Why a healthy cash flow is the secret to a successful agency
Business services is fast-paced, dynamic and competitive. But being busy isn’t enough. Whatever field your agency operates in, evidence of your success lies in your company’s bank balance, as much as in the volume of work you’re tackling. Having lots of projects on the go and more in the pipeline is well and good. But if you’re not getting paid on time your business isn’t truly healthy - or ready to grow and exploit new opportunities.
The nature of the work many agencies undertake can exacerbate issues with cash flow. Projects often take some time to complete and can prove elastic, with clients requesting unexpected last minute changes. Plus, larger client firms might insist on long payment terms, leaving an agency waiting for money for months after work has been delivered.
It doesn’t have to be this way. There are several paths to improving your business’s liquidity. What exactly should an ambitious agency owner be doing to ensure they have a healthy cash flow? And how can they use that strengthened position to scale their company up?
Calculate your average debtor days
This will help you to see how long you’re currently being left out of pocket. You may be shocked to find it’s taking 40, 70, 90, even 180 days to get paid. Don’t just rely on gut instinct when it comes to chasing payments, have the facts in front of you – then you can assess how urgent it is you address the situation.
Look at your payment terms
If you’re regularly getting paid late, you can think about revising them. While most companies stick to a typical 30-day payment term, it’s not obligatory to do so. Some agencies are shifting to zero days, 7 days or payment on receipt. It may require an awkward conversation with clients when you make the changeover, but life should become easier afterwards.
Don't be afraid to be tough
Introducing stricter payment terms isn’t bad manners, it’s good business. Agency owners have to be sensitive about handling client relationships, of course, but without funds your business will suffer, and its potential growth will be limited. Ultimately, if you’re strapped for cash, you will be less able to deliver what customers need.
Don't be sluggish about sending invoices
If you’re invoicing in arrears, you carry much of the blame for late payments. A decent cloud accounting package will both issue invoices automatically and send payment reminders. Also, check the accuracy of the information on the invoice itself – company details, customer information, order numbers, and payment references – to avoid unnecessary delays and failed payments.
Go one step further and consider advanced invoicing
This can work particularly well if an agency is being hired on a fixed monthly retainer basis.
Make it easy for clients to pay
Increasingly, companies prefer automated payment processes to cut down their paperwork. Automating your invoice payments makes for a more predictable cash flow, which can only be good for the agency, but it also creates less admin for the customer. Often, it’s a win-win situation.
Consider your payment methods
Weigh up whether using an automated, but flexible payment method, like Direct Debit may be preferable to Bacs transfers, or even standing orders. Standing orders are often better suited to smaller organisations and can only be used for fixed, regular payments. Direct Debit has more flexibility built into it, allowing for the collection of variable sums paid regularly or on a one-off basis if necessary. Unlike standing orders, which can be cancelled by the payer, Direct Debit is also under the control of the entity being paid rather than the customer.
Consider how you plan to finance any business expansion
Having a handle on cash flow means capital should be available to fund your growth strategy. This matters since many agencies’ value is in their intellectual property and ideas rather than material assets, which can make bank funding harder to secure. Getting to grips with your finances makes real sense if you hope to build your enterprise.
Once payments are coming in on time, cash reserves should start to grow. Now you have money in the bank to implement growth plans with certainty, decide how you want to expand - hiring more staff, taking on more ambitious work, or investing in new technology or equipment. Speak to a trusted adviser, such as your accountant, a mentor, or an industry peer for advice if you’re unsure how best to proceed.
Never forget why you set up the agency in the first place – to do the best work possible. Less time wasted chasing money owed means more effort can go into working with clients. Remove headaches about paying bills by getting paid on time yourself. That way you can focus on becoming one of the best agencies out there.