Liquidity and the Art of Invoicing

CB Insights, a venture capital and angel investor database, concluded that “running out of cash” is the second most likely reason given for start-ups to fail. (The first being “no market need”)

I have written elsewhere about cash burn, cash cushion, and overall cash liquidity, and would rather discuss here how customer invoicing and payments affect a company’s liquidity and some best practices to implement.

Cash flow is the lifeblood of a business. If you run out, the company fails…plain and simple.

So the type of customer you serve and how you invoice plays a large part in the health of your financials.

Aim to always have the customer pay as much of the invoice upfront as possible – in other words the customer pays 100% of the project or service offered before any work starts. This has the added benefit of financing your business in the short term, but also avoids some nightmare situations.

But what if the project is so large that the customer demands a payment plan?

Then make sure that at least 50% is paid upfront and 100% is paid before you finish the project. The customer may have a never-ending list of requests for you to fulfill before they pay their final invoice and the project runs into your future work.

A general rule is to never get paid in installments unless the amount is small enough to be put on a credit card, which you run every month. Then it must still constitute a prepayment for your work.

Here’s the problem you face by not receiving 100% upfront.

You must be able to stop your work at a moments notice when the payments seize without putting yourself in a difficult situation. Because if you stop work halfway through a project you’re suddenly the bad guy, and if you continue your work, you increase the chance of having bad debt. You’re stuck.

A multimillionaire entrepreneur and friend of mine said: “Allowing customers to pay in installments as work progresses sets you up for bad debts at best and a liquidity crisis at worst. The question is only how large those bad debts will be. “

All this to say, never finance your customer unless that is your primary business and you are a type of bank or lending institution. Credit cards exist to allow people to buy today what they can only afford in the future. And if the bank won’t give the consumer more credit why would you take on the risk that the bank won’t.

Also, never do invoice factoring where you have to pay another company to collect your receivables for you. The amount of ways this is just bad business practice is too numerous to describe in this email.

In summary, only target customers who can afford your services. Never try to help them to pay.

Who you serve matters, not just from a brand image perspective, but also because business is supposed to be fun. If you work with the right customers it will be.

Today, we’ve barely scratched the surface

Whatever stage you’re at in business, you need to be all over the numbers. In posts like this, we aim to offer bite-size food for thought – but in a few hundred words, we can only do so much.

If you’re ready to build your financial muscle, how about a FREE copy of James Vanreusel’s (highly-acclaimed) book for CEOs?

The #1 Key to Creating a Thriving Business takes you through the challenges of growing and scaling your company, from first to last. And you can request your copy here – no hidden fees, no strings.