Relationship Between Invoice Date & Cash Flow
In our sales invoice basics post we talked about keeping on top of your invoicing to improve cash flow. Today we are going to give you a very simplified demonstration of how when you invoice affects your cash flow and how much capital you need to keep a float until you get paid. This demonstation would not affect those of you who get paid 100 percent up front. This does affect those who get a deposit up front and those who do not get paid until the end of the job (not a great situation for various reasons but that’s another post).
Right click the image above and open in another tab or browser window to follow along.
Note: These samples assume the customer has the traditional 30 days to pay your invoice. Everything gets extended if you let them be slow payers. Obviously, if you offer a discount for early payment and they take advantage of this everything gets shortened.
The days nothing happens in the demos have been hidden to create the image. If you build your own cash flow chart there would be days in between invoicing and payment dates where you have to pay something yourself.
For projects where you had to buy products or services this will add into the equation. For simplicity sake we made the date you purchased the materials/services a few days before you complete and assumed you yourself have 30 days to pay your account. Adjust the timeline as needed if you have to purchase things further in advance of completion or had to pay cash instead of on account, which of course adds to the time you have to carry the costs of the project.
Bill as Soon as You Complete the Job
Our first sample shows what happens if you bill your job the day it is complete.
In our simple example of billing on the day of completion you end up waiting 5 days between paying your suppliers and you receiving your money from the customer (if they pay on time).
In this scenario you would need 4 days of additional cash to keep going if you have bills to pay within those 5 days.
Bill on the 15th of the Month
If you stock pile your invoicing and do it all on the 15th of the month then you have to finance your supplier costs 11 days until you receive your payment (again assuming the customer pays on time).
Bill on the 30th of the Month
You procrastinator you! You stock pile all your invoicing until the last couple of days of the month. This creates a very stressful situation for yourself plus adds time to how long you have to finance your business.
In the wait ’til the end of the month scenario you end up having to finance your business 14 days until you get paid.
Multiply This by the Number of Projects You Have
The Bad
When you are the procrastinator type (waiting until the 15th or end of the month) your financing woes get greater and greater. The number of things you have to pay for prior to collecting your money just pile up.
The Better
In the bill as you complete scenario, eventually, you could have money coming in every day! Quite possible if your business takes on smaller projects where you could complete within a day or two. The key to this is having a backlog of work (a line up of work) waiting.
Don’t Wait to Bill
If you want less worries about financing your business bill as you complete. Get in the habit of setting aside time each day to do your invoicing. Remember, some will pay in advance of the 30 day deadline to get their discount which in turn shortens your financing problems.
Some Businesses You are Stuck with Other’s Schedule
In some businesses even if you adopt the bill as you complete habit they have set dates they process bills for their jobs hence there needs to be an adjustment in your own financing plans so you do not get in trouble with your own suppliers.
An example of having to live with someone else’s schedule would be construction contracting on larger projects. Here where I am, on larger jobs all invoicing has to be submitted by the 25th of the month. The architect on the job looks over the subcontractor bills, approves (or adjusts them), submits to the project owner, project owner submits payment to the general contractor who then has to payout to the contractors (less 10% holdback). The owner usually is to pay the contractor on the 10th of the month following but you still have to wait for the contractor’s accounting department issue your cheque. Vary the timetable as applicable to your situation.
You Get Paid When I Get Paid
“You get paid when I get paid” attitude is a very good way to loose your good suppliers and contractors. It is just not good business to snowball your poor financial planning back onto your suppliers and contractors. This practice would be an unacceptable payment plan if you were on the receiving end of this attitude now wouldn’t it. If a customer did this to you you would reconsider doing business with them or raising your pricing to cover the lateness would you not? Well, you should, just as your suppliers and contractors will do to you.
Earn Better Credit Rating with Prompt Payment
When you have a good cash flow you can pay your bills on time (just like your home life) which in turn boosts your credit rating. As a business starting out you pretty well have no credit rating for the business, you have to go on your own personal credit rating when asking for credit accounts or credit cards. As your business evolves your suppliers will be willing to extend your credit account if you are good at paying on time or even early, just like your home life.
Parallels Between Business Cash Flow and Home Life Cash Flow
There are many parallels between cash flow for a business and your own home financing. Look at the examples again. Your home finances depend on when you get your pay check and thus you can pay your bills on time. Same with a business. Cash in the bank equates to paying your bills on time, being able to take advantage of early payment discounts and building your business’ credibility.
Stop procrastinating. Get in the habit of invoicing as soon as you can to improve your business cash flow.
Anyone got some suggestions on how they keep things organized so they can keep the cash flowing into their business continually?
Cash Flow Related Articles
- The Biggest Problem With Cash Flow Management
- 5 Ways to Protect Your Cash Flow – Cash Flow Management Tips to Keep Your Cash Flow Flowing
- Pump Up Your Cash Flow By Getting Paid
I use an Excel master sheet that lists every project by date, client, project number, size, rate, revenue per hour and per word, whether it is paid or not. This gives me an idea where the lucrative clients and project are. For invoice creation and revenue tracking, I use Quickbooks 2010.