Protect Your Cash Flow: How To Keep the Lights on When You’re Self-Employed
February 10, 2011
There are two things most people focus on when they talk about the risks and benefits of working for yourself—financial uncertainty and big financial success. Unfortunately, you typically have to get through the former before you can reap the big rewards. Those who run the company need their basic needs covered while they work toward the day they can live off profits. So how can freelancers, startups and small businesses build and protect their cash flow?
Start with “Ramen Profitability”
As a freelancer or small start up, your first financial goal should be what is often referred to “Ramen profitability.” Popularized by famous start up venture capitalist Paul Graham, Ramen profitability is defined by The Business Dictionary as “making just enough money to cover basic living expenses.”
Unless you have significant financial resources to live on for a good long while, you should not quit your day job until your new business can afford to pay rent on your apartment, put food in your stomach, and gas in your car (or be able to buy a bike). In the earliest stages, keeping a steady cash flow usually means paying your bills with income from your job, and reinvesting the business’ profits back into the company for growth and expansion.
Form Valuable Partnerships
Once you reach Ramen profitability and begin living off your business, your focus should shift to expanding and protecting your revenue. One way to accomplish both of these goals is to form new strategic partnerships. Seek out ways to pair your products or services with other companies in ways that are beneficial to both parties. “If you’re a house painter, your business may slack off during winter months,” explains business financial resource InvesMINT, “however apartment property managers routinely have maintenance projects, especially when tenants move in or out. A partnership with a larger company can be a bread and butter account.”
Not only will partnerships thicken your revenue, it also significantly reduces your risk of financial danger by diving your income across several different sources. If one of them dries up or goes south for any reason, the others should sustain your company while you work on replacing it.
Land Multiple Clients
If you are a freelancer looking to make your work your new full-time gig, you’ll need multiple clients. Using the same logic as discussed above, several clients equals less risk, since a shortage of work from one of them is neutralized by consistent jobs from the others. This is known as risk diversification because you are dividing your risk of financial trouble across several disconnected sources, which strengthens your cash flow and reduces the possibility that your revenue could disappear overnight.
Focus On Great Customer Service
Earning scores of new customers is a great achievement, but it’s only half the battle — keeping your customers coming back is just as important to your bottom line. In fact, global business research center The Yankee Group estimates that as much as 30% – 35% of calls to the average customer service line are repeat customers. Furthermore, About.com reports that repeat customers spend 33% more than new clients, and that it costs an average of 6x more to sell something to a new prospect than a repeat customer.
Further to the point, customer service advocacy website Get Satisfaction refers to customer service as “the new marketing.” A hurried, unhelpful customer service phone call could send that person to fire you and discourage others from using you. In contrast, a positive experience could cause him to cheer your name and recommend your services to everyone he knows. A happy customer who feels your company went out of its way to please them will, in effect, represent you to anyone he or she meets that needs what you offer, converting new buyers for you without any further effort on your behalf. It’s why FreshBooks puts such an emphasis on customer support.
Constantly Spread Awareness
You can’t acquire new customers and keep revenues flowing if no one knows about your brand or service. Targeted online and offline advertising is a great start, but let’s assume you already have a strong marketing system in place and want to go beyond it. If you’re a small business (or even a one man operation), start by spreading the word around your local area.
Grab a phone book and look up the contact information of every nearby business in your target market and get in touch, don’t be afraid to pick up the phone. If your company only caters to individuals instead of other businesses, send similar mailings to residential addresses by zip code (postal code). Or just trying getting your name out there, maybe by simply putting up flyers on bulletin boards. You want to maintain a constant stream of clients.
Build Cash Reserves
It may be hard to do as a young business or freelancer struggling to pay bills on the meager revenues you start out earning, but building strong reserves are vitally important for protecting your cash flow when hard times strike (or taxes are due). Ideally, you should aim to quickly build up several months of complete living expenses and bills in an emergency account that you do not touch unless it is absolutely necessary. In this way, if a client goes out of business, or your server fries out and takes your website offline for a week, you aren’t dead in the water.
How many months worth of expenses should you save in this account? Unfortunately there is no right answer for everyone, but financial services website BankRate.com recommends between three to six months. Seeing as your income is less stable as a start up owner or freelancer than it typically is as a salaried employee, you might want to consider saving more.