You sell hours, but you pay salaries
A professional services firm has very little inventory. Its main asset is people, and its main cost is payroll. That makes cash flow simple to describe and hard to manage. Staff are paid on a regular cycle, while client invoices go out at the end of the month and are often paid thirty, sixty or even ninety days later. A firm that is growing is spending more on payroll each month than it collects from clients that same month.
The problem is built into the model, and it gets worse with success. Winning a large engagement means hiring ahead of billing.
How the float works, step by step
- You win an engagement and begin work, with staff time and expenses accruing.
- At month-end you send the first invoice, and the client reviews it.
- The client's accounts-payable cycle processes it and pays, often a month or two after delivery.
- Meanwhile you have run payroll two or three times, paid rent and covered software and insurance.
By the time the first check arrives, the firm has funded the whole engagement for the better part of a quarter.
Where the extra cost comes from
| Cost | Why it gets ahead of revenue |
|---|---|
| New hires | Recruiting and onboarding precede billable hours |
| Subcontractors | Specialists are often paid sooner than you are |
| Software and tools | Subscriptions are monthly and per-seat |
| Business development | Proposals, events and marketing come before wins |
| Office space | Rent is fixed whether or not the project calendar is full |
Retainers versus project work
A firm with retainers has more predictable revenue but may find that clients ask for extra work without extra payment. A firm built on projects has uneven revenue: a strong quarter may be followed by a gap while the next proposal is considered. Either model benefits from a cash cushion, because the cushion lets the owner say yes to hiring when the work arrives instead of waiting.
Many California firms also serve clients that are large organizations with formal payment procedures. The invoice is not late in their eyes; it is simply on a schedule that does not match the firm's payroll.
A worked example, for illustration only
For illustration, a six-person consulting firm wins a contract that requires two more hires. Payroll and expenses for the engagement come to $45,000 per month, and the client pays sixty days after invoice. By the time the first payment arrives the firm has spent about $90,000 to $135,000. Working capital allows the firm to take on the project without running down the reserve. These figures are not our terms or a typical outcome.
How to apply
If invoices are open and payroll is not waiting, a funding decision based on your bank deposits can carry the float. The application takes about five minutes. We ask for roughly three months of business bank statements and use a soft credit pull; no tax returns are required. FICO 500 and above is considered, funding runs from $25,000 to $5,000,000, and money can arrive in as little as 24 hours. Sole proprietors can apply. Start your application.