One of the great difficulties of being self-employed is having an irregular income. Most of my client are public or civic institutions - so I haven't yet had any issues about non-payment (as colleagues do who work for individuals who refsue to pay or private companies that contract work knowing damn well they are going to go bust next month). But they don't pay the same day either. Usually there is a delay of three to four weeks - which means the work I am doing now will be paid in June and will be what I spend in July. I have learnt to have a buffer that covers a month's back invoices. But sometimes - for various reasons that non-payment gap gets bigger. Clients going off to Uzbekistan on field work, having forgot to put the invoice in the system. Or a project is unbilled as I am waiting for the last few hours work from a tardy contributor. These last two months the 'invoices owed' column has been stretching. Exponetially. It has been stressful. Not paying bills until my bills are paid - shuffling sums around so the rents and utilities can be paid. It takes time and energy to keep the water flowing through the system, making sure there's a little bit in each pond.
On two occasions I have asked my bank for an overdraft (equivalent to 5-10% of my annual turnover) to help balance out these cash flow issues. I have seven years trading experience, with accounts etc. But both times they have refused. The minimum loan they make is almost double that - 'and your cash flow wouldn't justify that' (I tried to ask what level my cash flow would have to be to get there and they wouldn't answer that question - presumably as it would give away their 'formula'). I've survived the dry periods but with some stress and lots of juggling accounts - but it's more the principle of not supporting small businesses that is starting to irritate me.
My bank sends out a lovely glossy magazine every month called 'Eigen Bedrif' (Own Business) which exalts the joys of being self employed, showing -usually young - entrepreneurs busy negotiating, fabricating or consulting. Yet this seems to be so much rhetoric about the joys of enterprise. And, I am starting to rather resent getting this entrepreneurial propaganda, when the bank seems to be prepared to do little to solve the second most common reason for small and young businesses failing (well OK I don't qualify as a start-up business any more). One banker I spoke to recently said the costs of securing a loan (due diligence - transaction costs) are too high for them to be interested in making small loans. Yet what I don't understand is that the bank is prepared to give me a personal overdraft (knowing that my sole source of income is my business) and give me a credit card with a limit that is more than 15% of my annual income. So I am left wondering why I qualify for such credit as an individual, but not as a business.
In recent weeks I have been editing a journal about micro-finance (credit, insurance) for small scale farmers in developing countries. They often have severe problems accessing credit - to cover the period between harvest and payment (especially with export crops) - or to purchase the inputs they need at the start of the planting season. Without collateral it is often impossible to get credit - and one failed harvest can mean losing their land, their main productive asset). Credit shortage is a major constraint on the productivity of small scale farmers. Its also a major headache for small scale western entrepreneurs. I would shift my bank tomorrow to one that offered a micro-credit facility. If I knew of one.
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2 comments:
Wow, this hits home. I was just thinking through a blog post on a similar topic (raising capital for small businesses), but cash flow management is equally relevant these days.
I've had the same experiences, payments seem to be delaying and a couple of clients are going out of business all together. This has two effects. As with you, the cash flows lag the work by a few weeks. This affects daily living expenses, but also forces me to pay travel costs before getting reimbursed for them. Jiggling cash levels across acccounts is a weekly chore.
The other is that I have to spend more time prospecting, which is not billable. I do draw a line on how much I give out without billing (a couple of days consultation to scope the problem and a possible solution to contract), but the lags between accepting contract terms and starting the contract are also getting longer.
I'm not sure what the answer is for smoothing the flows. A line of credit with the bank would be the usual solution, but, like you, the banks insist on longevity, profitability, and minimum balances before they will even talk about it. I keep a reserve (on top of the 20% business foundation required by KvK / IND), but I can't earn anything on it. It just sits there. Transfers between personal and business accounts can be done, but there are limits on how much I can loan the BV (~17K).
It's a difficult problem, thanks for pointing out that it's universal (and that it somehow needs to be solved if small businesses are to prosper).
Good to hear that I'm not alone with this. Perhaps we could open a thread on the topic in your ex-pats business Linked group. Find out how others deal with it. I estimate I spend 30% of my time doing admin - mostly related to managing cash flows etc. Which is probably about the same proportion of time that I used to spend in boring poinless meetings when I had a 'proper' job. Swings and roundabouts.
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