From Chapter 6 of The Savvy Guide To Making More Money
There have been times when I've made the mistake of doing something that brought in money, but didn't make a profit. At other times, I didn't look into the future to see when the money would actually arrive in my bank account and whether I could sustain the wait. I'm not going to let that happen to you! The next four questions will enable you to take your best ideas and choose the right one for you.
How likely are you to get paid and how long is it going to take?
The first part of this question may have you wondering why on earth somebody would bother to do work at generating money if they didn't think they would get paid. Yet many enterprises start off without this certainty. One of the key things that you need to do is to stack the odds in your favour.
For example, you might want to ask your boss for a raise but think there's very little chance of that actually happening. So imagine the next best thing that you could suggest - your Plan B; (e.g., suggest ways that you could get paid for doing extra work) and then a backup plan for that, your Plan C (e.g., give them details of a training course that you would like to do to add value to your role in the workplace). If you get the first outcome, that's ideal, but, if not, you need to have a plan in place to increase the odds of a favourable result.
If you see a fantastic commission opportunity, you need to ask yourself if the company is reputable and has a demonstrable track record in paying out on time. If you have an innovative idea that you think is a guaranteed seller, do some market research and test it out on an honest group of people before throwing yourself into it. If you're on a night out and you casually mention to somebody that you could do some work for them, turn this informal proposal into something real if they reply, 'That would be fantastic, we should talk about that.'
Next, you need to consider lead-in time. This is the gap between the point that marks the beginning of the sales process and the point when money starts to appear in your bank account. If you take on a large-scale project that aims to commercialize research currently at concept stage in a university, it could take months to build a prototype, more months (or even years) to take it to market and then even longer again before you actually see any money. While the rewards from this may be generous, can you sustain yourself and third-party costs until you get to that point?
Alternatively, you could start to give piano lessons or French-language grinds right away and get paid at the end of the session. However, this sales process actually begins when you start to advertise, and ends when the money appears in your bank account. The lead-in time is very short, but the potential to make money is a lot smaller.
For people who are already in business, it's important to take account of the sales cycle per customer and per product. For example, you may sell the same number of identical products to two different clients. However, one pays promptly and the other drags it out well beyond their credit terms. In the interim period, you might have to buy stock on a credit card, which incurs interest, or you may not be able to do something because you don't have the funds (which you're owed) to hand. As a result, the second customer is not really identical to the first customer, and it's important to be aware of this. Perhaps you could reward the former to show appreciation of their timeliness; and, in the case of the second client, you could apply a small interest charge (after their credit terms have expired) with the explanation that you're simply passing on the cost of an overdraft that you have had to bear.
In addition, it's useful to examine the sales cycles of your various products, so that you can plot your cash-flow throughout the year. For example, if you have a lean period in the summer, you could start the sales process in January; the payments you receive six months later could therefore be used to carry you through the time when the shorter-term sales won't be there. In addition, there may be times when bills are high (particularly around tax payments), so you should forward-plan your cash-flow to have the money arrive just as you need it. In many cases, it won't be as simple as this, but if you don't have this information, you can't act on it.
Finally, it's important to think of ways to shorten your sales cycle. For example, a very simple action is to ensure that as soon as a job is done, the invoice is issued promptly. Same for cheque payments - lodge them as soon as possible. If there is a build-up of invoices that need to issued, as well as payments that need to be processed, you are the cause of a lengthier sales cycle. Know, also, that it is four times easier to sell to people who have bought from you already: monitoring and growing retention in your customer base shortens the lead-in time, and makes it easier and less costly, because you don't have to start the sales process from scratch as you do with a new customer. We'll deal with this in much more detail later in the book.