The #1 Business Lifeline: Cashflow
During Moonwards early years (Formally Konnect) I used to run a daily project standup with all of our developers. Yep, that’s right, the CEO of a digital product agency running a standup with each individual developer on the team! Why? Because our ability to create and generate cash as a business was solely reliant on our developers ability to hit timeframes and deliver work.
The micromanagement I’m eluding to here is called “Milestone” payments. Our company had gone from minuscule overheads to a substantial set of weekly outgoings (8 employees and an office lease) all while delivering our projects on a “Milestone” basis. This meant we had to reach a very specific deliverable before we got any form of money from our clients. Great for our clients pockets but not so good for us.
In the software development space it’s almost unheard of for a project to start and finish without scope deviations, technical challenges or third-party influences. All of these risks, we were taking on and they were slowly choking our cashflow and our ability to grow.
In fact, we got to a point where milestones were causing so much pain, we entered into the cashflow wheel of death. This basically means, we were relying on new sales and new revenue to pay for the completion of existing projects. A deadly cycle that eventually gobbles up and crushes so many project based businesses. By way of example, ASIC reported that 2,349 construction firms went into liquidation in the past 12 months, primarily due to the fact that the cost of materials and labor was increasing while their cash flow wasn’t supporting this risk. This was the exact storm Konnect was heading for in our early days…
In the early days of Konnect, we’d be invoicing our clients 25% Deposit, 25% at Milestone 1, 25% at Milestone 2 and 25% at Delivery. The final two milestones, were by far the hardest, it wasn’t uncommon for us to double or sometimes triple the planned work to hit those milestones and get the cash through the door. We’d essentially structured our payment model like a really poor hostage negotiator, the client had what we wanted (the money), we had what the client wanted (the tech skills) but the determining factor to delivering those tech skills and payment of the money was the clients happiness (Not our actual quality of work).
This whole cycle started to spin out of control, one month we’d hit record numbers, needing to hire 2-3 new team members only for our biggest paying client to with-hold payment and send us back to square one. The whole ordeal was like a massive game of snakes and ladders. The unfortunate truth, is that this is what it feels like to be in a project based business; website creators, freelancers, construction businesses all too often fall into the trap of milestone based payment terms, inefficient cashflow and the daunting feeling of a business turning into a hostage style job.
If this sounds familiar, then I’m about to blow you away and welcome you to the new world of cash-flow!!
As we were working through the weeds of micromanaging, deadlines, cramming projects and late payments; I was fortunate enough to be introduced to my future mentor Anthony. He had started, scaled and exited a successful digital product agency in New York. I was having an early morning Zoom call with Anthony and started to vent my cashflow frustrations. Within 30 minutes he’d opened my eyes to a world that I’d never been aware of; this world was weekly billing.
You see, on the digital product space, too much emphasis is placed on getting paid once the work is completed. But the reality is, a piece of software is never completed. Facebook has a list of 24,000 known issues they’re working on right now!! So the question Anthony proposed was, if you continue with milestone payments will you be able to not only grow but actually survive as a business…
The stark reality was, we probably wouldn’t.
Without consistent cashflow a business simply isn’t able to grow. The biggest contributing factor to business growth is risk taking and albeit it sounds like an oxymoron; you can’t take risks without some form of financial certainty. In our case we couldn’t hire new employees, take on a bigger office lease, pay our staff more and in general increase overheads without a level of cashflow certainty.
So we changed everything, we completely flipped our whole quoting and billing model to revolve around our company invoicing our clients every single week based on the amount of work we intend to do. We had a plan to go from our clients holding us hostage to having full control over our cashflow and resource allocation. We scrapped our milestone payment terms and had all of our clients pay on a weekly basis based on the number of resources allocated to their project. All our invoices had a 7 day payment term (No longer 21 or 30 days), we’d invoice every Monday morning and slowly see the funds drip into our account throughout the week. We’d also be able to flag if someone was overdue on payment much sooner, and if clients fell overdue, we’d simply stop working on their project until they cleared their debts. No more months of unpaid work, hoping that one-day payment would be made.
For the first time we had reliable cashflow, genuine financial forecasts and could actually understand key requirements like resource allocation and project forecasts. Sure enough, some customers didn’t like the new billing model but that didn’t worry us. The upside of actually owning and controlling our cashflow was incredibly important.
And here is the kicker about actually owning your cashflow model, our product and client delivery got so much better! We weren’t cramming work to get paid, we could genuinely invest time into building world class products without worrying how we’d clear payroll on a Friday.
So this all sounds like a beautiful story with a happy ending. Well sort of, but I have to be completely honest. When we made the transition from milestone billing to weekly billing, it took us 12 months to ween out our final milestone client (that’s how much control they had over us). But we celebrated very hard once that final milestone project was completed.
The number one need for all humans is certainty. Cashflow is your businesses version of certainty. With consistent cashflow you can take punts on yourself and back your business for future growth.
It’s the oxygen to your business growth!!
If you were like me and stuck in the deadly cycle of milestone payments, consider a change. Trust me, you won’t regret it! And if you need some help structuring the transition, feel free to reach out, and I’d be happy to assist.
