We talk a lot about cash flow and its importance in running a successful marketing or creative agency. From our client conversations we know that it can be one of the most misunderstood areas when running a business and having this blind spot is dangerous. Many agency owners assume that as long as their profit and loss statement shows a profit, things are going well and their business is financially healthy, but this can often not be the case. Profit is not the same as cash.
An agency can appear to be profitable on paper but run out of cash. Why? Because your P&L does not show things like payment delays, VAT bills, loan repayments or how much you are owed by clients. Understanding the difference between profit and cash flow is essential for any agency founder who wants to build a sustainable business. Cash flow is what pays your team, covers the rent and keeps the lights on. It is often cash flow issues, not lack of profit that causes businesses to fail.
In our latest blog we break down the essential elements of cash flow for agencies, starting by understanding profitability, right through to KPIs, forecasting and how to spot problems early on. Whether you’re a fast growth agency or trying to stabilise your agency, this guide will help you to get control and understand your agency cash flow essentials.
1. Profitability: Questions every agency owner must ask
Profitability is the foundation of positive cash flow. If your agency isn’t consistently profitable, you’re going to struggle with cash, even with perfect invoicing, collections and payment terms. To get a clear picture of your agency cash flow, ask yourself these questions:
- Revenue & Margins: What’s our gross margin on client work? Do we have a clear understanding of project profitability (per job or client)?
- Costs & Efficiency: What percentage of revenue is spent on salaries (delivery team and overheads)? Are we over-servicing clients or undercharging? What’s our utilisation rate? How much of the team’s time is billable? Are we operating with too much overhead for our revenue level?
- Pricing & Value: Are our prices aligned with the value we deliver? How often do we review or increase our rates? Are we saying yes to unprofitable work just to keep revenue up?
- Client Mix & Risk: Are we reliant on one or two clients for the bulk of our revenue? How stable is our pipeline of new business? Do we have long payment terms that create cash flow gaps?
As a marketing or creative agency owner, the clearer you are on the answers to these questions, the easier it is to make decisions that drive both profitability and cash stability.
2. Turn you debtors into cash, quickly
Marketing or creative agencies regularly send out invoices to their clients, however, they don’t necessarily collect the cash quickly enough, impacting their cashflow. Steps to help overcome this include:
- Put a process in place to quickly collect cash eg: 7-14 day payment terms. This can be tough with large companies, who often dictate their terms, but negotiate this at the contract stage, not after the work is done.
- Accept credit cards or use tools like GoCardless (especially for retainer-based agencies). Yes, there are fees, but the speed and ease of payment often outweigh the cost.
- Track your accounts receivables in real time. Look at your dashboard, make sure you track as a business owner and have it included on your weekly/ monthly reports. You must be aware how significant it is to follow up and not to miss out on that cash.
- Implement an automated invoicing follow up process with accounting software eg: Xero or QuickBooks, until they are paid, no-one likes debt collection.
- It’s crucial you don’t build up your AR and fail to capture the cash.
3. Look forward to your cash flow projections
The whole objective of focusing on your agency financial health is to look forward and drive progress in your business. Looking forward can absolutely help you in achieving the goals and growth ambition you define. By being aware of what is coming up, it will also help you to avoid a potential disaster, decide whether to make new hires and accommodate large expenses. Often business owners are happy that things are moving along really well until they realise that the cash becomes tight.
If you do see that things are tight, hopefully, with reserves in place it will enable you to adjust as needed and be ready to tackle any challenges.
4. Create a cash reserve
When we start to work with a new client one of the first items we talk about is creating a cash reserve, if one is not already in place, to enable them to respond to any change in circumstances. When cash comes into the agency we can sometimes get excited and decide to spend or invest it back into the business.
For growth of course it is important to invest, but it is also key to put some of the cash away for a rainy day. There will sometimes be occasions when things change and you will need excess cash, this may include items such as new team hires, website development projects or tax.
By creating a cash reserve it will ensure you have options and enable you to continue to focus on growth.
5. Track these key cash flow KPIs
We recommend that any marketing or creative agency should have at least 3-months of operating profit in the bank, to cover any unforeseen circumstances. Be aware of your current ratio, which can be calculated as your current assets vs current liabilities, this will show that you can cover the business liabilities you have.
Understanding your debtor days (how long on average clients take to pay), will also help cash flow. Aim to reduce this number as far down as possible by improving your invoicing process, automate reminders or adjust payment terms.
As we start the second quarter of 2025 and come to the end of the tax year, now more than ever is the best time to review your cash flow essentials. Click HERE to read an article we wrote back in January which outlines how to build solid financial foundations. If you would like a help getting started in understanding the financial health of your marketing or creative agency, please get in touch to arrange a no-obligation discovery call with the team.
