We all know the saying “turnover is vanity and profit is sanity” but the full saying goes on to say, “CASH is reality”
The majority of agencies, nay businesses, out there suffer from cash pain from time to time during their business growth; that is the reality of business! Not everyone is an Apple, Google or Facebook!
For digital agencies (like all agencies) the highest overhead is always the wage bill.
So it’s no surprise, when you are paying your team (and possibly freelancers) every 30 days and your customers are often paying you anywhere up to 90 days, that even the most profitable agencies with the largest turnover can still have cash flow problems, even more so if you are growing agency recruiting in line or ahead of the sales curve!
Forecasting your cash flow properly is the key to survival, even if you are trading profitably. We know the feeling; your accounts show that you have made £50,000 in profit over the last quarter…but you don’t have it! The tax man will have taken his share of course by now, in terms of VAT and PAYE payments, but most of your cash flow difficulties will be down to the fact that you haven’t been paid by your customers.
As an agency, you probably won’t be at the top of the list for payments from your clients. Clients have cash flow difficulties too, and will be paying wages, tax, rent etc before you. Paying for that website build or marketing campaign will seem the least of their worries if cash is tight.
So, you need to be ahead of the game by accurately forecasting what your cash position will be for the at least the next quarter in advance.
We have put together a simple cash flow forecasting tool to help with this process and some of our clients now can’t live without this.
Also, below, here are some of our top tips for cash flow utopia.
1. Payment Stages
As per our previous blog, payment stages for new projects are key to keeping the cash flowing. Never set a project live without final payment, you will have NO leverage for the client to pay. Ensure customers know the terms up front and make sure they understand that the IP/Copyright for All/Part of the project (if you transfer it) is only theirs upon that payment. Don’t be afraid to play good cop bad cop, for example, say that you want to set the project love but that you are under strict instructions from your board to follow the business terms for legal/contractual reasons.
2. Client Dependency
Try not to put yourself in any position where you are over committed to one or two clients, a client should never occupy more than 10% of your turnover, inevitably this happens from time to time but make it a short-term problem, by increasing your client list as quickly as possible. The larger the clients you have, the more dependent you become on them for their cash and in turn, if you ever have an issue with them, then so the liability increases too. So spread your cash exposure.
3. Debtors report
Review it at least once a week without fail with both the Sales, Account Mangers and the delivery team, solve problems to get the cash in, be tenacious. You need deposits, stage payments and final payments to flow continuously in to the business.
Make sure you invoice through the month too….30 days from the 1st of the month, or the 10th……is sooner than 30 days from the 30th!
4. Funding
Often agencies become under capitalised, e.g you don’t have enough money to cash flow your business growth even if you have a semi-healthy balance sheet and a profitable month to month operating business.
We would recommend that as long as you have a healthy (positive) balance sheet or that operating monthly profits are being generated, you should work hard to get a bank to provide you with an overdraft to cover all stages, that reflects one months turnover or at the very least one month’s salary costs.
If cash is really tight, then seriously consider invoice discounting as an option. We have used this very successfully in the past. Cash was released into the business upon invoicing a client, yet WE remained in control of the client relationship (e.g not a Factoring Company chasing your bills) If you go down this route you should seek advice first, remember that the fees are higher than Overdraft/Loans but the increase of cash in the business will more than pay for its self vs the business interruption you will have when you continually run out of cash.
5. Debt chasing
It is important to have the right people at your agency, talking to the right people at the client to help you get paid. It’s no good if your accounts team are calling the clients account team for payment, when you are waiting for a PO from the marketing manager…get your account manager to chase the marketing manager, or you will just get ‘computer says no’ from your clients accounts team! Sounds simple, doesn’t it…but too often we hear that money isn’t coming in only to be told that it’s just been left ‘to accounts to sort’. Cash flow is the responsibility of everyone in the agency – not just finance people.
In addition, recruit nice people to chase for money –build relationships, don’t alienate. We always took calls from the suppliers who took the time to build relationships and help us grow…..but when you have someone nagging at you threatening legals at every turn and leaving 30 messages for you a day…doesn’t encourage you to pick up the phone really does it.
6. And the most important!
Do you have the right financial intelligence in the business?
You need to invest in the right accounting personnel in the business. You need someone to proactively manage the business finances, often this is NOT the agency owner, whom may be great with numbers but are definitely not an accountant!
These skills are NEVER an overhead, always an investment. They pay for themselves time and time again.
You are much better to have a dedicated part-time bookkeeper who can manager the accounts and debtors list than sharing the job around the office.
It’s also preferable to have a Part-time FD than have nothing at all. Creating the numbers is not enough. You need to be able to interpret them properly.
Before we took on our FD, all of our computers and equipment was paid for with cash, Nothing had ever been financed and therefore our cash wasn’t being used in a sensible way. We should have spread our payments out to improve the cash flow and use that money to grow the business.
Finally remember that debt can be a positive thing, through my agency growth we had confidence with its future success. There were times (£1.2m turover )when my overdraft went back into the black, so when we spoke to our business mentor at the time, we said “Finally we are free from the overdraft, we’re going to cancel it! – He shouted “NO! you need to double it!” – he went on to say one of the best pieces of advice we have ever heard, which was when you don’t need it ask for more, because it’s a lot harder to get it when you need it!
And finally remember running a business it’s all about calculated risks, not risk aversion.
“An entrepreneur in debt is an entrepreneur in business.” Duncan Bannatyne.
