Solving the Agency Cashflow Problem
Solving the Agency Cash Flow Problem
It’s no secret that managing cash flow in the agency world can feel like a persistent puzzle to solve. You’re either flush from a project deposit or scraping to make a payroll. Each agency operates differently so there’s no quick and easy fix, but there are some consistent ways to think through unpacking and diagnosing potential problems.
The critical, first step is to understand what kind of cash problem you have. The lack of cash flow is always the symptom of a deeper system or process that might be out of balance, never the core issue. Here are a few places to start looking:
Financial fundamentals: This includes pricing, cost structures, and ultimately, the gross margins you can deliver on projects. If your margins are too thin, you may have issues covering fixed expenses or weathering the peaks and valleys of client payments and new business. You should be able to answer these questions by taking a quick look at your profit and loss statement. A quick benchmark would be to test your financials against the 50/30/20 rule. Are you delivering 50% gross margin, spending 30% on operating expense, and delivering 20% in net profit? If you’re drastically off on these quick benchmarks, you may want to dig a bit deeper.
Timing: How are you billing customers compared to how you’re paying employees or contractors? If there is a drastic mismatch, you could actually be generating negative cash flows with new projects. Take a look at your client invoicing schedules, payment terms, and how you’re handling project closeouts. At the very least, try to match your inflows with your outflows. When possible, get paid before you’re on the hook to pay others.
Management: Do you have an understanding of your burn rate and do you have a cohesive spending plan? Do you know when you can make investments in new people, tools, equipment, etc.? How do your operating expenses compare to your top line revenue? There are some good benchmarks/standards here that can help you understand how you’re doing.
Predictability: How much of your business is one-off vs repeat? Do you have a strong correlation between leads and new business? Do you have a pool of old clients that you can leverage at times to create some more predictability in your revenue stream? How about flags for cutting expenses or ending contracts if things are slow? Highly unpredictable revenue streams combined with consistent/fixed expenses is a recipe for a cash flow crunch.
Services offering mix: What does your business look like in terms of engagement types? Are you pitching custom statements of work or do you have a series of productized services? A good balance of the two types can help smooth out cash flows, create more predictability, and diversify risk on your margins.
Once you diagnose where there might be opportunities to tighten up your cash flow machine, the next step is to identify some strategies and tactics to help you sleep at night. More on that later...
-From BK, NY