Service-based businesses (e.g. agencies, marketing, consultants) are unique in that our “product” is often intangible or knowledge-based. Projects lengths can be unpredictable and the end-product can go through many iterations. As a result, it’s hard to tell how much money you really made from one project to another.
Businesses start with a very small team and a handful of projects so it’s easy to tell who’s doing what, which customers still owe you, and what projects you made money on. As the business approaches $1mm in revenue, it becomes much harder to determine those things without data.
We see all kinds of manual, spreadsheet-based processes that seemed easy enough for in the beginning but is breaking at scale. It’s time for a change.
This is when most of our customers start looking for a solution. We modernize their accounting applications and we help them implement the software applications they’ll need to operate their business more effectively.
Here are the top 5 tips we’ve learned over the years that will have the biggest financial impact on your business:
- Invoice quicker – the sooner you can get the invoices out the door, the sooner you will be paid. A manual process where you are gathering information from various sources and inputting invoice line items into your accounting application will delay getting that cash in the door and lead to errors. We have seen some businesses take 3 weeks to get invoices out which means they are floating the cash for payroll for close to 2 months.
You should have an integrated system where the team tracks their time and project costs in one place and have that system generate invoices automatically and generate the data you need to run payroll.
If you can switch from billing after you’ve performed the work to charging up front or progress billing, even better. Your goal is to get cash in the door as fast as you can without sacrificing your relationship the customer. Don’t be afraid to try new things. All too often, we’ve seen a business starved for cash when their largest customer delays payment.
- Collect faster – once your invoices are sent, make sure you collect that cash as fast as you can. Don’t let cash sit in your accounts receivable. You never know what position your customer will be in 30 days or 60 days from when you sent that invoice.
Monitor your accounts receivable by reviewing your AR Aging report weekly. Have a clear plan for each invoice you see listed rather than just hoping it will get paid and clear itself off your aging.
Can you collect credit cards payments up front instead of waiting for a check? That 3% fee may be a net gain if you consider the effort it takes to hunt customers down (that’s not fun for anyone).
If they must use checks, what if you offered a 2% discount if they pay within 10 days? Could that work?
- Maximize profit – don’t focus on top line revenue. The vanity matric for many is sales. Some businesses can sell themselves out of business if they aren’t profitable enough. How profitable do you need to be to build a healthy business.
At a minimum, separate your labor and expenses related to delivering your service from your non-project related costs like Rent or Marketing. This will give you a high level Gross Margin which tells you how much money you make on all projects.
Even better, utilize software to calculate profitability at the project level. Do you do different types of projects? Which projects or more profitable that others? Should you focus your team’s time doing other things?
- Track staff performance – which team members are more profitable than the others. Do you have the data to see trends in your staff’s performance? Are employees in the same role yielding different billable hours?
What billable targets do you need to hit to obtain the growth or profitability you want for your business?
- Reduce write-downs – are you throwing money away? It’s all too easy for a project manager to feel the invoice will be too high for the customer and write it down. If these are not tracked, you may never know how much money your team is billing for but never collecting. Track this amount and investigate why the time is unbillable. Do your projects managers need a little more backbone? Are we doing things out of scope? Does the team need more training to get work done right the first time?
A fluid relationship between operations and accounting is key to collecting cash fast. Use the right tools that integrate with each other so you have the data you need at your fingertips to execute the suggestions above.
We’re big fans of automation and streamlined processes. Lose the manual spreadsheets and old tools and consider things like: Xero, Gusto, WorkflowMax, Harvest, or Accelo. Take control of your business and know what drives your numbers so you can reach your goals.
You don’t have to go it alone, reach out to us and let us help.