Taken from Empowered Finance’s regular musings on all things related to agency operations. Hence the working title – Agency Ops.
Cash is the lifeblood of a business. Without it, you run the risk of not making payroll, failing to meet your tax obligations and ultimately going out of business. And lack of cash is the biggest worry for agency owners.
Even as you grow, cash flow can still be an issue. The projects get larger and more complex, payment terms can become extended and the costs increase.
Research suggests that at least 3 months overheads as cash in the bank is the tipping point of being financially secure, in the event that you lose a client or come up against an unexpected cost.
So how do you achieve this?
By taking a proactive approach to cash management. Look at your cash on a weekly basis, with a clear view of what is going to be going in and out of your business over the next three months. Look at the timings of the ad hoc payments such as corporation tax and make sure they are factored in. And make sure you ignore any amounts that you have received that aren’t yours to keep such as amounts due to HMRC for VAT or client payments for third party costs.
5 ways to improve your cash flow
1) Reduce your payment terms.
Many businesses still operate on 30 day payment terms purely because it is the historical norm. By reducing payment terms to 14 days, 7 days or payment by return, you will speed up the rate at which you receive cash from clients. Even if it only works with one client, it’s an exercise worth doing.
2) Change your billing structure.
One approach is to fix your fees – by agreeing a fixed price for the work being done, rather than relying on using the actual hours worked to invoice, it becomes possible to invoice in advance, moving forward the whole payment cycle. If you work on a retained basis, look to bill quarterly or even annually in advance. If you work on a project basis, look to invoice the whole project in advance.
3) Nail down your invoicing process.
Ring the bell! You won the pitch with the amazing new client. Show me the money! Except they take another two weeks to sign the contract. And then they tell you to register on their supplier portal, which takes 10 working days. And then they take another two weeks to provide a PO number. Suddenly you’re six weeks down the road and you still haven’t sent the first invoice.
One of the simplest yet most commonly overlooked methods to improve cash flow is to make sure that you are issuing your invoices as quickly as possible. And you do this by having an efficient invoicing process in place.
4) Payment methods.
Do you still offer your clients a variety of different payment methods? Why? Do you really want to go off to the bank to have to pay in cheques? The bulk of invoicing and payments are now conducted electronically. Therefore you should look to utilise either bank transfers or if you have recurring monthly services, direct debit for receiving customer payments automatically.
5) Proactive credit control.
At a minimum, you should be making use of the automated email reminders within your accounting system. And if your accounting system doesn’t include this functionality, I suggest you switch to Xero. However, this alone isn’t enough. The best thing to do is to form personal relationships with the people who approve and pay your invoices, talk to them regularly and get verbal confirmation of when invoices will be paid. Emails are easy to ignore. Phone calls from a personal connection are a lot harder to ignore.
Empowered Finance are specialist accountants for the creative industries. We’ve worked in and for numerous agencies and clients so we understand your challenges. We help owners increase revenue, improve profit and generate more cash. We empower business owners with financial knowledge to make better decisions. If you want to learn more about how we can help your business visit https://empowered.finance or email firstname.lastname@example.org
Specialist accountants for creative and digital firms.