Cash flow management tips for marketing agencies
Ian Lurie Mar 4 2011
Unless you’re some huge, international conglomerate, you have cash flow problems. If you’re a huge, international conglomerate, then you’ve traded up to ‘liquidity crises’ and lay off 500 hapless employees when you’re in trouble. I don’t have experience with that.
I do have experience with small agency cash flow. I guess these fit for any small business, but I know they work for me, and I’ve learned some hard lessons around all this:
- Cash is king. Clients will offer you equity, barter, free product, services to be named later, etc. etc.. But the city utilities company, the landlord, and the grocery store generally prefer cash. So you need to collect cash first and foremost. Barter sounds lovely, and it’s useful to a point, but you’re going to need money in the bank. Especially if you have employees.
- Get a retainer. When a client hires you, get at least 30% up front. For me, the smaller the contract, the larger the percentage. You want a $1000 consulting gig? 100% in advance, please. Unfortunately, the smaller contracts are the ones that most often end up in collections. So get a retainer payment.
- Trust, but verify. If a client doesn’t want to pay a large retainer, and says you can trust them, then suggest the use of an escrow service. These services cost money, but they’re worth it if they keep everyone happy, and get you paid. If the client won’t do that, either, then don’t trust them. They may have the best of intentions, but right now, they don’t have the money.
- Keep an artificial ‘floor’. Set a minimum amount you want in the bank. Then set that to the effective ‘zero’ for your account balance, so that you always have that buffer. Be realistic—sometimes it’s impossible to have a $50,000 buffer. But do keep a buffer. The one time you don’t will be the time one client pays late on purpose, another decides to ‘hold onto your invoices’, another fires their payables person, and the rest all go on vacation.
- Don’t treat revolving credit like cash. Banks are evil. Get used to it. If you have a line of credit to keep yourself afloat, that’s fine. But pay it off every month. If you and I charged the same interest rates as banks do on month-to-month revolving lines of credit, we’d get sent to prison.
- Stagger billing. Try billing some clients on the 1st of the month, others on the 15th. This smooths out cash flow.
- Have a collections policy. At Portent, it goes like this: Everything is due net 30. At 31+, we start calling you. At 45+, we start calling you so often you think we’re that psycho ex-girl/boyfriend. At 60+, we may turn off your web site or stop other services. At 90+, we call a lawyer. People complain we don’t give them a break and we aren’t understanding. I believe that clients should be understanding that I am running a business, I have 27 people to pay, and need to be paid for the work I do.
- Be nice. While we pursue late payors, we try to do it nicely. I tell my staff to be nice. If you don’t think they’re being nice, well, wait until it gets to 90 days and I get on the phone with you.
- Don’t rely on contracts to save you. I went to law school. I can tell you that, in the end, people can screw you with or without an ironclad contract. And if it’s over $5000, are you really going to take them to court? Not if you’re doing a cost/benefits analysis. So be sure you understand your clients. Choose them carefully.
- Remind people you exist. If there’s a big change in leadership, check in with everyone and make sure they know who you are.
- Add 50% to any salary. When you hire an employee, add 50% to their salary. That’ll give you a reasonably accurate look at how much they’re going to cost you. Otherwise, you could be in for a nasty surprise at the end of the first few months.
- Think about taxes. Oh god. The first year Portent earned a profit—1996—I didn’t account for my tax bill. I owed $15,000 at the end of the year. Luckily, I got the money and paid my tax bill on time. But it could’ve been an utter disaster. So make sure you account for your tax bill at the end of the year.
This may all sound pretty grim. It’s not. If you’re worrying about cash flow, you probably have cash flow. You’re succeeding. I break at least one of the above rules on a monthly basis. That’s OK. If you’re considering them then you’re automatically ahead of 95% of American businesses.
Oh, and never think you’re too big to fail.
Ian Lurie is CEO and founder of Portent Inc. He's recorded training for Lynda.com, writes regularly for the Portent Blog and has been published on AllThingsD, Forbes.com and TechCrunch. Ian speaks at conferences around the world, including SearchLove, MozCon, SIC and ad:Tech. Follow him on Twitter at portentint. He also just published a book about strategy for services businesses: One Trick Ponies Get Shot, available on Kindle. Read More