Even the most successful digital agencies need a steady flow of short-term cash in order to pay staff, cover operational costs and invest in new opportunities. As a business owner, it’s essential to have a clear view of your finances to avoid cash flow issues, or you could risk the future of your digital agency.
Cash shortages in digital agencies are most often caused by:
- Losing clients
- Late payment
Digital agency owners should take a proactive approach to avoid cash flow problems by producing regular cash flow forecasts, scrutinising costs and implementing a structured credit control process.
If financial issues are a cause for concern within your creative agency, then read on for our professional take on managing cash flow.
For more detailed advice, reach out to Finance Cornerstone. We specialise in outsourced FD services for ambitious digital agencies with an eye on the future. If your agency earns in excess of £1m and you need help reaching the next level, let’s talk.
What is positive cash flow?
Simply put, positive cash flow is when more money flows into your account that out of it in any given period. If you haven’t enough money available to cover your costs over the course of a month, that is considered negative cash flow.
But, as you and I know, there is no such thing as a ‘standard’ month in a digital agency, especially one that’s experiencing exponential growth. In order for an agency to grow, at some point, it requires a leap of faith (albeit an informed one) to invest in staff and take on new clients. Cash may very well be tight for a period of time.
That said, a successful creative agency is one that’s built on solid financial reporting and analysis. Small business owners with big ambitions need to get a firm grasp on their numbers to be able to take advantage of new opportunities and plan for leaner times.
Why is positive cash flow important?
This might seem like a dumb question, but maintaining a positive cash flow is not just about paying the bills. Poor cash flow can cause digital agencies to stagnate and have even more dire consequences for small businesses.
Gaining control of your cash flow will protect your business and ensure a steady stream of working capital in order to:
- Stay in the black – at the very least, you should aim to have enough cash to stay on top of costs and avoid late payment penalties.
- Grow your business – if your cash is flowing freely, then you can afford to recruit and take on new business. If there’s no available cash, you won’t be able to scale.
- Invest in premises and equipment – to get the best people, you need to have decent premises and the tools they need to do the job.
- Develop your marketing strategy – marketing campaigns are among the first thing to suffer when money is tight, which is counterintuitive if you want to scale your agency.
What are the warning signs of cash flow problems?
Cash flow problems are usually pretty evident, but keep an eye on the following signs as you could be heading for a cash crunch:
- You are having to turn away new business as you’re at capacity and can’t afford to take on new staff. Or you’re struggling to serve your existing customers due to a lack of resource.
- Paying bills has become a source of anxiety and a bit of a juggling act.
- Outstanding payments are starting to become an issue each month – if you find yourself constantly chasing invoices or your clients pay late on a regular basis, then sooner or later your cash flow will inevitably take a hit.
- You are having to seek more and more finance – business loans and a company credit card are essential for most when running a business, but if borrowing starts to spiral, then it’s time to take a hard look at your financial situation.
For a free assessment of how your digital agency is performing, take a few minutes to complete our PROTECT framework survey.
Cash flow bottlenecks in digital agencies
As mentioned in the opener to this article, there are three main areas to inspect if you experience cash flow problems – late payments, expenses and client retention.
- Late or non-payment – this is probably the number one cause of cash flow issues for digital agencies and other small businesses. Your agency can only function when its income is predictable and steady. If you’re constantly chasing clients on outstanding invoices, it can place considerable strain on your day-to-day operations.
- Costs/expenses – if you neglect financial management, then there is no way of tracking what you’re spending. You could be leaking more money than you know.
- Client retention – it’s tempting for growing agencies to say yes to all the business. But if it comes at the expense of your existing clients, then it could endanger your relationship, and you may end up losing them. If this happens once too often, then you could suddenly find yourself with a negative cash flow and no way of recovering the cost.
How to maintain positive cash flow in your digital agency
Here’s our checklist for overcoming – and avoiding cash flow challenges as a growing agency.
1. Regular cash flow forecasting
Good financial management is fundamental to a successful creative agency. You should be producing a cash flow forecast on a monthly basis, at least three months in advance. That way, you can avoid, or plan for, possible cash shortages down the line.
Download Finance Cornerstone’s cash flow forecast template:
As a growing agency, you may not have the budget to take on an internal accounts team. And as an owner-manager, it’s doubtful you have the time to give cash flow forecasting the attention it needs. That’s why many businesses take on the services of an outsourced FD.
2. Get on top of late payments
Late payment is all too often a cause of anxiety for a small business owner – but it shouldn’t be. The most important aspect of cash flow management is ensuring your customers pay you in full and on time.
Establish a clear accounts receivable/credit control process, setting out:
- how to pay – make it as easy as possible for your clients to make payments online
- your payment terms – usually 30 days, but reduce it if it doesn’t suit your business
- your process for chasing up outstanding invoices with a clear timescale
- penalties for late payment
In addition, take care to vet new clients as much as possible. If it seems unlikely, they can pay you on time then walk away.
3. Manage expenses
Creative agencies have considerable expenses which can easily escalate as the agency grows. Sure, you need to speculate to accumulate on some level, but don’t let your costs get away from you.
Do the following to keep control of your expenses and see if you can find ways to save:
- Scrutinise your overheads. Renegotiate your energy tariffs or shop around for new deals.
- Using your cash flow forecast, make sensible projections and plan larger investments around them. Make substantial purchases at a point in the year when you’re likely to have more money.
- If you’re paying invoices as soon as they come in, then take a smarter approach. If the payment terms allow, then schedule one or two payment dates per month to coincide with money coming in.
- Keep an eye on your company and personal credit card, and it goes without saying that you should control staff spending.
4. Conduct a tax review
Tax returns come but once a year, but the consequences of an unexpectedly high bill can create shockwaves for a long time to come. Be sure to make time for tax planning on a monthly basis and investigate which tax reliefs or credits you may be entitled to. This is another area where an outsourced or part-time FD can be invaluable.
5. Reassess your pricing strategy
Even when your cash flows steady, it’s worth examining your pricing on a regular basis. In service-based businesses, there is a tendency to set prices on the time spent working for a client. We encourage our clients to consider charging at a value-based rate, which is more reflective of the results generated.
6. Get on good terms with lenders
Business finance is essential to most businesses, especially a start-up. Build a strong relationship with your lenders that is based on trust and mutual benefit. Don’t get behind on repayments, and keep your lender informed if things do go wrong.
7. Anticipate potential cash flow problems
Catastrophising is not advised in day-to-day life, but when it comes to your finances and managing cash flow, it’s important. A financial crisis can happen to any business, so it’s crucial to plan ahead for the worst. With our clients, we like to play the ‘what if?’ game.
- What would happen if your biggest client left? What if you lost two clients? Three? Four?
- What if we take on more work and need to hire more staff?
- What would happen if our overheads skyrocketed? (not so hard to imagine)
Sometimes, problems will come from the left field. Like a pandemic. But plan for what you know could happen, and you have a much better chance of success.
How can Finance Cornerstone help you with cash flow?
Finance Cornerstone was established to help digital companies to reach their full potential. You could not wish for a more experienced part-time Finance Director with a better track record in the industry.
As your part-time Finance Director, we will work with you to make your finance operations accessible, transparent and a source of driving change.
For an initial discussion, please get in touch to book a FREE discovery call.
Check out cash flow resources:
- Download our cash flow template
- Further reading on how to improve your business cash flow
- Find out your PROTECT score to see how your company is performing
Should a business always have positive cash flow?
The nature of the creative industry means that there can be an ebb and flow when it comes to business. A negative cash flow is sometimes unavoidable – but you should always know it’s coming. By establishing a regular cash flow forecast, you can make plans to see your agency through difficult periods.
Can a profitable digital agency have negative cash flow?
Negative cash flow can be a symptom of your business losing money, but sometimes, it’s just a case of poor planning. An agency may struggle to pay bills month on month but still show a profit at year-end. But this would indicate a lack of financial management, and long-term profit or growth is unlikely to be sustainable.