Any business owner knows just how deadly unmanaged cashflow issues can become. This is especially true in creative industries where agility is paramount. When the cash going out exceeds what’s coming in, it’s not just debts and expenses that creative agencies will struggle to cover, but the quality of work they can take on.

The problem is that the signals that there are cash flow issues are not always what you’d expect. Read more for the cash flow red flags, how to handle them, and the best ways to organize your finances so that you can avoid the issue altogether.

Cash Flow Issues are More Common Than You Think

There is hardly a business in existence that hasn’t faced a cash flow problem. In a 2019 Intuit survey of 3000 small businesses, 61% of participants shared that they regularly face cash flow issues, with 32% of them sometimes being left unable to pay their employees, loans, or vendors. The data on larger businesses is harder to come by but the last few years have brought some of the biggest creative businesses into the news, with Hollywood giants, Disney, AT&T, and Netflix all facing questions around debt and cash flow.

The size of a business does not protect it from the threat of limited cash flow but certainly, as smaller businesses try to expand, it can be the very thing that prevents them from taking on bigger, more lucrative projects. Expanding an agency’s client list can’t happen if the resources aren’t there to support those clients. For example, a video production company may snag a great commercial project but if it requires drone footage and they can’t afford the drone, they may be forced to turn it down simply because of cash flow.

As we come out of the pandemic, creative industries are trying to recover from the panic of big losses and make way for renewed growth. There’s also the matter of trying to maintain some level of stability through the natural ebb and flow that comes with creative work. Clients and projects are not steady bets. In order to stay strong throughout, it is crucial for businesses to have a strong grasp of their cash flow and a strategy on how to move forward. Two of the most effective ways to ensure this are:

1.     Having a cloud-based accounting solution in place that forces agencies to keep track of all transactions etc. It requires regular and accurate data entry on everything that is happening in businesses financially, with the result being a clear, trackable view of a business’s cash flow. This should also include the ability to forecast and build a larger business strategy.

2.     Having the foresight to note cash flow issues before they cripple the business.

It’s one thing to have the information on every expense and bit of income moving through your creative agency, but how do you see the red flags within all of that data?

Signs of Cash Flow Issues

The presence of cash flow issues is more insidious than people expect. Too many assume that the issue only exists when there’s no cash left in the bank, but there will be warnings long before that. Here are the major signs of impending cash flow issues for creative agency owners to take note of:

More Months Than Money

Reaching that dreaded zero on your bank account before the year is even up is perhaps the most obvious signal of a cash flow problem. If there are more months than money, something needs to change. Understanding how to fix the issue begins with tracking where it began, and why. Did it occur because of financial mismanagement, or perhaps seasonal changes in demand that weren’t accounted for?

The ability to judge what caused the problem and how best to prevent it from reoccurring has everything to do with how well a business knows itself. Having the right financial software allows business owners to track where the issue may have begun and put measures in place to avoid it in the future. For example, a headache that nearly every creative director has to face at some point is getting money out of clients. If payment is delayed, the knock-on effect on cash flow can be far-reaching. It’s one of the most typical contributors to the “more months than money problem” as it means that even though work is getting done, no money is coming in.

With the right cash management software, that pitfall can be dealt with effectively and a strategy put in place. Financial modeling would show the impact of the delayed payment and allow a creative agency to prepare a strategy to deal with it before it causes cash flow havoc.

Behind on Bills

When there’s no cash, it’s almost impossible to stay on top of the bills. Rent, electricity, and insurance “final notices” pile up and the more they do, the more impossible it seems to solve the problem. That stack of bills is a red flag that cash flow is not being managed properly.

It’s also a very common reality for small businesses. When Lemon Ad Stand, a Chicago-based creative agency, landed their biggest client, they were also faced with a 90-day payment term. Knowing that a delayed payment like that would put them behind on their bills, but not wanting to lose the client, they had to work with a lender to ease the gap.

If your agency is struggling to stay on top of bills, here are some key strategies to manage the problem:

1.    Contact Creditors and Develop a Plan

Rip the band-aid off and contact the creditors that have no doubt started calling already. Even if they haven’t yet begun to harass you, get on top of the issue. Making contact is often the part that causes the most dread. Sometimes it feels like if you ignore the creditors, the problem will go away.

Contacting the creditor forces the business to reckon with the reality of the issue, which is terrifying, but it also opens communication and allows both parties to decide on a way forward. Falling behind on bills is by no means a rare occurrence and it’s likely that if you’re willing to work with the creditor on developing a plan to pay it back, they’ll be more amenable than you expect.

2.    Negotiate Payment Terms

Creating a plan with a creditor is mainly about nailing down how and when a business will settle its bills by. For a creative agency owner, the driving factor behind these negotiations needs to be some kind of strategy around which bills need to be prioritized. The legal implications of not being able to pay employees for example are very different from being late on a gas bill.

Another aspect to consider is the relationship with the creditor. Where there’s a positive history with a vendor or service provider, it’s important to speak frankly and gauge how willing they would be to consider a flexible payment plan.  

3.    Consolidate Debt

Going into more debt to pay off your current debt may seem counter-intuitive but sometimes it’s the only way for a business to dig itself out from a cash flow crisis. Borrowing options however can vary quite considerably, and each will come with its own disadvantages. It’s generally not something to be entered into lightly or quickly.

Most lenders, especially for short-term loans, will require a business plan and a cash flow forecast to even consider a business’s viability. It’s also important to consider that a cash injection will mean very little if the fundamental issues with cash flow management aren’t dealt with in the business. It may pause the cycle for a moment but it’s highly likely that without serious intervention, the same problems will just pop up again.

4.    Seek Professional Help

There is very little substitution for the value of professional help when a creative agency gets into dire straits with debt and paying bills. This is especially true if the issues are a result of there not being adequate financial and accounting expertise in the business. In their early years, creative agencies tend to suffer the most in this area. Understandably, investment goes into the creative first but having the financial knowledge to back it up is fundamental.

Even if you have finance experts in the agency that you trust, sometimes it’s simply a matter of having fresh eyes on the situation. An outside perspective not only allows for clarity on what may have caused the bills to pile up in the first place, but how best to proceed.

Hiding Behind Credit

If you keep finding that you’re using credit cards to delay payments, leaning harder into your line of credit, or borrowing money from anyone who will give it to you, it’s time to re-evaluate. Staying on top of bills at a creative agency should not require that degree of panic and it generally points to some level of overspending.

Of course, getting more cash in the business may seem like the solution but it’s vital that attention is paid to what’s being spent and if there are any areas that could be buttoned up. It’s time to stop hiding behind that credit and create a strategy for recovery:

1.    Make a Budget

It’s a painfully obvious step to take, but reconsidering your budget is the first step to getting out from under debt. If overspending is behind your cash flow woes, this is how you’ll see it. Laying out all the essential expenditures and weighing them against the “extras” should make clear where a creative agency can cut back on spending. At the very least, sitting down to create a budget forces a rethink about what your financial priorities need to be.

2.    Spend Within Your Means

Ok, you’ve got the budget. Now it’s time to stick to it as best as possible. If there’s been a history of excessive spending, this will certainly be challenging but reigning in the business’s outgoings in line with its means is the bare minimum that can be done to improve cash flow. Scrutinize every expense and always keep your budget strategy in mind.

3.    Consolidate Your Debts to a Lower Interest Rate

Sometimes the expense that is throwing a creative agency off the most is simply high-interest rate loans. Debt consolidation and loan refinancing are two ways in which businesses can decrease the interest rate charged on their borrowing and in turn, their payments. Borrowing is a normal part of running a business, but it needs to be manageable, or it will decimate your cash flow.

Less Than 3 Months of Savings

The general rule of thumb when it comes to cash reserves is to have at least three months' worth of current operating expenses saved in the bank. Less than that makes businesses vulnerable to cash flow uses down the line. One of the most effective approaches when trying to save is to consider the 75/15/10 rule with the idea that 10% of what a business is bringing in goes into savings until at least three months of operating costs has accumulated.

A steady income is never guaranteed, especially in creative industries. Projects will vary in size and frequency and so too will an agency’s revenue stream. Having savings put aside gives the business some buffer from the inevitable cash flow crunch that a slow month or delayed client payment can cause. One of the most effective ways to understand just how much money to put aside is with accurate cash flow forecasting. This requires investing in software and expertise that can help turn your business's data into a predictive guide, but it’s worth it if you want to be better prepared for the ups and downs of running a creative agency.

Too Much Cash in the Bank

You’d think that having more than six months of savings in the bank would be a good sign for a business's cash flow, but it’s not quite as simple as that. For example, if you have 200K excess in your bank account (over and above an emergency fund), and this money is only earning 1% interest in the bank while inflation is 8-9%, your money will be worth half as much in 10 years.

With investment, a handy formula to use is the Rule of 72. Used to estimate how many years are needed to double invested money at a given annual rate of return, the formula can guide business owners on reinvestment strategies. Ultimately, however, the most important aspect to note is that simply having extra money in the bank is not adequate protection against cash flow issues. Having some savings available, as discussed, is an important buffer but if too much money is left sitting in the bank, value could be lost over time and lucrative investment opportunities missed.

A 2021 Hollywood Reporter article showed that after increasing their debt burdens in anticipation of the pandemic’s financial hit, major Hollywood executives were left with an unexpected question: what to do with all that cash in the bank. To put that into perspective, Disney ended 2019 with $6.9 billion in cash, cash equivalents, and restricted cash, but by the end of 2020 had more than double that, with $17.1 billion. Comcast experienced a similar cash boost, indicating a shift in the industry. Buying back stock, paying back debt, or increasing marketing and advertising expenditure were all options for companies faced with the issue.

The lesson implicit in all this however is that having extra cash in the bank doesn’t mean letting it sit. It needs to be used effectively so that value can grow and the business be able to benefit from it. This requires careful planning and modeling ahead of time so that the full impact of an investment can be considered. There’ll never just be one investment option available, so modeling the outcomes is vital if a business wants to get the best possible ROI.

Taking on Projects You’re Not Proud Of

When a creative director keeps finding themselves stuck with projects they’re not proud of for the sake of bringing cash in the door, it’s often a signal of larger cash flow problems. In the creative industry, you’re only as good as your last project  and constantly compromising on the quality of work you take on for the sake of income can have dire consequences on an agency’s reputation. If you’re a video production company wanting to aim for New York commercials, getting stuck in odd, quick-paying jobs could sully your portfolio and limit your chances of attracting your desired clientele.

The ”eat while you can” mentality is usually a stress reaction to not knowing what the coming months will bring. It’s entirely natural, but it’s not necessary. Financial modeling and cash flow forecasts can help businesses map out what their next few months are likely to hold, arming them with information that allows them to see the whole picture, rather than simply worrying about it. The peace of mind that it brings allows creative agencies to be more selective about the business they take on, making it easier to focus on projects that support their overall vision.

Thinking more long-term when it comes to finances empowers agencies to craft their direction more thoughtfully. As much as cash flow issues are to be avoided, it’s also important to not become too reliant on taking on compromising projects that, though they might pay, could negatively affect the business’s image and possible future earnings. Big clients will always look at who else an agency has worked with, so it’s important that the roster be as cultivated as possible. Creatives should be proud of the work they’re taking on, not dreading them every time for the sake of a quick cash injection.

Staying Clear of the Danger Zone

One of the most effective ways to stay ahead of cash flow issues is to get organized about your finances. All the issues we’ve discussed, from falling behind on bills to dealing with excess debt, can be improved by a creative agency having a better overall understanding of their finances and prospects.

Dryrun, with its financial modeling and cash management capabilities, makes all of that possible. The automated software gives businesses access to risk assessments, as well as a full-picture view of their present financial status. When the team at Wondersauce, a New York creative agency, started looking at ways to manage their cash flow as they grew their business, it was Dryrun they turned to. Wondersauce had concerns about how they could expand staff and offices, without causing a cash flow crunch.

The very first forecast they built with the platform was focused on expansion into a new office. It had to take into account present and future expenses, the state of their revenue stream, and be something that could make sense to the whole Wondersauce team. Dryrun brought that picture together so that the agency could make informed, cash-flow-friendly decisions on how best to proceed with their business.

From small businesses to multi-million dollar revenue creative agencies, Dryrun is a powerhouse tool. Not only does it empower businesses with a better idea of their day-to-day cash flow, but it provides the opportunity to model future projections so that they can grow their business and get ahead of any problems.

Book a consultation with our team at Dryrun and transform the way you manage the cash flow of your creative agency.

__

Forecast Your Cash Flow, Revenue and Profit in the Ultimate Scenario-Modelling Tool to gain confidence, clarity and insight into your business.

Dryrun ties automation with unmatched flexibility delivering clear, powerful and accurate forecasts in a fraction of the time spent in spreadsheets.

Book your DISCOVERY CALL to learn about the Dryrun advantage or start your FREE TRIAL today!

Dryrun - Focus Forward