How Your Customers’ Cash Flow Impacts Your Business
Overcoming cash flow gaps is a major priority for small business owners—managing expenses and revenue is vital to a business’ health. But it’s less obvious how a small business should operate in a web of lenders, vendors and customers. It’s important to understand how this ecosystem works, and particularly how your customers’ cash flow impacts your sales cycle.
Kabbage customers The Landscaper’s Buddy, Morgan James Publishing and Right Time Rooter & Plumbing Services have become experts at navigating their customers’ unique sales flows in order to manage their business’ cash position.
Get to know your customers’ seasonal ups and downs
Joel Westrate founded The Landscaper’s Buddy in 2013 to help landscapers save time and labor when carrying heavy loads on a job site. “I grew up working on my family’s Christmas tree farm and knew that landscapers needed a better way to transport trees and materials by hand,” he says. After running the business for six years, he’s also become an expert in the seasonality of his customers.
While Joel spends a lot of time managing his own cash flow between the vendors he works with, like freight carriers and manufacturers, he also knows that “landscapers have their own cash flow issues.” He’s learned that customers make their purchasing decisions in the winter during the slow season. By the time summer comes, many landscapers are too busy with projects to buy new products. Joel has built his sales strategy around this cycle. He spends the winters going to trade shows to meet potential customers and calling prospects, while in the slower summer season he focuses on marketing his business.
Be prepared for gaps in cash flow (sometimes really long gaps)
Certain types of businesses have particularly long gaps between when they sell a product or service and when they get paid. The publishing industry has a particularly long lead time, says David Hancock, founder of Morgan James Publishing.
David started a publishing company after being frustrated with the traditional process while publishing his own book. “I had no input on the process when working with a major publisher. But when I tried self-publishing, it lacked the same credibility and distribution. So I decided to blend the two to give more value to authors.”
Morgan James Publishing was founded in 2003, and David quickly discovered the complexity of the publishing industry’s payment system. “Publishing is a very expensive business,” says David. “You always need a little bit more cash flow.” David will often find a great author, pay for the printing costs in advance and then sell the copies to bookstores. But the stores may not sell the book for months, and the payment typically comes 90 to 120 days later. In the meantime, David has to pay to warehouse the books, so he makes sure to have funds available. “There are gaps in cash, and it’s always a balancing act,” he says.
Price your services accordingly
Different segments of customers have different levels of cash flow, which is something that Anthony Flowers learned while working in administration at a large plumbing corporation. After working in the industry for nearly 25 years, Anthony noticed that the company’s pricing was leaving out a section of the surrounding population who needed the services but couldn’t afford them.
“That’s when I decided to start my own business, because I couldn’t help enough people when I worked for the corporation,” says Anthony. “With their pricing, a lot of people were getting left out. I made a lot of money sitting behind a desk, but then I realized there were other people who still had to fix their hot water or their toilet.”
Anthony started Right Time Rooter & Plumbing Services and priced his services specifically for customers who needed a lower price point. From there, he learned to navigate the various cash flow cycles of his customers. For example, while some customers could pay immediately with credit cards or PayPal, larger jobs required payment times as long as 90 or 120 days. “Meanwhile, I still have to manage payroll and get the bills paid.” Anthony knows he has to manage not only how he gets paid based on each customer, but when. If there are major cash flow gaps, he uses a Kabbage line of credit to cover large or unexpected expenses.
Every business has its own cash flow ecosystem that determines when and how payments come in and out. Make sure you learn the complexities of customers’ cash flow to understand the impact it has on your own. Doing so will help you predict any gaps and have resources on hand to cover them.