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Managing Cash Flow Issues in a Creative Agency

Managing Cash Flow Issues in a Creative Agency

One of the things that business owners
often struggle with is cash flow. Saying that a business is having cash flow
problems is kind of like saying that a car won’t run. There’s an underlying
issue that is really important to know about in order to determine what
the real problem is. So for cars not running it could be that it doesn’t have
any gas, it could be that the tires are all flat, it could be that the engine is messed up,
it could be that it needs a new battery, There’s a whole list of things that
could cause a car not to run. Same thing with a business. When it comes to cash flow,
there’s a whole list of things that can cause cash flow problems for a business.
We’re going to talk about some of those. So one of the things that can cause cash
flow problems in a business is related to collections and accounts receivable, Most businesses
have accounts receivable to some extent, and most businesses that have accounts receivable
run into accounts receivable problems at some point in the life of their business.
The problem with accounts receivable is generally finding, or is generally
having a client or customer who won’t pay their accounts receivable. So there’s
a couple of ways that you can manage accounts receivable or just manage that
process to make sure that customers are paying for what you’re delivering to
them. The first thing that is kind of the easiest way to do that, if it’s possible, is
just get rid of accounts receivable completely. Figure out a way
in business to charge customers either throughout the process or up
front for the service that you’re providing. Most business owners are
scared to do that, and it may not be something that you need to do, that you
can change overnight but it’s something that you can start doing with
new clients, and actually have them pay up front for the service so that
there never is an account receivable for the client. If you have accounts
receivable and you’re having trouble collecting on those you can work with a
collection agency, you can have somebody internally who you make the champion of
going and contacting these clients. Another thing that I would recommend
is, if you’re going to have accounts receivable, make sure that you’re always
retaining something that would be of value to that client until
you get the final payment in. So in the creative agency world,
the website example, if you’re building a website for a client,
make sure that there’s something that you’re retaining it’s going to be key
for them to be able to use that website until you get that final payment from
them. Cash flow problems in a business are are often caused by emotional
decision-making and business is a very emotional thing, We certainly understand
that, and there’s certainly decisions in business that are okay to be made based
on some emotion. But it can also get a business owner into trouble if they’re
making decisions based on a feeling rather than facts, in a situation. It can end up causing trouble.
One of the ways it can cause trouble is in cash flow. If a business owner is buying something based
on emotion or hiring based on emotion without really understanding the cash
flow of their business it can cause cash flow crunches. So there’s a real simple
way to avoid having those kinds of problems, and it’s simply to run a
projection. To know how much cash you’re gonna have in ten to twelve
weeks is a really easy way to help a business owner avoid making those
emotional decisions. It’ll help them to see how much cash they will have.
It’ll also help them to understand, hey, if I go out and hire this new person
or buy this piece of equipment is that going to be really detrimental to my cash
flow? Is that gonna make it so I’m not able to meet payroll in the next five
weeks? Something like that. So a simple projection, it’s not something that needs
to take a lot of time, it’s not even something that the business owner needs
to do. It’s something that an accountant can certainly do for the business owner.
But it can provide a significant amount of visibility and also really help a
business owner manage the risk of running into future cash flow problems.
OK, the next area we’ll talk about that can lead to cash flow problems is debt,
Or another way of saying that is is paying for past mistakes. Most of the
time in a creative agency, because there’s not large pieces of equipment or
buildings or things like that. the business can run without much debt.
And so, when there’s situations where a creative agency does have debt,
sometimes it can be a result of things in the past that have happened. But the
the problem with having debt. or the way that leads to cash flow problems. is
this idea that you’ve got this amount of money that needs to be paid back each
month. But it’s not a tax deduction and it’s not something that you can
really do anything about. So if you’ve got debt from the past, you have to
continue paying that debt off and there’s not a lot of ways to really get
out of that. The other thing that business owners don’t really think about
when it comes to paying debt back is kind of an interesting area,
is this idea that in order to pay back debt, you’re
paying back debt with after-tax dollars. So if you have a $1,000 a month
debt payment and your business tax rate is 25% for a nice round number, you’ve
actually got to make more like $1,300 in profit in order to pay back that
$1,000 in debt. Because $300 of it,s going to go to taxes and then the other
$1,000 is going to go to paying off the debt. So when you take on debt, it’s not
always a bad thing in business and it can be something that’s really useful in
fueling the growth of a business very quickly. But when you are taking on debt,
it’s important to just be aware of how that will affect future cash flow. And
again, a simple projection will help you to understand here’s how much cash is
coming in each month here’s how much cash is going out. Making sure that
you’re factoring in those debt payments that are required each month. So debt is
something in a business that is not always necessarily a bad thing. It can be
in that it can be a drain on cash flow, it can create situations where
business owner can’t expand as quickly as they want to because they have
to pay off past debts, but debt can be a good thing as well if it’s used
to expand the business in a way that helps the business grow and accomplish
their mission more quickly. So to that end, when a business owner is taking on debt, there are good and bad ways to
do that, or better and worse ways, I guess I would say, to do that. One thing that
that I would certainly recommend is take your time. The faster you
need the money, the more expensive it’s gonna be. So if you’re
going out and getting a loan from a cabbage or one of those
PayPal loans are very expensive as well. Those types of
loans are charging very high interest rates, almost at the same level as what a
credit card would be charging. In some situations you’re even better to
put some money just on a credit card instead of going with one of those
types of loans. Certainly a local bank with a line of credit. They’re going to make
you go through a full credit application process, but you’re gonna be able to get
a much lower interest rate and most likely a much longer payback as well for
something like that. So just be aware that if you do need to take on debt for
the business, the more you can plan in advance for that, the better the debt
will be that you’re able to get a hold of. Another area that can cause cash
flow problems, it’s a little less common and probably a little less thought of as
causing cash flow problems, is uncontrolled growth in a business. And
what I mean by that is that a business, especially in a startup environment,
there might be a lot of hype around the business, and things start
growing very quickly in revenues shooting up, and the business owners
are having to ramp up extremely quickly on the expense side of things as well,
and they’re hiring new people and they’re running these projections,
you know we grew 30% last year, we’re expecting 30% this year or next
year, or even numbers much larger than that. Maybe we grew a hundred percent
last year and we expect to be able to do that for the next five years, and in
order to sustain that type of growth the business owner has to
hire in advance of really needing the employees. And what happens there is that
if the growth trend drops off, even just a little bit, it can end up causing a
very quick cash flow crunch in the business because the business owners are
really fueling a lot of the expenses, they’re paying for a lot of the
expenses of today with tomorrow’s revenue, and that ends up putting them in
a tough situation if tomorrow’s revenue ends up being even just a little bit
lower than what they were projecting it to be in the first place, One of the
biggest reasons that we see business owners dealing with cash flow problems
or cash flow crunches goes back to simply looking at business profitability,
So at a very basic level, if a business is profitable month over month over
month, and the business owner is not pulling all of the profits out of the
business, there with few exceptions will not be cash flow problems in that
business. The opposite of that is one of two things. Either a business is not
profitable, and that’s just simply where a business is spending more than what
they’re making over a given period of time, or a business is profitable but the
business owner is pulling more money out of the business than what the profits
are. So simple ways to avoid that problem: One, make sure that the business is
profitable. And that goes back to just looking at exactly how much money the
business is making each month and, as a business owner, making sure you
understand, “How much money did my business truly earn this month? Was there
a profit? Was there a loss? What’s that bottom-line number for the business this
month?” The second thing there is to look at how
much money is being pulled out of the business. There’s different tax
strategies and how a business owner salaries set up and how they take draws
out of a business, and those things are all important, but that has to play into
the cash flow as well. So if a business made ten thousand dollars profit one
month and the business owner pulled out twelve thousand, it’s not hard to see how
in a couple of months, a business could start to run out of cash. So there’s
things that can be done to make sure that, one, the business is
profitable, and two, if and when the business is profitable,
hopefully all the time, that the business owner is not pulling
too much money out of the business. A simple formula that I’ve used, that I
personally use for my business and I’ve encouraged some other business
owners to use, is to look at the business profit and take out any debt payments
that you have. So let’s say your business made $10,000 in profit and
you have $2,000 that you have to pay off on some past debt, so
reduce your business profit by that number. So you’ve got $8,000
left. Have the business owner be disciplined to only pull half of that
number out of the business, so of that $8,000, take $4,000 out and
spend it on whatever you want, use that for personal money however, you want.
Leave the other $4,000 sit in the business. There’s two reasons to leave
that sit in the business: one, to pay taxes with. So when it comes time for
taxes and you’ve got the tax bills due, use that money that’s been accumulating
to pay your tax bill. The other thing is as an emergency fund, a little bit of an
emergency fund for the business, so that if you do have that downturn in revenue
for a month or two, you’re able to hang on to the key employees, you’re able to
continue paying your rent and other overhead expenses. You’ll start to
build up a little bit of a buffer there. But if you follow that simple formula
and the business is profitable, it’s a great way to ensure that you’re not going to run
into any cash flow problems with your business.

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