Last year, compulsory liquidations increased by 44%, with 1 in every 186 companies entering insolvency. From low revenue to unforeseen expenses, there are a number of reasons a business is forced to close due to its inability to meet debts. At the core of all these problems, though, is cash flow.
To build your agency on solid financial foundations and steer clear of the dreaded bankruptcy, it’s crucial you understand the ins and outs of agency cash flow. Get to grips with what this is and how you can improve yours in our easy-to-understand guide.
Cash flow refers to the money that moves in and out of your agency. This includes cash received (your incoming payments and revenue) and money spent (also known as your business expenses, costs, or overheads).
Usually, cash flow is calculated over a specific period of time. For instance, a startup might carry out weekly or monthly cash flow reports to make sure their incoming revenue covers their costs.
Your agency might have cash flows from different aspects of your business, including:
Monitoring your cash flow is essential for healthy finances. In a successful, growing agency, your incoming money should exceed your outgoings every month.
However, this isn’t always the case, especially for new or small businesses. When your expenses outweigh your income – or you simply don’t know the state of your cash flow – it’s time to work on improving your money management.
Whether you’re struggling to pay bills or would like a better understanding of your agency’s finances, getting to grips with cash flow is a great place to start. Learn how to improve yours with these tips.
Your agency will have two main categories of expenses; fixed and variable.
Your fixed expenses are set costs you pay regularly (such as every month) regardless of how many sales you make. They can include your office rent, software subscriptions, and employee payroll.
Your variable expenses are a little trickier to track than your fixed expenses as they vary depending on your sales. Typically, costs will increase in line with your revenue. Variable expenses might include supplier, travel, and marketing costs.
By tracking both your fixed and variable costs, you can better predict your upcoming expenses, helping you put aside enough cash to cover them.
Alongside fixed and variable costs, you can also have one-off costs. For example, you might have to buy new laptops for your agency or pay a deposit for your office space.
One-off costs aren’t always expected, making it crucial you put aside an emergency fund to cover these expenses.
To make tracking your cash flow simpler, it’s a great idea to set up a free business account.
This will separate your business and personal finances, and record all of your incoming payments and expenses. Keeping an eye on how much money moves in and out of your agency is far simpler with a dedicated account.
A business account is also crucial for easy record-keeping, helping you stay tax-compliant and improving your cash flow management.
A common cash flow problem businesses face is late accounts receivable (the payments you’re expecting from clients).
If you don’t yet have an emergency fund to cover costs in the meantime, this can cause a domino effect on your cash flow that makes it tricky to meet your bills.
To improve your cash flow, set up a smart invoicing system.
Software can help you automate your invoices, with auto-fill technology and instant calculations reducing the risk of errors that can delay incoming payments This also helps you keep a digital record of your invoices, enabling you to track their progress through your system.
It’s advisable that you add a stipulation in your client contracts that details interest added to late payments. This reduces the chance of a customer falling behind on their outstanding invoices, keeping your cash flow moving smoothly.
If you’re struggling with cash flow because your expenses exceed your income, consider diversifying your revenue streams.
Passive income opportunities are a great way of boosting your cash flow without increasing labour. These income streams can take a little effort to set up, but once they get started they require very little maintenance to generate revenue.
Examples of passive income for agencies include:
You can also look into adding services to your existing offering. If you’re a copywriting agency, for example, you might be able to increase your reach by adding social media captioning services and proofreading. Or, you could offer consulting services, creating a B2B revenue stream alongside your B2C offerings.
If you’re finding your cash flow tricky to manage or it’s taking up too much time, it could be worth looking into a financial advisor, bookkeeper, or accountant. Each of these offers slightly different benefits.
To determine which is right for your agency, let’s take a quick look at the role of these financial professionals:
While each of these will create an additional cost for your agency, they’ll also make it much easier to manage your cash flow.
You might also end up saving money. For example, a bookkeeper will ensure you include all deductible expenses on your tax return, lowering your yearly tax bill and increasing your available income.
Optimizing your agency’s cash flow enhances your understanding of its financial health. This not only makes it easier to meet financial obligations but also builds a foundation for informed decision-making and long-term stability.
For more business news and advice, be sure to check out the latest on the BIMA blog or join the community of tech and creative agencies.