Managing Cash Within Your Agency
Author’s Note: this blog was written before the current situation with COVID-19. Our goal in sharing is not to shame or embarrass anyone without cash reserves. We want to offer any useful advice for those businesses that might not know how to prepare for emergencies.
Did you know that 82% of small businesses that have failed cite cash flow as a major issue? 😟This is a very scary statistic and we surely hope you’re never part of this large percentage of businesses who don’t end up making it.
That being said, we’ve seen businesses close their doors, or face some really hard decisions because of a lack of cash. While you may not be in this camp, we guarantee that having more cash on hand will open up more opportunities for your agency.
Here are some big decisions you may encounter where having cash on hand can either make or break you:
A Client Leaves, Downsizes or Pipeline Dries Up: Every agency deals with times when client loads are lighter or when a client decides to part ways. In the agency world, having cash on hand can be the determining factor of whether you have to lay some of your fellow team members off or whether you can temporarily work on those valuable internal projects. It might be normal in our industry to think of layoffs as the inevitable cost of doing business, but we should remember that layoffs affect real lives and families. It’s not something to think of as a casual plan B!
Investing in New Offerings: Many agency founders, after years in the service industry, want to change things up and focus on how they can better serve their clients and the industry. This can be in the form of a software product or unique service offering. Both require time and an up front cash investment. Without having some cash on hand, you may have to forego having the opportunity to explore.
Reinvesting in the Team: You know us, we’re huge advocates of investing resources back into the team because the people are what keep us in business. There are endless ways to reinvest back into the team: internal projects, conferences, courses, books, etc. Sometimes this is last on the list for agencies, but it shouldn’t be. Reinvesting into your employees provides countless benefits including increased skill set, decreased turnover, increased engagement in the organization, and an advantage over the competition, to name a few.
Now that you know some of the benefits, here are some ways to keep some more cash on hand. The name of the game is always finding ways to get cash in your hand earlier.
Contract Net Terms
For those of you billing on a retainer, try getting paid up front. If you’re billing a fixed project, get 50% at kickoff and make sure the milestones for the remaining 50% are extremely clear . i.e. 25% due once the design files are approved in writing and final 25% due once a site goes live but before design assets are handed over.
AR Tips
Make sure there’s someone that’s diligently following up on outstanding AR, we recommend once per week. This person needs to be connected enough to the teams delivering client work. You don’t want someone following up on an outstanding invoice when you’ve deliberately delayed the project and thus the outstanding payment.
Pro tip: Make sure the person is specific with invoice numbers, dates, and amounts when following up as it’s important to keep all those touch points organized.
Set Up Multiple Bank Accounts
Did you know that the way you set up your bank accounts can actually set you up for cash flow success? By having multiple accounts, you can keep your funds organized and ensure you don’t spend money that’s supposed to be saved. Some suggestions for bank accounts are:
Have an operating account which keeps the majority of your working cash/capital
Create a separate account for tax payments. Make these transfers on a monthly basis so you don’t accidentally dip into funds meant to pay taxes.
Create a separate account for cash reserves. Depending on your company’s goals, it’s suggested to have around 3-6 months of operating costs on hand.
Understand Your Metrics
This isn’t going to get you cash in your hand immediately however the sooner you understand the key metrics for your industry, the easier it’ll be to make changes to have increased profit and thus, cash in the bank. If you’re not sure what metrics you should be capturing, here’s an article on the 10 Key Financial Metrics to Measure the Performance of Your Agency.
Everyday we make decisions that help us invest in our own future. We strive to deliver incredible work to our clients and grow our company along the way! But the reality is that we can’t leave it to chance to make our company a success. Ensuring a healthy cash flow system will help put your mind to rest, and give the certainty of a future for your employees.
