When Frank Robertson had a service company providing printer maintenance to manufacturers, he quickly learned the value of cash flow. Like every sales person, Frank loved large sales, the problem was that the large sales could be months between. They couldn’t be counted on happening every month.
That’s when he realized the advantage of smaller service contracts that he billed monthly and receive payment on monthly. The consistency of those contracts made budgeting easier. He could know how much he could count on every month. As he had payroll and other overhead, like rent, utilities, and a car payment each month, the cash flow from monthly contracts gave him peace of mind knowing that he could cover his nut.
Over the years in sales and marketing, Frank discovered an important lesson. Professional sales people tend to be optimists. That means that, on the whole, they consistently overestimate what their closing ratio will be. Therefore, they know that they have another large sale coming in next month so when this large sale comes in, it is all right to splurge.
After a while, the experienced sales people learn to counter this impulse in themselves and so can actually put the bulk of the large sale aside to cover their bills until the next sale. In Frank’s experience, those monthly contracts added up and enabled him to meet payroll and overhead monthly.
Choice of Accounting Method Affects Ability to Manage
As a side note, when doing your accounting to manage your business, using the “accrual method” will let you plan and control your business better than using the “cash method” of accounting. Your accountant may advise you to report your taxes by the “cash method,” but it make managing day-to-day more difficult because you don’t see in front of you that large payment coming due in two week nor do you see the large job you finished last week that doesn’t pay you for another three weeks. With accrual accounting, when you make the sale, you record it and can then put it on your cash flow report. The same is true when you make a large purchase, especially if you got 90 days no interest. You book it when you buy the product so that it too goes on your cash flow report.
The nice thing about QuickBooks Pro, and other small business accounting programs like it, is that you can switch your reporting method when it comes to reporting your taxes. Talk to an accountant who knows your software about this feature.
There is an additional benefit to developing consistent revenue like small contracts. If you ever lose a contract, you have the other contracts to smooth out your business while you find a new customer to replace your lost business.
Most of these suggestions are service based offerings so look to add a service component if possible to your sales. The objective here is to find a way to bill consistently, month-after-month. Look at the above examples of ways that others are making their lives smoother with regular income then let these ideas inspire you to develop your own.
For instance, a small contract of $97 per month is $1,164 over a year. Even if you offer a 10% discount for an annual contract, that is $1,047.60. Should you decide to offer two free months for paying in advance, that is still $970 per year. In that case, though, be sure to set aside the payment withdrawing only 1/12 every month until the year has run its course.
If you are an entrepreneur or solopreneur, you may think that you don’t have a payroll issue like other small businesses. However, as other smart entrepreneurs do, at some point, you will offload some tasks to free yourself up for tasks only you can do to grow your business. When you hire a virtual assistant or a service like an accountant, they will expect to be paid regularly just like an employee. Thus, the effect is the same as a payroll.
Should you choose to strive for the big sales in preference to the smaller, on-going contracts, be sure that you develop the business practice of squirreling aside the majority of your revenue and parcel it out on a monthly basis. In fact, you may be legally required to do that if the customer pays in advance for your products or services. Check with your accountant to be sure how the law works in your locality.
Everyone loves the large sale, even Frank Robertson. But your business will run more smoothly when you develop ongoing, repeatable income, like membership sites or service contracts. Those smaller sales add up over time. Moreover, losing one is easier to maintain your business and to replace that sale than it is with a mega sale. The best part is that monthly billing makes it possible to cover your payroll and overhead.
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