Software house cash flow: how to predict whether the company will have the funds to pay the team?

Why can a profitable software house run out of money for payroll?

Financial result and cash balance are two different pieces of information.

A company can issue an invoice for 100,000 PLN and report revenue, but until the client makes the transfer, the money is not available. Meanwhile, the people who did the work covered by that invoice have to be paid.

Team costs have fixed dates

In most technology companies, the biggest cost is the work of specialists.

Every month you have to account for, among other things:

• employee salaries,
• B2B developer invoices,
• the cost of Project Managers and Delivery Managers,
• the work of testers, designers and analysts,
• taxes and contributions,
• bonuses,
• licences and tools,
• cloud infrastructure,
• subcontractor costs.

The dates of these payables are relatively predictable. The company knows when it has to make the transfers, even if it does not yet know exactly when clients will pay.

The invoice due date is not the date the money arrives

If an invoice is due on the 15th of the month, many companies automatically put that amount into the inflow forecast under exactly that date.

In practice, the client may pay:

• three days before the due date,
• exactly on the due date,
• seven days late,
• only after a reminder,
• after its own approval cycle is complete,
• in instalments.

If a business partner regularly pays nine days after the due date, assuming the inflow on the formal due date overstates the forecast balance.

Planning payroll on the basis of nominal invoice due dates can give a false sense of security.

Projects are invoiced later than their costs are incurred

In a Fixed Price project, the team may work for several weeks before a milestone is reached that allows an invoice to be issued.

In the Time and Material model, hours are often settled after the end of the month. Then the client approves the timesheet, the company issues the invoice and waits for payment.

This means that many weeks can pass between doing the work and receiving the money.

During that time the software house finances:

• team salaries,
• contractor invoices,
• infrastructure costs,
• tools,
• subcontractors,
• project management activities.

Sales growth can increase the need for cash

A new project often requires hiring another person or increasing contractor involvement before the first inflow from the client appears.

The company grows, but at the same time it has to finance up front:

• recruitment,
• onboarding,
• new workstations,
• additional licences,
• the first weeks of delivery,
• the period of waiting for the invoice and the transfer.

That is why a growing number of projects can temporarily worsen liquidity, even if all the engagements are profitable.

How to forecast software house cash flow and secure payroll?

An effective forecast should answer not only how much the company will earn, but above all: when the specific money will arrive in the account and which payables have to be covered at that point.

1. Prepare a rolling plan of inflows and outflows

The forecast should cover at least the next few weeks and be updated regularly.

For each inflow it is worth specifying:

• the client,
• the project number or stage,
• the amount,
• the formal payment due date,
• the expected transfer date,
• the probability of the inflow,
• the invoice status,
• information about any delay.

On the cost side you should include:

• salaries,
• B2B invoices,
• taxes and contributions,
• fixed costs,
• subcontractor invoices,
• licences,
• infrastructure,
• planned recruitment,
• project expenses.

The forecast should be updated after every significant event: a payment received, an invoice issued, a change of due date or a new cost appearing.

2. Take into account how clients actually pay

The formal date on the invoice is a starting point, but it should not be the only basis for the forecast.

For each business partner it is worth analysing:

• the average number of days of delay,
• recent payments,
• the trend: improving or worsening,
• behaviour on invoices of different values,
• how often they make partial payments,
• their response to payment reminders,
• the gap between the declared and the actual transfer date.

If a client has paid on average eight days late over the last six months, that is exactly the scenario that should be built into cash planning.

3. Separate certain inflows from expected ones

Not every amount visible in sales has the same level of certainty.

It is worth separating:

Confirmed inflows

• the invoice has been issued,
• the client has accepted the document,
• the payment has been announced,
• the client’s history is stable.

Probable inflows

• the invoice has been issued, but the client usually pays later,
• the document is awaiting approval,
• the due date is near, but there is no confirmation.

Planned inflows

• the project stage has not yet been accepted,
• the invoice has not been issued,
• revenue depends on further work being delivered.

Payroll should not be secured solely with planned revenue. To assess safety you need inflows whose probability is high.

4. Calculate a minimum safety balance

The company should set an amount below which it does not want to fall after payroll and the most important transfers have been made.

The minimum balance may include:

• the full monthly cost of the team,
• taxes and contributions,
• the most important fixed costs,
• a reserve for unforeseen expenses,
• a buffer for client delays.

Example:

• salaries and B2B invoices: 180,000 PLN,
• taxes and contributions: 45,000 PLN,
• tools and infrastructure: 25,000 PLN,
• other fixed costs: 30,000 PLN.

The total basic requirement is 280,000 PLN.

If the forecast balance before payroll is 260,000 PLN, the company should react early, even if it has issued invoices of a much higher value.

5. Set warning thresholds and action scenarios

A forecast is only valuable when it leads to decisions.

It is worth setting thresholds, for example:

• a warning when the forecast balance falls below the cost of one month of the team’s work,
• an alert when an important client exceeds its typical delay,
• a signal when several large inflows depend on a single business partner,
• an alarm when planned costs exceed inflows by a defined amount.

Possible actions include:

• issuing the invoice earlier,
• changing the payment schedule,
• collecting an advance payment,
• speeding up acceptance of a stage,
• contacting a client that is paying late,
• postponing an expense that is not urgent,
• renegotiating the due date with a supplier,
• securing working capital financing.