Let’s make no mistake about it – a business requires cash to succeed. It’s all about cash. It has to be. You’ve heard it before… “Turnover is vanity, profit is sanity but cash is reality.”
As a caveat up front, I’m not an accountant and I’ve not considered everything in this post. It’s purpose is to share my experience and my thoughts, not to serve as proper financial education.
In the winter of 2012, we hit a wall. As a four-person agency, we were making sales and were delivering great work, but had no cash to expand the team. And we desperately needed to – there were projects queuing up.
Our average debtor days had just topped 75 days AND we were invoicing 30 days in arrears. That’s a long time waiting to get paid!
In addition to having a huge advantage over your competitors, some of the benefits of getting paid sooner rather than later are really quite convincing, I think you’ll agree:
- You can stay in business
- You can pay your team
- You can grow your team
It was around November 2012 that we decided to change. After assessing the risks, we looked for solutions that would counteract the position that we were in and the danger ahead. We decided to implement direct debit payments, and brought every client forward to advanced invoicing, reducing terms to zero days, or payment on receipt.
This was to be a mandatory change, which meant we risked potentially ruffling up a few feathers. I find it intriguing when business owners let their natural character rule over reason when it comes to business – being assertive doesn’t mean that you’re not a nice person. This is the lifeblood of your business, and there is little room for pleasantries. This doesn’t mean you have to be aggressive either. With any change, make sure you plan out exactly what is going to happen and communicate this with your client in advance.
Don’t get me wrong; implementing something like Direct Debit (retrospectively) AND reducing payment terms at the same time is a tough decision to make. Lots of questions ran through my head – will they be angry? Will they leave us? In my experience I find that if you do good work and you’re honest with your clients, they’ll understand. It’s an enormous cliché but it’s entirely true.
With anything money-related, a fraction of clients will ask for special arrangements particularly if their payment processes are more complex. However, if we go by the 80/20 rule, then it’s still in your best interests to have the majority of your clients paying you on time on an agreed date. It seems crazy to me that this is seen as anything other than fair and sensible. The 20% (normally your best clients who pay on time) can be left to continue as they were. If anything needs attention, you can attribute more time to each case, knowing that you’ve saved a tonne of time overall.
Over the next three months our debtor days plummeted and our cash reserves grew. I think the image above speaks for itself, and highlights how making a decision, and taking action, turned things around and gave us the platform to grow. As an agency owner, it’s your job to make those decisions, no matter how difficult or scary they can seem. What’s scarier is thinking about what might happen if you fail to act.
We worked like dogs that Christmas, but through Q1 of 2013 we hired four new team members and took the next step as an agency. We talk about step-change deals being the key to growth, but this was a step-change decision and was equally, if not more, important.
Above is a graph showing our cash position from 2010-2013. You can see below that shortly after (March, June, July) we implemented the changes, our cash on hand spiked, allowing us to make better, faster, and more focused decisions when it came to growing the agency.
Here are 5 tips to help your agency grow:
- Implement direct debit or standing order for payments under a certain value. Not only does this create predictable cash flow, but also it saves a bucket load of time and cost on credit control. You’re a startup, not a bank. Don’t feel the need to give anybody credit, because I guarantee that most won’t extend the same gesture to you in times of need. Don’t worry about the reaction – all you’re asking is to be paid fairly and on time for your work. So what if you lose a late-paying client – you were practically working for free in the first place. That time can be spent on another client who is willing to value your services.
- Bring someone else in to manage credit control and have a process that you share with your clients before engaging them for work. Agency work is beautiful and stressful all at the same time. We rely on strong and open relationships with clients to get to the end result. This is made so much harder when you have to play Jekyll and Hyde – one moment laughing together and dreaming up new ideas, and the next moment mumbling the words from a recent Rihanna song under your breath, before picking up the phone to talk money. Get it off your desk – the relationships are too important.
- The process part is crucial, and the transparency that goes with it. The objective is to remove all emotion. If your process is to send a final demand letter after payment is seven days late, then that’s your process. You’re not being unfair or unreasonable; you’re simply following your process. Just make sure you follow it.
- You can always be kind and accommodate isolated situations, but let those situations be the exception and not the rule. “But my client will leave…” Great! They weren’t paying you anyway. But you did lose time and money whilst building up unnecessary stress at the same time. Plus, it doesn’t change the fact that you have a duty to ensure that your own team and suppliers get paid.
- Your good clients (you know, the ones who pay you) are counting on you to do great work for them. Get cash in fast, so that you can focus on doing better work, expanding your team and not worrying about how to pay the bills. You’re building an agency to be the best that it can be, and that needs your full attention.
I’ve come to realise that building an agency comes with a lot of fluff that can blindside you from the reality:
Cash is the one thing that will keep your agency in business. It’s really that simple.
This series of posts are a summary of my experiences and learning over five years of building up Zest Digital, a fast-growth digital marketing agency based in Oxford. If you know somebody who might benefit from this post, please feel free to share it.