Cash killers for service-based businesses(and how to fix them)
Running a service Business can often feel like trying to fill a bucket that has several small annoying holes in the bottom. You’re working hard but the bank account does not seem to reflect the effort.
Below are some of the more common cash killers and the tactical shifts that can be made to plug the leaks.
Scope Creep (The Silent Margin Eater)
This happens when you agree to small, additional tasks outside the original contract without billing for them. Over time these “small favors” eat your margin alive.
The Fix: Detailed SOWs(Statements of Work). Define exactly what is included, and more importantly, what’s not.
The Change Order approach: When they ask for more, respond with: “I can definitely do that. It’ll fall under a new change order; would you like me to send over the estimate for these additional hours?”
2. High Days Sales Outstanding(DSO)
If you finish work on the 1st but don’t get paid until the 30th, you’re essentially giving your clients an interest-free loan. Meanwhile, you struggle to cover rent, payroll and other overheads.
The Fix: Implement “due upon receipt “terms. Use automated invoicing software that sends nudges so you don’t have to play bill collector. Require upfront deposits. Never start work without 25-50% deposit.
3. Underutilization (Administrative Bloat)
If you or your team spends 40% of the week on internal meetings, sorting mail or some other administrative task. Those are non-billable hours or lost revenues.
The Fix: Aim for at least 70% billable utilization for anyone in a production role (the 70/30 rule). Also, audit your workflow. Anything you do more than three times should be automated or delegated to a lower-cost system.
4. High Client Concentration
If one client represents 50% of your revenue, they aren’t a client; they’re your boss. If they pay late or churn, your business is placed under tremendous stress.
The Fix: (a) The 20% Rule- Aim to have no single client represent more than 20% of your total revenue.(b) Aggressive Prospecting - Even when you’re busy, spend 10% of your week on business development to keep the pipeline full.
5. Fixed Cost Dilemma
Many owners over-hire or rent “ego” offices before the recurring revenue justifies it.
The Fix: (a) Variable Cost Labor- Use contractors for specialized or overflow work until the demand is consistent enough to justify a full-time salary. (b) Review Subscriptions- Cancel the SaaS subscriptions you haven’t logged into for three months.
6. Feast or Famine Cycles
Operating with a lumpy revenue cycles makes it impossible to plan. One month you have too much work to bill and the nothing the next.
The Fix: (a) Productized Services/Retainers- Move away from one-off projects and towards monthly recurring revenue (b) Offer ongoing support subscriptions to level out the valleys.