Lack of cash flow is the leading cause of business failure.
80% of all businesses fail in their first year of operations. Of those 20% that survive the first year, 80% of those fail to survive 5 years in business. The 4% of companies that survive their 5th birthday have only survived because they managed to generate enough positive cash flow to keep the lights on and continue doing business.
As a Chief Financial Officer (CFO), ensuring positive cash flow is my most important responsibility. In this capacity, I have found that selecting your clients wisely helps tremendously towards meeting this goal.
Great clients ensure positive cash flow
We have defined the qualities of a great client that have proven to be extraordinarily helpful to ensuring positive cash flow. When we follow our own guidelines, we normally see positive cash flow. When we fail to follow our own guidelines, we often experience problems with cash flow. Positive cash flow, by the way, is also important for clients because it would be terribly disruptive to a client if their vendor went out of business or lost key employees due to poor financial management and/or inadequate cash flow.
So, this is what we look for in finding the perfect client:
- Friendly and understanding
- Web-savvy, tech-savvy
- Realistic budget
- Pays on time
- Pays without dispute
And now a brief explanation of what I’m talking about…
Friendly and understanding
Problems will happen. Obstacles will get in our way. Mistakes will happen. When adversity happens, it is important to have a client that is friendly and understanding. Clients need to be open-minded enough to be able to be our partner, not our adversary, so we can solves these problems and issues together. We need to be a team and work as partners and we need to enjoy the people we work with instead of avoiding them. This only happens when people are friendly and understanding.
Problems will happen. Obstacles will get in our way. Mistakes will happen. When adversity happens, it is important that clients have the ability and aptitude to understand issues and be part of the solution rather than the problem. When we explain something in technical terms, we need to ensure that these explanations are followed. Again, we need to be able to solve these problems together, as partners, and as a team. This can only happen when everybody understands the issues.
Quality takes time and the devil is in the details. We need to ensure that there is an adequate, realistic budget to pay for what needs to be done. When I hear people say we have a small budget, then we are probably not the right vendor for you because we cannot be constrained by inadequate budgets. When I say “realistic budget” I mean big budget, not small budget and not tight budget. Big budget means big enough to satisfy a client by paying attention to quality control, usability, accessibility, design, and project management.
Pays on time
It is so important for cash flow that clients pay on time. We have to pay our own bills on time. We have to make payroll, pay rent, keep the lights on, ensure an uninterrupted Internet connection, plus all of the Software as a Services (SaaS) that we rely on to conduct business, e.g., GoToMeeting, JIRA, Freshbooks, Basecamp, Citrix, QuickBooks, Amazon Web Services, Slack, Softlayer, Media Temple, Verizon Wireless, Cox Cable, etc., For us to pay our bills on time so we can stay in business, we need clients that pay on time as well.
Pays without dispute
I certainly understand wanting a breakdown of an invoice so I can ensure that it is correct and no mistakes have been made. And, I can understand and accept an occasional invoice challenge or dispute. But, when I send out invoices on a monthly basis and the same clients dispute these invoices on a monthly basis, this is not good. Obviously, there is a problem. Either we are not managing expectations properly or we simply have a client that does not have a realistic budget to be able to handle the work required to satisfy their requirements. Since we work so hard to manage expectations and share our burn rate (burn down chart), we believe we have eliminated our part of the equation.
The Client Scorecard
We are okay if a client scores 3 out of 5 or 4 out of 5. But, when they are only scoring 1 out of 5 or 2 out of 5, something is wrong and our cash flow usually suffers. Better to gracefully exit the relationship so client and vendor can find a better match for their needs.