Poor cash flow is one of the biggest challenges that marketing and creative agencies face in today’s fast-paced business landscape. When we start to talk about agency cash flow with our clients, in its simplest form, we mean the movement of money coming in and out of the agency.
As part of understanding this process, there are two figures you also need to be clear on, profit and revenue. Your revenue is the total amount of money coming into the agency and your profit is your revenue once you have taken out all of the overheads. However, the focus for growth should not just be on profitability but on cash preservation.
A lot of people get confused between profit and cash flow, they are different. You cannot take the profit and loss from your accounting system and use it as a basis for cash forecasting. It is possible that a marketing agency has made a profit but lost cash. This is possible because your cash gets tied up in the working capital or money owed to you from your clients. So even though sales have been reported in the P&L, the funds have not been collected and are not yet in your bank account.
Why is cash flow important?
Cash flow is important for any business to understand because it is the foundation from which to keep the business running. If you are a marketing agency looking for growth there are lots of questions that need to be considered. A key thing to anticipate is when you might need access to more cash and where the crunch points might be. Some examples might include when tax payments are due, if clients withhold payments or in response to the seasonality of your business. Cash is the fuel that drives your business.
As we make the transition to focus more on cash flow, there are a few common mistakes that are made, they include:
- Thinking that it is all about generating new sales.
- Only looking at your bank account to judge the financial state of your business.
- Only looking at your profit and loss report is not where you will see the cash available for investment or innovation.
- Thinking that a cash increase is always good and a decrease is bad, this statement must be reviewed in context. If for example, your increased cash is because of a deferred tax payment that may incur interest, it will be more costly in the long term.
- A lack of processes and systems may result in incorrect invoicing, delayed payments or wasted time.
As part of building and growing an agency, we need to ensure that we have a solid working capital and enough money to cover our costs. To understand your cash flow, we need to understand the Cash Conversion Cycle, which is simply, how many days we have to work before we turn a profit into cash. The lower the number of days it takes to convert sales to profit, the better.
Strategies to Improve your Cash Flow
When we start to work with our clients a question that often comes up is how they can improve their cash flow?, helping them to transition from a cash-consuming business to a cash generating business. Timing is often one of the biggest challenges when considering cash flow management. We can help improve cash flow by:
1. Making payment easy:
Fundamentally we need to start by asking our clients to pay their invoices, with advancing technology in tools such as Quick Books or Xero, this can be made much easier. Ideas to help here might include:
- Automating our invoicing process for our retained clients.
- Setting up clear, shorter payment terms, 30 days or less is ideal.
- Asking for deposits at the beginning of a project to secure the work and confirm commitment from your client.
- Putting in late payment penalties and enforcing them to encourage prompt action.
- Having a dedicated internal resource to follow up on unpaid invoices.
2. Having retainer-based pricing
As we know from a business perspective, it is best to retain and nurture our existing clients rather than continue to focus on gaining new ones. For the clients that you work with in an ongoing capacity, set up a retained agreement.
3. Optimising your service
When looking at your regular clients think about how you could develop the relationship with them to better support their needs. As their business grows how else could you support them, building in higher profit-generating services where you can and where relevant. Consider bundling your services together to create different tiers eg: bronze, silver and gold.
4. Creating a cash reserve
Consider how much you would need in the bank to see you through uncertain times. For example, would you need to have three or six months’ worth of budget to cover operating costs, respond to unforeseen circumstances or save for a tax bill? Depending upon the seasonality of your business, you may also need to save for when there is less demand for your agency, although setting up retained client agreements will help to manage this. Creating a cash reserve will help to make big problems look small.
5. Knowing your numbers
One of the first places we start with any new client is to teach them about their numbers. Helping them understand their profit and loss, revenue and cash flow numbers, will support them to make any required adjustments. Tools like Xero can help you to regularly run the numbers and create a simple KPI dashboard to make this easier. Key metrics that you might like to include are AR days, AP days, debtors’ and creditors’ reports. It is not enough to just look at your bank balance.
6. Reviewing your costs – can they be reduced?
As part of a client’s financial performance review, one of the first places we start is to consider the outgoings. We look at whether we can reduce costs, eg: utility bills, mobile phone contracts, the tools we subscribe to help us with the day-to-day running of the agency and the talent we have in-house. If we can reduce our costs in some way, we can start to improve our overall cash flow.
7. Improve your business cycles
Improve your business cycles to accelerate future cash flow growth. This is important because it is often an operational issue that needs to be reviewed and optimised, to ensure a smooth delivery of work. This is particuarly relevant for large agencies with a lot of project-based work. Key cycles to review, include:
- Sales cycle: Look at the time between first presenting your offer to a potential client and a “YES”.
- Production and delivery cycle: this is the time you need to deliver the service.
- Billing and payment cycle: this is the time you need to issue the invoice and get paid.
In Summary
It is important to not only take the steps we have outlined above to review and define your cash flow status now but to also put KPIs in place to measure this on an ongoing basis. By looking forward with your cash flow it can help you to achieve the SMART goals that you set and help you to avoid potential future bumps in the road.
Our team can support you to make informed decisions enabling you to stay ahead of the curve in this competitive agency landscape. We can walk you through the review process every step of the way and help you create a dashboard to track your cash flow KPIs and performance. Get in touch to arrange a no-obligation discovery call and let us support you in taking the next step of your agency journey.
