The Subject of this Article is Cash Flow. 

Big companies enjoy it and very few independent consultants and small businesses ever achieve it. Cash flow is the flow of cash into and out of a business or home. It's the engine of business and can either make or break a company. Cash flow was one of the primary drivers for leaving the consulting field for some of the reasons we'll discuss in this article. 

I should state that I was an independent consultant for 4 years, working with various companies in setting up and institutionalizing Software Configuration Management systems and practices. While I was an independent, times were great and I loved the freedom. Setting the agenda for services, collaborating with client team members in establishing the standards and processes, client team members 'making way' for the consultant (me) to 'work my magic.' It was very satisfying work and at the end of a gig, I was proud of the achievement. 

During and at the end of a gig, it was required to invoice the customer. Not that the idea of getting paid was objectionable, it was just the process of submitting, waiting, reminding, reminding again, waiting and usually, finally, getting a check. This was an amazingly repetitive process which each client played out with remarkable consistency. The consistency was the delay (timeframe) in getting paid. Each company had their own small differences but the timeframe usually wasn't negotiable, set in company practices and stated in the contract.    My last gig was net-20 (20 workdays = month) at a less-than-enviable rate.     As this company also had some cashflow issues, they passed these delays along to their contractors and it resulted in me missing a house payment, degrading my credit rating (FICO score) and impacting my rate later that year when I wanted to refinance. 

Most of the other clients I had during my 4 years as an independent consultant hit me with varying invoice processing delays (anywhere between 10-30 days). Luckily, I was never the subject of one of the horror stories I'd hear about in networking clubs where a client refused or ignored the invoice. That is a continual danger faced in the consulting world as most smaller/independents can't afford (time, money or resources) to chase down the culprits as that would take them out of the game (finding/performing the next gig). One of my independent colleagues lost $19k on a client in San Diego (he lives in Colorado). He repeatedly reminded the client and tried various avenues for getting paid, but had to focus his attentions on his latest client and wound up just losing the money.  

One might ask, doesn't the independent check the creditworthiness of the potential client? Although we all employ various levels of checks, whether web based or phone based, a full credit check just isn't in the cards. Most times the consultant is just happy to gain the potential client with the sporadic, hit and miss nature of being an independent. I'm sure after getting taken for $19k my friend was more cautious, but too much caution can actually have a negative effect on the client-consultant relationship.

Here's an All-too Familiar Scenario :

Joe Consultant was recently laid off and in opening his own independent consulting firm, has contracted with BigCompany A on a 3 month gig.  The contract stipulates that Joe's daily rate will be $400 ($50/hr) and he will submit invoices bi-weekly,  having the payments remitted 'net-20' (in 20 workdays).

1.    Joe Consultant completes an invoice period and submits his invoice ($4,000) to the client on week 2 of his contract. 

2.    As it's been 2 weeks since Joe had any income, his family now has to start buying groceries, fuel, etc. on credit card as Joe has no substantial collateral with which to secure bank financing.

3.    Joe Consultant completes the next invoice period and submits his second invoice ($4,000) to the client on week 4 of his contract.

4.    As it's now been 4 weeks since Joe had income, his house payment, insurance payment, health care costs, company taxes, credit cards, etc. can't be paid and must wait.

5.    Joe Consultant completes the next invoice period and submits his third invoice ($4,000) to the client on week 6 of his contract.  He also receives payment for his first 2 week's work on week 6 ($4,000).

As it's now been 6 weeks since Joe had income, BigCompany A's payment must be used to pay for the items which were delayed (house payment, insurance payment, health care costs, taxes, etc.) and the credit expenditures will have to continue to keep the family fed and house operating.

Joe Consultant has begun a cycle that many independent's find themselves faced with. The credit cards used have run up a significant debt and is charging interest at incredible amounts (18-21%). The payments that had to wait will often show up next month with a late fee being assessed. The health care provider may cancel (some do). The late house payment will most likely have a late fee and a worse impact on lowering your credit rating (FICO score) which will require time to repair and may not be evident for some time, but will hurt you when you need it the most (refinance, home equity loan).  

What has caused this situation? Simply, the delay in getting paid quickly from the client. This scenario can be remedied by the simple act of pre-funding the accounts receivable. Or in simpler terms, 'selling' the invoice submissions. 

Here's an example of how this can happen:

Joe Consultant submits his invoice (of his creditworthy client) to a funding source who in turn provides a check back to Joe, minus a small reserve, for him to use as he thinks will benefit his company most (usually in 24-48hrs after initial setup). Joe is no longer involved or concerned with the invoice resolution and can continue tending to the business. Joe will receive a subsequent payment reflecting the reserve, minus a fee, once the invoice is paid.

Wouldn't it be nice if we could just submit an invoice and be paid on our schedule? Sounds too good to be true but it happens with many companies.    Think of the things you might do with your business if you knew when and how much you were getting paid each invoice submittal. You could build the business, do some digging on new client interests and locations. You could pay your taxes on time and avoid the penalty. Maybe get your benefits costs up to date. Maybe setup the next gig to start in two weeks and take a much needed vacation?

For the small consultant firms, how could you exploit the use of having funds available when you want them? Have you ever passed up an opportunity for consultant placement because the number of consultants needed couldn't be financed through your firm when  accounting for the delays in invoice processing? You might choose to investigate Government opportunities that you wouldn't have looked at in the past knowing the delays you'd have to incur.   

Many large corporations take advantage of pre-funding the accounts receivables already but most small and independents don't know of it's existence. 

  Some Questions: 

• How long will it take to get paid?   Usually, the first pre-funding operation runs up to 2-3 weeks with subsequent submissions being funded within 24-48 hrs.
  
• What will my clients think?  Hopefully they'll recognize that because you're getting paid quickly you'll be more satisfied with the opportunity.  The funding source wants your client to remain happy with your services and won't want to jeopardize your relationship as there would be a corresponding impact to their business.
  
• What if the client ignores the invoice, can I be held liable or made to return any payments?   No, with the exception of fraudulent invoice submission which I would highly advise against as there there will be numerous other negative impacts as well.
  
• Is there a fee for this?  Yes.  However it's drawn on the back side of the transaction when the invoice gets paid (depending on various factors of risk and fundability). When the invoice gets paid, the funding source will return the small 'reserve' they kept from the original payment minus the fee (amount varies between funding sources).
  
• How can I account for the 'fee' that is being assessed?   As it's the client's contractual delays impacting the payment, one could rationalize negotiating a higher rate to offset the funding fee so there would be no recognizable change.

In summary, one of the harnesses that have kept independent consultants and small businesses in-check for many years can now be cast off. This capability will revolutionize this community and assure greater control, flexibility and solvency.

If you find yourself or your company in a similar situation, there are representatives (called Certified Cash Flow Consultants) who can help review your situation to see if there is a good fit between you and a qualified funding source. 

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cashflow said:

	... Great article, I have something about similar issue on cashflow. I invite you to visit my site.
	report abuse vote down vote up

June 29, 2007
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