Turnover is vanity, profit is sanity. We’ve all heard this haven’t we? It’s only partly true as you can be profitable and still have negative cashflow. Try keeping sane without any money to pay next month’s salary bill.
How does this happen? Many Agencies make the following common mistakes. Here they are and how to avoid them.
- Make sure you have got a purchase order.
If your client has a purchase order system you won’t get paid without one. Make sure you get one as close to the start of the project as possible. Preferably before but that’s not always possible. Bear in mind the track record of this client in judging how far/hard to push on this.
- Terms and conditions – ask to invoice % up front
Good cashflow begins before you start working. Ask for 50% invoice up front; they can only say no. If they say they might be more inclined to say yes to 20%.
- Don’t wait until the end of the month to invoice.
Batching your monthly invoices until the end of the month will slow down your cashflow by up to 2 or maybe 3 weeks. Catch up with invoicing on a weekly basis or when projects or campaigns pass a milestone.
- Make sure they are received
A quick phone call to make sure your invoices have been received, logged and input will mean no excuses if payment is late.
- Understand who has to authorise them.
Someone, somewhere will have to agree your invoice. Maybe it’s more than one person. Find out who they are, understand how your invoice gets in front of them and onto a payment list. For smaller clients this might be just one person; for larger clients there will be system. Learn the system and use it.
- Weekly cashflow
Knowing what you’ve got to pay next week (Suppliers, tax, salaries) balanced by what you know is coming in from clients is a really useful tool to focus the mind. Who do you need to call to get the cash in?
If cashflow is tight and your cash is tied up in debtors, then there are ways to access the cash. Factoring has moved on and there are several new, more flexible cloud solutions that allow you to sell individual invoices such as marketinvoice.com. There is a cost involved but it can help to get over a temporary cash squeeze.
Always monitor your debtors. Most systems will have an aged debtor report which will take the hard work out of this. If they slip past their due date, make your normal phone calls to chase. If there is no success do you know who to call to chase? Top tip here – Finance Directors hate to be chased for invoice payments. Be polite but clear and it’s likely you’ll be added to the next payment run.
- Getting Carried Away
Just because you have cash in the bank don’t get carried away and spend it. Seems obvious but Companies house is littered with failed agencies who paid out too much in dividends, kitted out expensive property and didn’t keep enough cash in the business. Aim to keep at least 2 months’ worth of running costs as a cash buffer.
Cashflow is a lagging indicator. It shows what you have done in the past. To get a rounded view on your cashflow and what you can afford to do or not do, you need to look at a leading indicator – a forecast of your future revenue. If your forecast is down be more conservative with your spending. I have such strong views on what makes a good forecast I’m building my own – check out agencymap.io to find out more.