According to the U.S. Bank, 82% of small businesses fail due to cash flow management issues. While marketing agencies are lucky to shoulder less expenses than many other types of businesses, they are not immune to the impacts of poor cash flow. As such, it’s important to take action to consistently maintain a stable marketing agency cash flow that both matches up with your burn rate and leaves some free cash flow available in order to help you scale up.
What is cash flow and if I’m profitable, why does it matter?
One of the reasons that so many businesses struggle with cash flow is that it can be easy to ignore it if your profit margin is pretty good. Don’t be fooled – cash flow is actually MUCH more important than profits when it comes to the sustainability of your business! The reason cash flow is important is because it determines your ability to cover expenses if and when they happen. For this reason, there can be a mismatch between good cash flow and consistent profits. Let us explain.
Let’s say that your business makes $20,000 per month and you bill some recurring clients on the first of the month for a total of $15,000. For this example, let’s assume that the other $5,000 per month is billed through invoice.
Now, let’s say you have some employees (possibly including yourself) who are on payroll, and you need $14,000 per month to cover your payroll on the 5th of the month. You also have some recurring expenses in the amount of $1,500 that must be paid by the 5th. The total of your expenses each month that must be paid by the 5th is $15,500 but only $15,000 of your monthly income is coming in on a consistent basis. See where things can get messy?
The truth is, even the most profitable businesses can really struggle with getting behind on bills or making payroll if the timing isn’t just right. Luckily, you found this blog full of great tips to help you avoid that fate!
How to Achieve Sustainable Cash Flow for Your Marketing Agency
Maintaining stable cash flow comes down to a few different factors. The three main factors that impact your cash flow the most are how quick and reliable your accounts receivable is, how much money you have in savings or as a line of credit, and how much bargaining power you have over your bills and expenses. Let’s take a look at each of these factors.
How to Manage Your Accounts Receivable for Positive Cash Flow
In the example mentioned above, slow accounts receivable was the primary culprit in this cash flow crime! There are a few different things that slow your AR down. Here are the most common:
- Failing to bill clients on time
- Late payments by clients
- Slow payment processor
- Failure to follow up on late invoices
- Not enough invoice reminders leading up to the due date
If you struggle with slow AR, fixing any of the above problems will result in an instant improvement in your business!
Access to Free Cash Flow or a Business Line of Credit
The most successful way to solve cash flow issues is to simply have more cash. If you’re making more than you’re spending, the best thing you can do is leave that money in your business checking or savings account for a time when cash flow isn’t going so hot. In the event that your burn rate is a little tighter, you might also consider a business line of credit that you can tap into in the event that cash flow is slow. If you do this, just make sure you are responsible about paying it back immediately. Never spend more than the value of your current invoices, and don’t leave a balance at the end of the month. Otherwise, you could end up with even bigger cash flow issues by adding more expenses to your plate in the form of debt repayment.
Negotiating Your Bills for Better Cash Flow
The third strategy we like to employ often is renegotiating bill payments to better match your business. In the example above, the business owner could have easily covered their payroll expenses if their other bills hadn’t been due at the same time, or if their payroll schedule was more optimized. Considering bi-weekly payroll rather than monthly or re-negotiating bill payment deadlines can make a world of difference when it comes to your cash flow!
The Best Strategy for Improving Cash Flow is Cash Flow Forecasting
These strategies are all great solutions to your cash flow problems, but they don’t really help you forecast how your cash flow will play out as you grow. If you truly want to achieve great cash flow while scaling rapidly, investing in cash flow forecasting is the best decision you can make. Cash flow forecasting allows you to strategize your next steps based on solid, historical data you already have for your business.
Interested in learning more about how we can help improve your cash flow? Schedule a free discovery call today!