, state” and then visit TwitterMap or TwitterLocal to find “Twits” near you.”(Carrie Hill: Small Business Owners Need Twitter and LinkedIn)
“How could I hire a stranger to work on an important project? Simple. I knew enough about her from Twitter to be confident she could do the work. Her authentic behavior in the [Internet] told me she was intelligent and articulate. When we briefly stepped into the real world, I quickly confirmed this. And her work was outstanding.
The most valuable social networks, and the most valuable contacts within those networks, are based on trust. Most of my Twitter friends are people I have never met in person and with whom I had no connection prior to twitter. Twitter provides exactly the right environment in which to build trust.”(Joel Postman: twitter is the new anti-metaverse)
twitter is the new discovery channel
“Twitter has become my best way to discover. Discover cool websites….discover blogs, podcasts, even breaking news… It has been an amazing and inspiring
resource.” (twitter is new discovery channel)
“We also combine the power of our collective news/intellectual interests. I get the “best of” ideas that various Twitter friends read or create, any given day. This magnifies the depth and breadth of information I consume.” (Laura Fitton: Ode to twitter)
Twitter is a sounding board. Get advice, directions and support
“Twitter is a sounding board. CEOs of large companies ask questions about products and strategy. Small businesses can do the same.” Joel Postman
“I use Twitter to ask for advice, directions, support, and to ask others for their open-ended interpretations to general questions.” (Chris Brogan: Newbies guide to twitter)
Build traffic; Engage your customers and get insights into your business
Twitter helps engage your customers by offering them valuable information and insights. By talking to your customers in a high trust environment, you can get insights into your own business with unmatched depth and volume.
“Building links to a small business Web site? Follow people who can help you out, engage in the community and when they call for help/suggestions, offer yours” (Carrie Hill: Small Business Owners Need Twitter and LinkedIn)
Twitter is Answers (like Yahoo! Answers), a chat room, a water cooler, an advertising tool and more rolled into one.
If you realized twitter’s potential the first time you saw it, you may be a genius. Because, not even Evan Williams, its founder, could have guessed how useful twitter was going to be. Lots of people, including me, can’t figure out the first time why they should use twitter.
“Frankly, twitter went from “what the heck” to “how the heck did I live without this?” very quickly.”
“I began to see how creative/productive Twitterers can inspire. I used it to surround myself with role models. I started getting to know people, and to enjoy the company, humor, conversation and great links.” (Laura Fitton: Ode to twitter)
Twitter is Answers (like Yahoo! Answers), a chat room, a water cooler, an advertising tool and more rolled into one. You can derive value out of it by spending time and connecting with people on it.
Picture credit: Sitting on the toilet http://www.flickr.com/photos/cambodia4kidsorg/
Clients and Service Providers: Partners or Arch-enemies?
Have you ever finished a meal at a restaurant and found the experience not worth your time and money? The waiter was not attentive enough, the food was stale, options were limited and finally you got the overall feeling that the management did not really appreciate your business as your attempts to request better service were ignored.
You just joined the dissatisfied customers club.
Could I get some service please? Picture credit: http://www.flickr.com/photos/mandj98/
Most know an unsatisfactory service when we are receiving it. Are we able to think for our own customers and go the extra mile to make their experience delightful?
p2w2 provides you with nuggets from the collective experience of all our users to make your more successful in building a lasting partnership with your customers.
p2w2 Blog had a great post recently on Pitfalls in Supplier Relationship Management. Interestingly, most of those points could apply in the other direction too. Suppliers too can at times get too fat and arrogant and succumb to the same pitfalls. They stop relating to the individual(s) behind the client organization, seek to squeeze too much by atrociously charging for every additional service request, adopt the “take it or leave it” approach when the client is trapped in a dire situation and finally, make every decision a matter of ego.
Another great post is on Freelancer Essentials, and it talks about how to establish as a reliable service provider. I will extend on these posts.
In my own career, I have gained a lot from working with seasoned professionals in customer relations. The need to manage clients and internal teams across the globe makes it even more challenging! This post draws from my experience on the bare essentials in establishing great relations with your clients.
View it from long-term client relationship perspective
The Expansive Relationship of Two Individuals as An Independent One. Picture Credit: http://www.flickr.com/photos/derricksphotos/
Brighten the relationship with out-of-work activities
Ask for feedback; Listen to your customer
Don’t pay lip service to listening to your customers. An often used, but usually poor strategy, is to use someone else (either outsourced, or a different administrative department) to survey your customers.
Your must ask for feedback frequently – what are we doing well for you? Where can we improve? Most people shy away from asking.
There are many benefits from asking for feedback.
First, it gives your client a platform to vent their feelings. You must patiently listen to her. That itself shows to the client that you give importance to her. You are one step closer to satisfying the client.
Second, it helps you narrow the gap between client’s expectations and your performance.
Third, you can figure out if there’s something you have but does not cost much for you but has a lot of value to your client. Discovering such aspects creates mutually beneficial relationship.
Put yourself in your client’s shoes
Bad news does not age well
The earlier you tell your client, the better the chance of working together on reducing the impact.
To deliver the message faster and to mitigate the impact, You can set up regular status meetings and using the meetings to disclose or warn about bad news. Being too early is better than being late at all.
Never defend the indefensible
Customer is never wrong about the results s/he wants
Part amicably when things are simply not working out
Keep track of your goal
and not losing sight of what we have set out to achieve – a successful, well run business – should keep us right on track! I would love to hear from you on any other advice you might have for us and your fellow small business colleagues here at P2W2. Please do leave your comments!