Solving agency cash flow issues

Published Jun 27 2024 8 minute read Last updated Jun 27 2024
agency cash flow
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  • Sean Dougherty
    Written by Sean Dougherty

    A copywriter at Funnel, Sean has more than 15 years of experience working in branding and advertising (both agency and client side). He's also a professional voice actor.

Without a healthy cash flow, businesses won’t survive — and marketing agencies are no different. 

Compared to a successful e-commerce shop or physical store with consistent sales and even greater sales around the holidays, agencies experience less predictability when it comes to cash flow. 

Whether it’s project delays or lengthy payment terms, cash flow gaps can hinder an agency's growth (and success), and these may point to a more significant underlying issue within your financial system or business model. 

Here’s what to consider as a marketing agency concerned about (or already struggling with) cash flow challenges. 

What is cash flow?

There are many financial terms in business. However, cash flow is one of the most crucial factors, especially when growing your agency. 

Cash flow refers to the net cash and cash equivalents that go in and out of a company. 

The cash you bring in is your cash inflow (revenue) the cash you spend is your cash outflow (expenses). Reviewing cash flow statements can help identify potential cash flow issues before they become critical concerns. Agencies, especially, should schedule regular reviews. Depending on the size of your agency, weekly or monthly intervals will allow you to stay on top of trends. 

During these review periods, focus on metrics like free cash flow, operating cash flow and days sales outstanding (DSO).

Recommended reading: Digital marketing budget allocation in six steps

What is positive cash flow?

While cash flow can be a complex topic (depending on the metrics you’re tracking) at its most basic, positive cash flow is when your cash inflows are higher than your outflows within a set period. So, when you have positive cash flow, more money is coming into your business than out — a sign that your agency is healthy. 

It's common for startups and high-growth agencies to spend a lot of cash in the early stages, leading to a negative cash flow where more money is spent than received. However, that needs to change at some point for sustainable growth. 

Impacts of negative cash flow 

Negative cash flow leads to financial instability and stunted growth, so you need to recognize the warning signs before poor cash flow creates issues that are hard to bounce back from. 

Here are some of the potential consequences of poorly managing cash flow:

  • Inability to expand into new markets, even if you have potential leads. You may start to rely too heavily on credit or loans, leading to a cycle of accumulating debt. You may never financially catch up if you don’t alter your strategy or implement more effective systems. 
  • Poor operational agility that hinders your ability to meet client demands without experiencing financial stress. When you’re cash-strapped, you may also be forced to cut corners you wouldn’t otherwise, impacting the quality of work you present to clients. Your agency’s reputation could take a hit that may be hard to recover from. 
  • Missed opportunities to fund training and development programs that ensure your team stays ahead of industry trends, utilizes the latest technology,. 
  • Speaking of tech, if you have negative cash flow, you won’t be able to take advantage of the latest tech innovations. For example, marketing dashboard tools allow your team members to quickly analyze and share metrics with clients and one another. 
  • Lower probability you’ll build strong relationships with vendors and debtors, affecting your ability to gain a competitive advantage. Negative cash flow can also reduce employee morale and increase turnover.
  • Not being able to build the type of monetary safety net that could save your agency during a downturn, unexpected event, or any other uncertainty that could slow or stop growth. 

While negative cash flow is something you can bounce back from, especially when caught early, cash shortages in digital agencies are caused by overspending, lost clients, or late payments. If this trend continues, your agency will struggle to stay afloat and eventually fail. 

7 causes of agency cash flow issues and how to fix them

Whether you’re a creative, SEO, digital, strategy, or other marketing agency, you likely face similar cash flow issues. As a leading agency, you must anticipate growth and churn surrounding client accounts while matching agency resources accordingly. 

Your pricing must match the market while building maximum profits. It’s a tough, high-stakes game that many agencies struggle with. However, becoming more aware of the following potential issues can make all the difference. This proactive approach will lead to more efficient operations, mindful spending and positive cash flow. 

Consider the following cash flow issues so that you can avoid them. 

1. Not tracking your cash flow 

If you’re not tracking your costs and expenses using a financial and cash flow management system, you may leak money you’re unaware of. Once you realize it, it may be too late.

You may also unknowingly be ignoring significant overhead costs. For example, when tracking your cash flow, you may notice that your rent costs are chewing into your ability to grow. Realizing this can help you pivot, perhaps toward becoming a fully remote agency. You may also want to consider contract workers or freelancers instead of hiring full-time employees. 

The solution: Invest in tools that allow you to use regular cash flow forecasting. Create a monthly cash flow forecast (ideally three months in advance). The key is automation, finding tools that produce easy-to-read graphs and charts. Data storytelling can help you immediately see if there are potential issues so that you can dig deeper. 

2. Issues collecting accounts receivables

It’s common for an agency to perform work, deliver it to the client and wait for the money they’re owed. Sure, you may have high-grossing clients, but if they don’t pay on time and you can’t pay your expenses, your cash flow will suffer.

The solution: The most obvious tip is to eliminate accounts receivable. If there is a way you can charge clients throughout the process, that is ideal. If you’re hesitant to switch things up for previous clients, implement new payment options for all new clients, such as an installment plan. 

Push for balances owed by investing in software that sends automated reminders. If a client does not respect your payment terms and passes the initial agreed-upon period, following up can help move this process along. Make it clear in the terms that interest will be collected on the unpaid balance. 

If you have yet to receive the final payment, hold something of value, such as creative assets, website content, branding strategy or other final deliverables. Of course, this is a last resort as you’ll want to foster positive client relationships. Be proactive so it doesn’t get to this point. For example, offer an early-payment discount (e.g., 2/15 net 30).

3. Loss of a large client or retainer

As an agency, you want to grow — and fast. However, if you take on every business opportunity without the proper bandwidth, you could hinder the relationship you have with existing clients. You could lose clients you’ve relied on if you spread yourself too thin and do not offer quality work. 

If this happens repeatedly, a negative cash flow crisis with no way to recover could follow — especially if your margins are already tight and you don’t have a cash reserve. 

In the worst-case scenario, for whatever internal or external reason, you may lose a client that you’re overly dependent on. Take, for example, an agency with one client providing 80% of the work. If they cut back and pause your contract, you will have no way to diversify your revenue streams quickly enough. 

The solution: If you start with one major client, leverage their account to grow your client base. Invest in social campaigns, the latest tech and lead generation. 

Diversifying your receivables can achieve healthier, more sustainable long-term growth while reducing risk.

4. Growing your agency too quickly

Growth is great, but not if that growth is uncontrolled. Yes, the more signed contracts you get, the more revenue you have. However, you must increase expenses, including staffing costs, to continue that growth. 

If you begin to hire more people to meet the anticipated demand but don’t grow as quickly as you initially thought, you may experience a cash flow crunch. Paying for today’s expenses to make tomorrow’s revenue is a balancing act that requires insight.

The solution: Try to align your invoicing schedules so that the expenses you pay out better coincide with the money coming in. For example, if you pay invoices as soon as they come in but allow your clients 30 days to pay, there could be gaps. If the payment terms you’ve been given allow, schedule one or two of your expenses so that payment dates match the money coming in more closely. 

Look at possible lending options before you need them. If you want to scale quickly, a short-term loan can be a good idea, especially if you know when certain clients will pay. If you need long-term funding options, consider finding an investor or a line of credit. However, if you are taking out loans, ensure you have the systems to grow successfully. 

5. Knock-on effects of seasonality

There will always be slower periods throughout the year — usually in the summer months and around the holiday weeks in December. These seasonality cycles can create cash flow issues, especially since most of your expenses will remain consistent regardless of these cycles. 

The solution: Planning ahead for slower periods can ensure your employees are paid and the lights stay on. Monitoring resource allocation can help you identify any significant imbalances early on. Lean on monitoring tools to compare revenue year over year, focusing specifically on periods when revenue drops. 

If you know when you’ll have slower periods, use that time to diversify or expand on current strategies. Has your agency wanted to move into a new market? If so, use these periods to focus on growth opportunities, implementing systems so that when business is booming again, you’re set up to make diversified, sustainable revenue streams. 

Offer specials during slow periods to secure funding to expand. For example, you could run a holiday special, offering new package options for those who purchase in December, which will be implemented in January. 

6. Scope creep and endless revisions

Scope creep can be a nightmare for agencies, especially when cash flow is a concern. 

For example, suppose your agency agreed to create a 30-page report for a predetermined cost, but the client keeps adding more pages or unexpected requirements that you didn’t initially factor into the cost. In that case, you can find yourself in a tough position. If you agree to make them happy, you could eat into your profits and negatively affect your cash flow. 

The solution: Effective communication is crucial to avoid scope creep. Before taking on a project, ensure your agency fully understands the client’s expectations. Go over every project in detail, whether you’re dealing with a long-standing client or a new one. 

7. Poor client retention & high acquisition costs

For marketing agencies, client churn is a significant issue. Without steady clients you can rely on, you can’t comfortably scale — and if you try, without the funding, your agency could crash and burn. 

If you do have a lot of clients leaving, consider some of the most common causes, including:

  • Poor communication 
  • A lack of trust and transparency 
  • Poor or inconsistent results 

The solution: Instead of saying yes to every client without the right systems or resources, choose clients who best align with your agency. Effective communication is critical, so you’ll want to prioritize clients who share your vision. Work together to develop long-term goals instead of just month-by-month overviews. This strategy can help hold certain clients longer. 

Ensure you treat every client the same way regarding certain agency best practices. Regular check-ins, prompt responses and metrics that showcase consistent results are all great tactics for keeping clients. 

Related: Customer cohort analysis explained

Tips to regain positive cash flow

If you’re already dealing with cash flow issues and want to turn things around, it’s never too late to pivot. Here are some tips to improve:

  • Develop a more streamlined billing process, setting up systems that make invoicing and client communication a breeze. 
  • Lean on client retainers, especially for new clients. A small upfront fee can help you avoid cash flow issues. 
  • Start diversifying your services, adding options for quicker turnaround. For example, if you specialize in building full websites, why not offer add-on services, like SEO-focused blog posts? In doing so, you may be able to redevelop your pricing strategy to receive payments faster and more frequently. 
  • Constantly monitor cash flow and other key metrics. Look for red flags that may lead to future cash flow issues, like billing increases or rising interest rates. You should also optimize your business performance dashboard to increase ROI, ROAS and other crucial key performance indicators (KPIs) to support healthier ongoing cash flow. 

Funnel can help optimize your dashboard

Whether your goal is to improve data quality or eliminate irrelevant data (so that you can focus more on financial metrics), Funnel can help you curate your data set and optimize your dashboard so that you’re tracking the KPIs that matter most to you — and those that will help boost and solve agency cash issues. 

Learn more about Funnel Dashboards today!

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