Like all businesses, creative agencies are at the mercy of the market and, due to factors in or outside of their control, can find themselves facing issues with cash flow. Whether this is caused by unpaid invoices from clients, insufficient jobs in the pipeline or reckless spending, negative cash flow has the potential to sink a business.
We’ve rounded up some of the biggest mistakes agency owners make when it comes to cash flow and put together the only guide you need to staying on top of your businesses finances.
Read on to learn why cash flow is so important to your business, signs to watch out for when you are dipping into the negatives as well as some of the biggest financial traps for business owners.
Why Does Cashflow Matter?
Aside from just maximizing revenue, ensuring your business has consistently positive cash flow is important to achieve growth and fulfilling its potential in the long term. Here are a few reasons why you should be keeping a closer eye on cash flow in your business.
Every agency owner has different ambitions and goals for the future of their business. While the aim of every agency isn’t world domination, a certain level of flexibility (and cash flow) is required to ensure your business can stay on top of industry trends and remain competitive. If like many business owners, your aim is to scale up your business, you will need a steady source of positive cash flow to get there.
Like all businesses, creative agencies go through ebbs and flows of business depending on the time of year. In fact, some statistics show that agencies in the creative marketing and advertising space invoice only 6% of their total annual revenue in November. (https://martech.zone/modern-technologies-impacting-digital-marketing/)
You may find yourself with adequate cash flow while things are busy during the summer months but if you fail to take steps to ensure there’s plenty in the pipeline for later in the year, you may be in trouble.
Investing in New Technology
In the creative space, business growth and investment in new technologies go hand in hand. The level of investment that’s needed will depend on your clients and the services offered by your agency but customers expect certain services from a creative agency and your ability to provide these will directly affect the amount of business you win.
How to Recognize Negative Cash Flow
It may sound simple, but negative cash flow can often fly below the radar and remain unnoticed in a business until it’s too late. Never fear, we have rounded up some of the major red flags to watch out for in your agency to help you recognize when your cash flow is dipping.
Relying on Credit Cards
Don’t get us wrong, credit cards are a great tool for individuals and businesses alike. Where they can become an issue is if the line between cold hard cash and credit starts to blur. If you or a member of your team starts to use the company credit card for purchases that wouldn’t be covered by the cash your agency has in the bank, you know you have a problem.
The rule of thumb here is, regardless of the size of your line of credit, don’t spend money you don’t have. Another key takeaway here is to make sure your business is paying off any credit card balances in full at the end of the statement period to avoid paying interest. This adds up fast and can turn into a noose around your businesses neck faster than you can say platinum Amex.
Mounting Unpaid Invoices
The minute you start to notice more unpaid invoices from your clients than paid, you know you have a problem. Through no fault of your own, this situation is the kiss of death and, unless remedied fast, has the potential to sink your agency.
If you find yourself dealing with unpaid invoices from clients, read on for our tips on setting up an effective accounts receivable process in your business.
What Causes Negative Cash Flow?
Negative cash flow is the kiss of death for creative agencies and should be avoided at all costs. Here are some of the major factors that can contribute to negative cash flow in your business.
Bad Credit Control
Keeping a close eye on your credit is an absolute must for agencies. While it can be tempting to be lenient with clients, especially in the early stages of agency ownership, this is a dangerous game and one that can end in ruin.
Failing to make your expectations clear up front for payment deadlines is one of the easiest ways for businesses to lose positive cash flow. As well as setting crystal clear deadlines right off the bat, agency owners should be careful not to hand over completed work until the agreed-upon payment has been received. Failing that, businesses should be prepared to go down all avenues to collect unpaid bills including engaging the services of debt collectors and legal representatives.
Poor Client Retention
The statistics around the cost of finding new clients vs retaining new ones are pretty clear. Not only does it cost businesses up to five times more to find new clients than retain existing ones, but the success rate of selling to an existing customer is also between 60-70% compared to 5-20% for a new client. (https://www.outboundengine.com/blog/customer-retention-marketing-vs-customer-acquisition-marketing/)
Mismanagement of Funds
Many an agency owner has fallen into the trap of spending more than the business can afford. While it can be tempting to splash out on fancy dinners and events to woo new clients or just overspend on the day-to-day running of the business unless your earnings are enough to cover these lavish purchases, think twice.
It may seem simple, but the best way to avoid this trap and ensure you have enough cash in the bank to cover your expenses is to budget. It’s far from the most exciting part of your job, but taking the time to set out a solid budget taking into account current and predicted earnings and all expenses will save your ass. Once you’ve put pen to paper and got your budget locked down, you just need to stick to it!
How to Maximize Cashflow
Now that you know what not to do, including the traps that creative agency owners can fall into, let’s look at some effective strategies for maximizing cash flow in your business.
Be Selective with Clients
It can be easy for agency owners, especially those that are new to the game, to get distracted by the dollars and find themselves agreeing to take on every client who crosses their path. While new business owners may not find themselves in a position to be selective and turn away clients, it’s always worth doing your due diligence to make sure that the client will be worth your time.
- Set out a clear credit policy. By incorporating your credit policy in your contract with your clients, you are helping cover your business financially so you have some legal standing if they decide they would rather not pay.
- Do your research. While it’s easy to go off a hunch with a prospective client, it’s important to always do your research. Whether you do this process yourself or outsource it to a third party, it’s essential to look into the history of an individual or a business before agreeing to work with them.
Focus on Client Retention
As we mentioned above, businesses that prioritize signing new clients over satisfying existing ones are doing themselves a disservice. While bringing on new clients is an important part of business growth, it’s not a sustainable way to run a business if you aren’t retaining all the new clients you bring on board.
While there are lots of ways to make sure your clients are satisfied, in this case, keeping it simple is usually the way to go.
- Do good work. This is a sure-fire way to keep your clients happy and coming back for more. Ensure your team aren’t overworked and are dedicating the necessary time to each project to get it done right. Rather than assuming you know what’s best, first listen to your clients’ needs, then use your knowledge of the industry to do the best work to fulfil their needs.
- Value their time. No one appreciates missed deadlines, and your customers are no different. You expect clients to stick to their end of the bargain, so make sure you too provide the work you say you will, on schedule with no excuses.
- Check-in. Despite your best intentions, sometimes things don’t go according to plan. By making a point of checking in with your clients on a regular basis, either once work has been completed or at other relevant points throughout the year, you can nip any issues in the bud and prevent losing your clients to another agency.
Hone your Accounts Receivable Strategy
As an agency owner, you’re no doubt aware that not all clients pay on time. What you may not know is, over half of all small businesses are in the same boat. Recent statistics show that up to 64% of small businesses have reported receiving late payments from clients.
While it may be comforting to know you’re not alone, that doesn’t make it any easier when you have bills of your own to pay. Here are a few simple ways to ensure your accounts receivable strategy is on point.
- Be upfront. A good accounts receivable strategy starts before you even begin work for a client. By including your payment terms in all client contracts, you are covering your agency and ensuring all clients know exactly what they are expected to pay and when.
- Stay in control. In business, it’s important to have leverage. Before handing over the finished product (be it a brand new website, Google Ads or social media account) to your client, ensure that you first receive payment. By withholding your work until you are paid in full, you can almost entirely remove the risk of shady clients dipping out on the bill.
- Take action. In the event that a client does fail to pay, don’t be afraid to take things further. Armed with your signed contract you can escalate the situation to collections agencies or a lawyer depending on the situation.
If all of this sounds too much for you, that’s OK. You’re not an accountant after all. If your agency isn’t large enough to justify bringing on an in-house finance team, there are still plenty of options available to you.
Sprout Accounting specialize in financial services for creative agencies and other small businesses in the Vancouver area. Depending on the size of your business and your needs, we offer a range of packages tailor-made to suit your needs.
From annual tax returns to financial advice and regular business reporting, our team of financially savvy CFO’s and accountants are exactly what your business needs to step it up a notch and do what you do best. Check out our full range of financial services here. (https://www.sproutaccounting.ca/pricing)
Switch Up your Invoicing
Now, this may seem basic but stay with us. Menial tasks like invoicing often get set aside and overlooked in favour of more interesting work. While this is completely understandable, it could be slowing down your receivables and negatively affecting your cash flow.
Making small changes like sending invoices to clients as soon as a job is completed can help speed up payment and improve your cash flow. Another option to consider is tweaking your payment terms. While many businesses operate with 30-day payment windows by default, reducing these can make a big difference to your payment times.
The Bottom Line
Achieving positive cash flow in your business is essential not only for short term growth but also long term success in the creative agency space. Considering the ever-evolving nature of this industry, cash flow is crucial to ensure your business can continue to invest in the technology and new team members necessary to stay competitive.
The key takeaway here is that as a business owner, you don’t need to do everything yourself. Outsourcing aspects of your operation (like accounting and finance) can actively save you money and help your business thrive.