The Cash Flow Pyramid Scheme
Let's talk about the cash flow pyramid scheme. Have you heard of it before? Probably not because I came up with this idea organically.
There are a lot of business owners who are making a profit on each project, but are only sustaining their business by bringing in new business, not necessarily serving their current practice. Quite like a pyramid scheme where someone is trying to con new recruits to make money, and only those near the top are making any of the money!
Let's put together a little example:
1. You book client #1 - yay! Client #1 helps to pay for your paycheck and lots of expenses to running a business.
2. You book client #2 - client #2 helps to pay for client #1 direct costs, but wait - all of client #2's money is gone?!? How will you pay for client #2's direct costs?
3. You book client #3 - Client #3 now pays for client #2's direct expenses. And there's no money left over.... you are now in the cash flow pyramid scheme.
In plain terms: your cash flow process is robbing Peter to pay Paul!
You now have to book new clients to pay for the expenses of past/current clients! Eek! This is when the cycle begins. And it becomes dangerous super fast!
Not sure if you're in this boat? Take all of your client payments minus any earned income (either you've fulfilled a portion of the project + expenses) then total the balance.
If your total bank account balances don't meet this number, then you're definitely living in the cash flow pyramid scheme.
If your bank account balances barely meeting this number, you might be OK, OR you might be under assuming your tax payments and business reserves.
If you have this amount + more, then you might be OK!
But Brooke, I have an agreement and I get to keep the retainer? DUH, of course you do, but that's not the point. The point is your profits aren't keeping you afloat, it is new business. And new business is dangerous if the well dries up or if you go through a business drought.
And if you're in this boat if you don't have enough money. It's time to turn the ship around.
You need to figure out how much money you need to get by. Cut your personal and business expenses to cut the business bloat.
Realize it may be time to charge more. Don't make drastic changes, but start raising your prices every 2 bookings until you find a safer profit margin to operate your business.
Consider bringing in an additional team member -> I know this seems counter intuitive, but if you're already maxed out for time, then you're probably cutting yourself short. Start small. Hire a bookkeeper or CPA, consider a VA to handle emails or to help with small tasks. Buckle down so you can focus on the biggest two pieces: serving your clients and being the #1 salesperson for your business!
Remember, you didn't get into this mess overnight. It's going to take time to dig out of the hole. Start small, and strive for goals of 50% of total retainers, then 60% and keep going up until you meet 100% of retainers needed! Use your plentiful seasons to also put money away for your future lean seasons (no more feast + famine in your business)!
But time will pass, so march onward to getting yourself on track and creating a plan for getting up and running, and removing yourself from the cash flow pyramid scheme cycle!
Brooke Olsen Consulting is a pricing and business strategist team. We specialize in pricing + profitability, financial education and business strategy for creative business owners and entrepreneurs just like you! We're focused on creating an intentional business and life by breaking down the black box of your financials and system processes. Check out our core values for more of the heart behind our corner!