Is cash flow keeping you up at night?

As an agency owner, there’s nothing that keeps you up at night like cash flow management. Well, there’s also staff, customers and the endless stress of running a business. But you get the point, cash flow and managing your finances are one of the most important tasks we complete. So why do we bury our heads so frequently?

Story time

My business nearly closed its doors in its first 12 weeks. Business was good. Too good infact, and I was bringing clients on board at a fast pace. But when my suppliers were looking paid I didn’t have the money. 

And this was one of the most stressful times of my life. If not the most.

My payment terms were too generous and collecting payments wasn’t as high a priority as it should have been. I’d overtraded and I was in debt. It kept me up many nights and I was stressed beyond belief.

After speaking to my customers and negotiating better terms, this was resolved. But it didn’t happen immediately. Going forward every new customer paid upfront if and when possible. I maintain this policy to this day.

A sale isn’t a sale until the money’s in the bank – this became our motto

At times cash flow can be tight and this often leads to stress or worry. We need to pay our teams, and our suppliers. If there’s anything left, we pay ourselves. It’s often overlooked while our heads are busy “doing the work”, but poor cash flow management is one of the top reasons small businesses fail. 

I learned from my lesson and ensured it became a top priority. It’s partly the reason we never considered any debt in business, but that’s another story. 

Tips to manage your agency cash flow like a pro

Cash flow, accounts or forecasts are rarely sexy, but they are critical to your business success. Managing your cash flow doesn’t have to be complicated. We used to live within the Xero platform looking at our income and expenses daily, but it definitely doesn’t have to be as intense as that to master your finances.

Here’s what I’d start with:

Create a cash flow forecast

Map out expected inflows and outflows over the next 12 months. Identify gaps and pinpoint when cash will be tight. Each year I sit down with a coffee and look at my forecast for the following 12 months. I review where I expect business to be maintained and I look to spot areas where revenue will be lighter.

Factoring in growth ambitions I look to see where capacity remains and this becomes the basis of my sales and marketing focus.

Manage receivables tightly

Let’s go back to my motto. A sale isn’t a sale until the money is in the bank. This is something I live by and I never consider any project greenlighted until the invoice is paid. There’s a process to doing this as effectively as possible.

  1. Ensure you discuss payment terms upfront – I talk about money a lot and I’m not behind the door in asking for favourable payment terms with the invoices I send. Each of us provides a quality service and we expect to be paid. But don’t leave that to chance. Confirm and agree on payment terms before you start the project.
  2. Send invoices promptly – Often I’ve been told I send my invoices too quickly. Yet the people who mention this are the ones who struggle to pay on time. However, sending an invoice when agreed is key.
  3. Ensure the details are correct – Incorrect details are the first excuse any business will make to stall payment. But sometimes the fault lies with us. Either we’re sending the invoice to the wrong person or we’ve incorrect elements or prices listed. Remove delays by ensuring the invoice details are perfect.
  4. Keep in contact with clients – Contact accounts when you send the invoice. “Have you received that ok?”, then follow up before the agreed payment date to confirm it’s on the payment run. Then if it runs over, be the person they want to pay first. It’s often not a case of who shouts loudest, but rather, who has the best relationship with accounts payable. Be that person.
  5. Don’t let receivables age – It’s always harder to get historic debts paid. Sometimes people move roles or dispute the invoice. Dealing with it head-on before it becomes bad debt is key.

Revisit payment terms

When cash flow is tight, one of the easiest ways to lighten the burden is to extend payment windows to suppliers. Now this must be done strictly, as it can be harder to pay back suppliers over time if the current situation doesn’t improve. But it can also provide breathing space when you need it. Communication is key and ensuring your supplier is willing to do this, will ensure you get the support if needed.

When was the last time you negotiated better terms? As your business changes, so do its needs and asking for better terms is a simple way to support your cash flow. There are many positive reasons why you might do so.

  1. Business growth – As your sales volumes increase, you gain more leverage to ask for better pricing and extended payment windows to support your working capital needs.
  2. Strengthen supplier relationships – Negotiating in good faith shows your commitment to the supplier relationship long-term.
  3. Match customer terms – If you extend payment terms to your customers, getting similar terms from suppliers better aligns cash inflows and outflows.
  4. New product/service lines – Expanding into new areas may require adjusting payment terms to account for different supply chain dynamics.
  5. Planned expansion/investment – If you are financing growth initiatives like new facilities, equipment or hires, more cash on hand is needed.
  6. Seasonality issues – Businesses with peaks and valleys in demand can negotiate seasonal terms to smooth cash flow over the year.
  7. Supply chain disruptions – Extending terms can provide more cash flow flexibility when managing supply hiccups or delays.

Trim expenses aggressively 

Every year I sat down with a highlighter and questioned every expense in our business. I categorised them into the following categories: Essential and Non-essential. We analysed this line-by-line lightly at first and then more intensely.

When we were being strict with the budget, non-essential expenses were stripped immediately. For those essential ones we needed to run the business or maintain service we looked at ways to reduce the cost. Paying upfront for annual subscriptions seemed easy and saved 10-20% on some hefty subscriptions. We also looked at alternative systems and suppliers for materials we needed. Often just by asking the question about pricing, we were able to reduce costs. 

Apathy is not a good way to run a business and keeping on top of costs is critical.

Incentivise upfront payments 

This is something I do now as an agency consultant. Each of my programme clients works on a 6-12 month contract. Because of this, these customers who pay upfront for my services get a discounted rate, versus those who need one-off or ad-hoc support.

Revisit pricing 

Over the past few years, inflation has eroded the agency profit margins. Salaries are up, costs are up, but have your prices risen to match? If cash is tight long-term, raising prices may be required to improve margins. Many of us wait for inflationary pressures or market changes before updating our pricing structures, but this shouldn’t be the case. Building in price rises to your agreements is key to maintaining your profitability. Otherwise, you’re working harder each year for less money!

Build a buffer 

Prevention is the best form of medicine and having a war chest of funds will ensure you can ride tighter periods without breaking much of a sweat. I get it though, when our business was young, we took a lot of the profit as we went. Filling our pensions and enjoying the fruits of our labour. But when we took growth seriously, we knew we needed to have money available to capitalise on our growth ambitions. 

A general rule of thumb is to have 3-4 months of company expenses in cash on hand at any given time. This ended up being hundreds of thousands for us quickly, but we were able to move in a new direction quickly and self-fund it. When Covid hit we had a runway before that money ran out and this allowed us to be more aggressive than our competitors. We survived, but many didn’t. The buffer was barely touched, but we had the confidence and cash to do what was needed.

Who is responsible for cash flow management?

If you’re planning for growth or exit, cash flow management is critical. In many larger organisations, the financial director is responsible for keeping your financial ship sailing. In smaller businesses, this lies at the feet of the MD or founder. We had a head for numbers, but many don’t. Even then, we brought in experts to help us. Our accountant was one of our favourite numbers to call and we worked with them to create management accounts on a monthly basis.

Their support, understanding and guidance were critical to our growth. Not just managing the numbers, but managing us as entrepreneurs.

As part of my growth programmes, we shine a light directly on your finances, the good and the bad. By doing so we can plan for growth and be ready to tackle it head-on. Where we need support, we bring in the experts, so that we’re not dealing with “general direction of travel” but real-world numbers.

If you’re ready for the next phase of growth in your business, get in touch to schedule a discovery call or check out our Youtube Channel where we continue the conversation. Alternatively check out my FREE digital course to help build your business from zero to 200k months and beyond.

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