Cash Flow Management: 5 Strategies for Service Companies

Make sure your company has the funding it needs to thrive and survive, even during lean times.

Cash flow is critical for every business, but many service companies face extra pressures in this area:

• Their business models are highly reliant on labor, so payroll tends to be a larger part of their costs. Reducing this type of fixed expense is much harder to do and more disruptive to the business. 
• Revenue can be tougher to predict for some types of service businesses, such as consulting services or construction, where customers can delay projects or their needs may be infrequent. 
• Many of those businesses operate in industries where customers expect longer payment terms, which also impacts cash flow.
• Several service-based companies, like accountants or landscapers, are seasonal. The end of the year might be a busy time for retailers, but those service businesses may experience slower revenues.

Fortunately, there are several steps that your service business can take to adapt to cash flow challenges.

Build cash reserves

Most companies go through slower times, but seasonal and cyclical businesses know they will go through periods where revenue either decreases or stops. Even during a great economy, your company might get hit with unexpected expenses. It’s critical to have cash reserves to get through those challenges. 

That’s why it’s wise to save a set percentage of revenue each month. One rule of thumb says your company should keep enough on hand to pay three to six months of expenses. But it’s just a rule of thumb. Smart businesses examine their expenses more closely to determine how much they will reasonably expect to spend. They’ll also take the larger economic environment into account. During a recession, for example, they might keep nine to 12 months in cash reserves. 

However, companies should avoid keeping too much in reserves. Those funds could be put to better use by investing in increased capacity and business growth. 

Develop cash flow forecasts

Cash flow forecasting lets your company use its historical data to predict how much it will need during upcoming months or quarters. That way, you know if there will be lean times coming so you can adjust spending or beef up cash reserves.

Forecasting can be a little more challenging for newer companies because they don’t have a long track record to guide them. They may have to use estimates or industry averages to guide their planning.

Make sure your company has access to working capital 

During slower seasons, your business may need access to outside sources of capital. Some popular options include: 

• Early payment and invoice discounting: Businesses can increase their cash flow by incentivizing their customers to pay their invoices ahead of schedule in exchange for a small discount. Many companies offer static discounts like 2/10 net 30, but they may do better with dynamic discounting. C2FO’s early payment solution empowers companies to control the size of discounts and when they’re offered.
• Factoring: Companies sell their invoices to a factoring company, which provides 70% to 90% of the invoice value almost immediately. The factor collects the full value from the customer on the original due date, then releases the rest of the money to the company, less the factor’s fees. Many businesses use factoring, but they need to know the drawbacks.
• Lines of credit: A company can borrow from a lender up to a preapproved amount and only pays interest on the amount that is borrowed. In times of economic stress, though, the lender could end the relationship with little notice. 

Pro tip: Set up relationships with these sources before you need them. In some cases, the process could take weeks or months, and that’s assuming you’re successful. However, if your company’s customers offer early payment programs through C2FO, you can start accelerating invoices in moments, with payments arriving in days. If your company faces an immediate shortfall, you might not have the time to wait. 

Reduce the time it takes to get paid

As mentioned above, offering discounts can increase cash flow when your company needs it most. Instead of waiting 30, 60 or 90 days to receive customer payments, discounting can put money into your accounts faster. 

Companies can take other actions to get paid more quickly, including:

• Optimizing billing: Bill customers as soon as possible because the sooner they receive the bill, the sooner they can pay. That’s why it is important to invest in quality processes and platforms. 
• Minimizing errors: If your invoices contain errors, your customers are going to dispute those charges — and that means it’s going to take longer for them to pay. That’s also true if the invoices are being sent to the wrong addresses or people. 
• Offering customers multiple ways to pay: In particular, online portals let customers authorize payment in moments.

Maintain good working relationships with your vendors

If your company is a good customer — it pays on time, communicates clearly and treats vendors with respect — those vendors might be willing to help when times get lean. For example, investing in those relationships makes it much easier to negotiate flexible payment terms.

One key is to communicate your company’s needs quickly, either as soon as a problem arises or even before it occurs. It’s also important to make any requests win-win so that your vendor benefits, too.

The bottom line on cash flow and service companies

Service companies face more challenges around cash flow, but they can improve the situation by “controlling the controllables” — building cash reserves, using cash flow forecasts, speeding up customer payments, setting up financing and seeking longer payment terms from their vendors. 

If working capital is a focus for your business, you should consider C2FO’s solutions. Our platform has become an indispensable tool for many service companies because it allows them to increase their cash flow on demand. Learn more about how it works.