Cash Flow

3 Steps To Gaining 12 Weeks of Certainty On Your Financial Position

By December 13th, 2019 No Comments

In a project-based agency, 12 weeks of certainty is about the best you can hope for. Three months is about the limit of true visibility you can have when it comes to your projected financial performance.

It can make being the business owner an uneasy place to be, with the constant pressure of having to win the next client or project always on your mind. As you grow the business it doesn’t become any easier, all it means is that you’ve committed to a bigger set of fixed overheads that don’t run in line with the inconsistent nature of your revenue. 

If you have a few troublesome projects or new business has slowed down, your runway will be even shorter than that. When that’s the case, it’s critical to have the right forecasting in place to know exactly what needs to happen and when over that 12 week period.

The better visibility you have, the more confidence you can have that you’re focusing on the right areas to get through the difficult times. Below I talk through the three tools that we at MAP implement in agencies to gain that clarity.  

#1 Revenue Forecast

First up is your monthly revenue forecast. This is a live view of only the confirmed projects and retainers that you have in the agency. The important distinction to make is that the forecast is based on revenue, not sales. Revenue means that for it to be recognised in a month, the team has to have delivered the work.

As an example – if you win a £60k project and it is estimated to be delivered evenly over July, August and September, you would recognise £20k per month. It matters because it means that your P&L is a genuine view of the revenue and the costs that match in that month and is not skewed by the timing of when you raise your sales invoices. It means that your margins and break-even point are genuine, and other key metrics such as Staff Costs % of Revenue are accurate and can give the insights that we need.

What the revenue forecast then gives you is visibility of any shortfall against your targets. I would suggest comparing to three key numbers:

  • Breakeven – what is the minimum revenue we need to hit in order to cover our costs and breakeven?
  • Budget – based on our financial targets for the year, what monthly revenue are we aiming for to make our desired profit margin?
  • Capacity – with the team we currently have, what is the maximum amount of work we can deliver each month?

As with every metric, have one person in the business with full ownership and accountability for it. There is absolutely no harm in that being the business owner or Managing Director, especially in turbulent times. No one cares as much or is as passionate about the success of the business as you.

#2 Pipeline Forecast 

Once you know the shortfall of confirmed work against your targets, the Pipeline Forecast comes in to give you and the team visibility of what opportunities you have to make up the gap. Base it on the same format as above and estimate the expected start date and duration of the project so that you can see how the confirmed + pipeline compares to breakeven, budget and capacity.

As you continue to collate this data you’ll start to have a better understanding of what the numbers mean and what you need to see in the pipeline to be reassured that you’re on track. A good starting point is to take the shortfall, double it, and then look to have that amount of opportunities in the pipeline for any given month. What then varies from agency to agency is the conversion rate and turnaround times, so make sure to spend time working out what applies to you.

Both Revenue and Pipeline forecasting work best when factored into a weekly routine and you’re creating a pulse throughout the business. Our top tip is to set up a 30-minute weekly sales meeting where the team get together and update the Pipeline Forecast with actuals, projected and the actions for next week. Agreeing on the actions and using the meeting to hold everyone accountable is invaluable.

#3 Cash Flow Forecast

Finally, and the most important thing in any business, is your Cash Flow Forecast. Winning projects and delivering them is very different from generating cash. What matters here is your process for generating cash on each individual project, and keeping each in a positive cash flow cycle. Map out your way of doing things – what level of deposit do we ask for before we start work, what are the milestones we work to, what are our credit control processes when the invoice has been raised.

Where the Cash Flow Forecast comes in is to give you visibility of the weekly movement of cash in and out of the business. Start with factoring in all overheads, including payroll. In an agency, the costs are relatively predictable and the main variance comes from Direct Costs and the use of Freelancers. Next up, factor in any other cash commitments you may have – VAT, PAYE, a loan or HP repayments. Finally, drop in your current Receivables list and add each amount into the week in which you believe they will pay you.

I would then leave it at that and keep it worst case, only factoring in any invoices that have already been sent to the client. What you then have is visibility of the expected closing cash balance each week and how that compares to your available cash. In a similar exercise to revenue, you can then look at what ongoing projects and pipeline you have that is going to bring additional cash in, and when it needs to happen. Everything fits together as you use this information to prompt action in the weekly sales meeting.

You’ll notice that when your back is against the wall and the cash flow forecast is looking tight, you’re really on the ball when it comes to generating cash. The most successful business owners that we work with continue applying these principles even when not in that position. They continue improving their credit control, they continue asking for favorable terms with suppliers. It’s one of the reasons they are where they are.

As above, look to build a weekly routine into your agency to create the pulse and help you keep on top of everything. Ask your Studio Manager to update the cash flow forecast every Monday morning and report back to you on the state of play. Similar to the Pipeline Forecast, it’s also a means of prompting actions – which clients are we going to make sure to pay us this week, which invoices are we going to send out, etc.