Ways to Effectively Track and Manage Agency Cashflow

We’ve worked with hundreds of creative agencies over the last 2 decades and no matter how big or boutique, almost all have struggled to effectively manage their cashflow. The real concern is having to pay your team at the end of the month, while your clients keep you hanging for much longer. This sore spot has become even more pronounced in the early half of 2020 as agencies navigate the tumultuous storm that is COVID-19.

RelatedCOVID-19 does not have to equal lay-offs

Top recommendations for smart cashflow management

Our close relationship with creative agencies has enabled us to collect some truly valuable intel on gaps in cash flow management and how to close them. Here are 3 smart tips that you can implement at your agency immediately:

1. Know your cash-on-hand

Slower client payments are understandable during the current economic climate; however, this should not become the norm. To ensure this doesn’t happen, you need to know your accessibility to cash which will ultimately indicate if and how well you can sustain your agency.

There is often ambiguity around how far out to project cash flow. We recommend following a simple projection grid of 30-60-90 days including corresponding expenses for the same period. As for frequency, a monthly analysis is a good place to start; weekly, if times are uncertain.

Your cash flow projection should include everything from what’s in your checking account to savings, investments, and petty cash. To make your projection more robust we recommend chalking out a monthly cashflow goal such as maintaining a base of 2+ months’ worth of cash on hand. For smaller agencies that might have a client that is worth over 25% of Adjusted Gross Income, the base cash-on-hand goal should be at least 4+ months. A clearly mapped out goal such as this one will keep you from overspending or misspending.

2. Track AR Aging

Aside from keeping a check on your agency’s financial health, projecting cash flow for 30-60-90 days can keep you from falling into the deep, dark, dreaded hole of WRITE-OFFS.
Having a pulse on cash flow lets you track Accounts Receivable aging or in other words how far your client is from making their payments.

It is common to look at AR by how old they are. Typically, it is normal to see payments not coming in within 30 days of their due date, especially when businesses find themselves in the midst of an economic slowdown. You should be concerned however, when AR aging creeps to 31-60 days of overdue invoice. This is the time to keep tabs on overdue payments on a weekly, if not daily, basis. What you want to completely avoid is the 61-90 days period- this is when invoices have the potential to become write-offs, and therefore, is a serious cause for concern.

By leveraging Function Point’s QuickBooks Integration, FP’s customers can track AR aging quickly and accurately.
This is particularly helpful for agency operations personnel, such as AEs and PMs who can assist their finance teams chase and close pending payments. More importantly, QuickBooks’ integration keeps communication open in real-time between departments– PMs and AEs can easily tell clients which invoices are overdue without wasting valuable resources on slow-paying or unprofitable customers.

3. Clearly communicate expectations

An important aspect of managing your cash is managing communication with those who are handling it. Here’s what we mean:

Always ask for a deposit
Get your servicing team to ensure that they always ask clients for a deposit before starting a new project. Make this a non-negotiable in most instances so a reliable process is put in place to get at least partially paid upfront, every time. This is part of the larger exercise of setting clear expectations with clients right from the word ‘go’.

Prioritize client jobs
Encourage your teams to identify which clients are reliable and can positively meet payments vs. those whose projects take up umpteen hours only to see untimely or no payments. Once identified, prioritize client jobs accordingly so your team isn’t wasting crucial billable hours on unprofitable jobs. Check out the Function Point Blog for more resources on how you can boost agency profitability and productivity.

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