The Importance Of Managing Your Agency’s Cash Flow
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Wax on, wax off. Cash in, cash out. Keep doing it for long enough and your agency is sure to thrive and grow – managing cash, that is, not waxing.
However, mismanage your agency cash flow for just a moment and it can spell disaster. You wouldn’t want to run out of wax or accidentally scratch the car, incurring the wrath of Mr. Miyagi, would you? Of course not. And the consequences are that much harsher when it comes to agency cash flow, especially if you’re a small business just setting out or are looking to scale up. So let’s cover the basics: what is cash flow? Why is agency cash flow important? How can you manage it effectively, and can anything help you do it?
What is Cash Flow?
Cash flow is essentially the money that is moving in and out of your business. Often this all comes in a clump at the end of the month, but the flow is actually continuous, and you need to be on top of it at all times. The cash flowing in comes in the form of payments from clients for work completed (or ordered), as well as accounts receivable – aka the money you’re due. Cash flowing out goes to any possible expense you can think of – wages, equipment, office space, software, utilities, insurance, etc. The list goes on, and it’s always sad to see how much longer that “out” is than the “in.” But it’s your job to manage your agency’s cash flow, making the “ins” higher than the “outs.”
Billing and Invoicing
Often, you can’t control the when and how of many of your outgoings – rent for a studio is due when then landlord says it’s due. However, you do have much more control over the cash flowing in, and it is very important to get the billing and invoicing that supplies it correct, so you have the cash you need when payday rolls around.
Invoices should be sent as quickly as possible to ensure the client has time to pay before you need it for your outgoings. A good way to keep on top of your invoicing is to have all information in a system like Productive, so when it comes time to collect, it’s as simple as clicking a couple of buttons (rather than trawling through spreadsheets). Additionally, software allows you to set recurring budgets and bills, which will take a lot of work off your shoulders for ongoing clients.
Invoicing quickly will often mean being paid quickly, but sometimes you have to give people a little nudge in the right direction. First, the carrot: some agencies offer early payment incentives such as a discount on the invoice if it’s paid within a week. Second, the stick: something that none of us like doing, but are forced to sometimes, is applying late payment fees. These should be clearly stated in your contracts and on your invoices, then it’s just a matter of chasing them up. Using one or both of these methods should help reduce late payments and keep your agency cash flow on track.
Another important aspect of managing agency cash flow is not just chasing money owed, but planning to know what that will look like in one month, six months, or more. For agencies, this means keeping track of potential clients using a robust and comprehensive sales pipeline.
Learn a Lesson from Moby Dick
If you only learn one thing from Moby Dick, let it be this (spoiler alert): chasing whales can get you sunk. If you’re looking to learn more than one thing from Mr. Melville, we would also recommend “how to harpoon” and “the biology of sperm whales.”
Agencies often spend a lot of time chasing industry whales, but once you’ve got a big client on the hook, so to speak, it can actually spell disaster for your firm. That’s why it is imperative that you watch out for big clients that pay after the completion of a project, since this can really throw your cash flow off, with loads going out and nothing coming in. There are ways to land your white whale and still manage cash flow, however.
First, you can just be frank with clients – ask for 50% upfront and 50% on completion. This isn’t a matter of trust, but rather a way to give you the cash needed for the resources a big project requires. Which takes us to the next thing you can do: make clear breakdowns of the resources you require! This includes physical materials, equipment, office or studio space, and one of the most important aspects of any project – people.
One of the biggest potential outgoings you’re likely to have is personnel, with top talent requiring top-tier pay – including you! Managing the cash out for staff depends on how you staff your agency, namely whether you have a fixed staff on set salaries or you hire contractors on a per-project basis. Each of these options has its benefits, as well as its drawbacks. Salaried workers mean you know exactly how much is going out and when, making your life a little easier when working out your cash flow. On the other hand, bringing in freelancers allows you to pay them when you get paid, without having to worry about floating cash. That said, fixed employees are more likely to turn up Monday to Friday, whereas many agencies worry about keeping track of contractors – this is where time tracking and resource management software like Productive can really help you get on top of things
Follow our tips on how to manage an agency’s cash flow, and in no time at all, you’ll be beating out the competition with a totally-not-against-the-rules front kick to the face. Good agency cash flow management will give you the resources you need to scale and stop you floundering as a small business. And with robust management software like Productive available, it’s far easier to do so than ever before – it’s as simple as that (yes, you can call us sensei now!).