How do I manage cash flow when customers are stretching out how long they take to pay?
Short answer
Tighten terms going forward, chase the aging receivables aggressively, and build a cash buffer sized to your actual collection lag, not your best-case assumption. You can be profitable on paper and still run out of cash if collections slip.
Profit and cash are not the same thing, and this is where it bites
A job can be fully profitable on the books and still be a cash problem if you paid for materials and labor 30 days ago and the customer's invoice sits unpaid at day 60. Growth actually makes this worse, not better, because you're funding more jobs' worth of gap out of pocket at the same time.
Run an aging report monthly at minimum: current, 30 days, 60 days, 90-plus. If the 60 and 90-day buckets are growing as a share of total receivables, that's the leading indicator, not the bank balance, which lags behind it by weeks.
Tighten terms on new work immediately
You don't need to fix every existing account today, but every new job going forward can have shorter terms, a deposit, milestone billing instead of a single invoice at the end, or a credit card on file. The leverage to set terms is highest before the work starts, not after.
For customers who have become chronically slow, move them to cash-on-delivery or prepay. You're not obligated to keep extending the same credit to someone who's shown you they don't honor it.
Size your buffer to your real collection lag, not your hope
If your average collection period is 45 days, your cash reserve needs to cover roughly that many days of payroll and fixed costs, not 15. Underestimating this is the single most common reason profitable businesses end up scrambling for a line of credit at the worst possible time.
Sizing a cash buffer to real collection lag
| Average days to collect (DSO) | 48 days |
|---|---|
| Fixed monthly costs (payroll, rent, insurance) | $62,000 |
| Daily fixed cost | $2,067 |
| Buffer needed to cover the collection lag48 days x daily fixed cost | $99,000 |
| Common mistake: buffer actually held | $25,000-$30,000 |
The math: Buffer target = average days sales outstanding x average daily fixed cost. If your DSO creeps up, your buffer target has to move with it.
Tightening the cash gap
- 1.Run an aging report monthly and watch the 60/90-day buckets specifically
- 2.Require deposits or milestone billing on all new work
- 3.Move chronically slow accounts to cash-on-delivery or prepay
- 4.Calculate your actual DSO and size a buffer against it, not a guess
- 5.Consider a line of credit before you need it, not during the crunch
Where owners get this wrong
- Looking at profit and loss only and ignoring the aging report.
- Extending the same terms to a customer who's proven slow three invoices in a row.
- Waiting until cash is actually tight to apply for a line of credit, when it's hardest to get approved.
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