Here’s Why An Unplanned Milestone Based Project Can Lead to a Complete Loss

By PRETTY BOOKS ON June 24, 2021
HERE'S WHY is a collection of simple explanations for the things in your business that just don't make sense. There are a lot of moving parts in your business, and not all of them are obvious. Here's Why gets right to the point in identifying what's happening, why, and what you can do to improve your operations. Here's the deal, you need clarity in your finances to make data driven decisions for your company.

You just settled a deal with a cool, big client. The client is reputable and prominent, and could be your stepping stone to lots of new opportunities. The negotiation was tough, but you compromised and agreed to take a lower profit margin since the potential for future work of this caliber is high. You’ve done one or two projects like this before, but it’s fairly new to you. The client gave you 50% up front as a retainer fee, and they’re paying you upon delivery at the end.

It’s simple, right? Everyone does it. But you forgot one thing. The client isn’t paying you until they accept your final project. Here’s the deal: that milestone-based project could be detrimental.

You didn’t agree on a concrete end to the project.

Imagine this: you complete the project and deliver it to the client expecting a payout. But they’re not quite satisfied, so you tweak some things here and change some things there. The more back and forth on this project, the less profitable it becomes. You’re in a pickle. You’ve already spent more money than the client gave you. If you walk away, you’re losing money.

Let’s say you projected making a 20% profit on this deal if everything goes according to your plans. That’s 80% in expenses, including paying your contractors. You are getting 50% up front. You have a similar deal with your contractors, paying them 50% up front and paying the rest upon completion of their work. Your contractor expects their payment when they complete their work, meaning you have to advance them out of your own pocket. Remember, you aren’t getting paid the final 50% until delivery of your project is complete.

You haven’t created a projection for the project.

Let’s take a step back and assume everything is going well. You’re on track to end on time, you’re not straining relationships, and everything looks good. Until you get to the middle of your project and realize that you’re out of money. You’re incurring 80% of the total sale in expenses and you only got 50% up front. That’s 30% you are going to owe in the middle. What do you do now that you’re out of money? Take out a loan? Borrow from a future sale’s deposit?

Before you sign anything, do a quick projection of this project’s cash inflow and outflow. Map your outflow on a timeline—with specific dates when cash will leave your account. This projection isn’t about profitability; it’s about understanding how much money you’ll need to spend and how much money you will receive at any given point in the project.

Lay out this sale in weeks and months to see if you can truly afford it. Map it against other projects you are working on and see if it makes sense to take this one on. Even if you are in the middle of a project, it’s important to stop and do some quick math to figure out how much you’re spending to complete it, the timeline, and how much you have left from the initial deposit. If you do this up front, you could save yourself some trouble down the line. You might be able to pivot and take action if you’re clear on what is happening.

You could be draining your company’s resources.

If you aren’t projecting and managing your sale with the intent of aligning your cash flow, you could drain your company resources. These resources aren’t just cash—you could be damaging your relationships and business operations too.

If you didn’t carefully plan your cash obligations, you could find yourself in a situation where you are stretched thin on money and can’t fulfill your obligations. You run the risk of accidentally impacting your relationships with your vendors, contractors, and clients. Keeping your promises is important in business. If you don’t keep your promises, you could lose trust and credibility. You could sever potential partnerships.

Projects that aren’t properly projected can also strain your operations. You could end up spending so much of your resources and energy on one or two projects that you don’t scope your operations correctly. You could be pushing the limits of your employee morale, leadership, growth, business operations, business plans, or business activities while also draining your cash and straining relationships.

What do I do before I sign a contract?

Just because the project is new or milestone based does not mean it will be detrimental to your business. You just have to be smart. Before you sign that contract, make sure you:

  1. Carefully scope your work. You’re never going to be perfect, but the more you do it and the more attentive you are, the better you’ll get. Investigate your cash inflow and outflow, and project them in a timeline with specific dates. Compare it to your other projects to see how much drain you can expect from taking on this project.
  2. Negotiate your terms. Ask for bigger deposits. Break the project up into more than just two milestones. Have a very clear milestone delivery checklist. Be as specific as possible on what you can deliver and when you will get the money you need.
  3. Set terms that ensure more money from your customers sooner. Ask for more up front, set multiple milestones, and provide incentives for paying early. Set good terms with your subcontractors. Ask them to share the risk and get paid when you do.

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The information provided in this post is for general informational and educational purposes only and is not a substitute for professional advice. Consult your financial, business, or tax advisor with respect to matters referenced in this post. Pretty Books assumes no liability for actions taken in reliance upon this information.
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