Taking Care of (Other People's) Business

7 Ways to Improve a Consulting Firm’s Cash Flow Problems

7 Ways to Improve a Consulting Firm’s Cash Flow Problems

To avoid cash flow and budgetary problems, consultants should learn these 7 tricks to manage their irregular revenue and improve their firm's finances.

Thursday, June 11, 2015/Categories: Business Insurance, Business Tips

As a management consultant, you've helped all kinds of clients improve their profitability, increase their revenue, and manage their finances — so it's somewhat ironic that small consulting firms often struggle with their own cash flow problems.

With the feast or famine nature of your work, consulting firms have highly irregular income and will need to take precautions to weather lean months and ensure they're saving enough of their revenue during busy times.

How do you avoid budgetary shortfalls and cash flow problems at your consulting firm? Let's look at seven tips that will help you manage your firm's finances.

Consulting Firm Risk Management: 7 Tips to Avoid Cash Flow Problems

  1. Have an emergency fund. Unexpected expenses will crop up, so it's important to keep an emergency fund that you can use if you need to buy a new laptop, repair your car, or pay for other necessities.
  2. Put a percentage of every paycheck into a tax fund, a retirement fund, and an emergency fund. Here's an old budgetary trick: before you even think about spending your income, take out a little money and put it in your savings. Automatically putting a percentage of your earnings into savings will ensure that you don't spend too much and will help you build up a buffer of cash.
  3. Offer monthly payment plans to clients. Say you're working on a major project for clients. You're set to earn a sizeable commission. This is all good news. But there's a problem: your clients won't be able to pay right away. What do you do? By offering a monthly payment option, you can give clients a way to pay a little at a time. Not only are your clients more likely to pay, it will even out your earnings and provide a steady income rather than sudden spikes.
  4. Require a deposit upfront for projects. If you're committed to a long-term project, consider asking for a retainer or an upfront payment. By doing so, you won't have to wait for a huge paycheck at the end of the project. Long-term projects are a great source of income, but they can create months with little to no income. While you're dedicated completely to one project, you won't be able to make money elsewhere, which means your finances will be in a holding pattern until the big check comes in.
  5. Require payments for milestones. In addition to asking for some payment upfront, you can ask for partial payments along the way for various milestones. If you're working on a major project, see if the work can be separated into easily distinguishable chunks. In addition to helping you get money sooner, this strategy helps your clients' budget. They're able to pay bit by bit, and you won't have to worry about late payments at the end of the project.
  6. Invest in business liability insurance. Many small business budgets can't survive sudden shocks. That's why businesses invest in General Liability, Errors and Omissions, and other small business insurance policies that can pay for expensive lawsuits that could bankrupt your firm. In exchange for a yearly premium, you get cost certainty and the reassurance of knowing that a lawsuit won't be able to take your business down.
  7. Include prospecting activities in a daily or weekly schedule so that there's never a major dry spell. When you're up to your ears in consulting work, it's hard to remember that you need to go and find more work. If you're only focused on the task at hand, you run the risk of not having any future prospects after you finish it. Add networking events and business development to your calendar to make sure there's always more work coming down the pipeline.

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