It’s safe to say that every agency owner that we speak to here at MAP has a revenue target for their business. They’ll have thought through what they want their top line revenue to be over a period of time and that’s what they’ll be aiming for.
Most will have a net profit target too, which is great because it encourages you to be efficient with your resources and delivers a return for you as the owner.
Very few have a cash target.
That’s where we believe most agency owners are missing a trick. If you’re very clear on what you want to have in the bank one, two and three years from now, it encourages a number of key outcomes:
#1 Your financial systems are watertight
If you’re going to hit that cash target it’s critical to have mapped out how you move a prospect from showing interest in working with you to putting the cash in your bank. What does the sales process look like to get a compelling proposal in front of them?
When they’ve signed the proposal, do you have the correct milestones in place to receive a deposit up front and leave only a small percentage until the end of the project?
Are those milestones completely under your control? Finally, when you’ve raised an invoice, what credit control systems do you have in place to make sure they pay on time? The number one sign of a happy customer is prompt payment.
Only when you have visibility of the entire financial system can you continuously improve it and have the confidence that you’re minimising any drop-offs along the way.
#2 It forces you to be profitable
No matter how good you are at the aforementioned best practices for generating cash, they will only get you so far. Your agency has to be generating a profit in the first place for the end result to be a healthy bank balance.
The first step in planning what that profit figure needs to be is always to review past performance – how have you done at turning profit into cash in previous years?
Based on what you know of your financial systems, how much can you expect to be tied up in amounts owed by customers or work in progress? From there you can work out that if you want £200k in the bank, you might need to generate £250k in profit.
If you have a focus on cash, it means you have to have a focus on profit.
#3 You can weather any storms
The nature of project work is that for most agencies there will always be peaks and troughs in revenue. When the studio is busy it can be very easy to become absorbed in the delivery of those projects and allow your new business activity to wane.
Every agency is different but it’s not unusual for new clients and projects to take 6 months to convert so you can see where the issue arises.
With a largely fixed cost base in your people, you’ll swing into losses quickly and this is where having cash reserves can be invaluable. It means you can still make the right decisions when it comes to what projects to bring in, and you don’t have to start cutting costs too quickly and letting people go which could also stump your recovery.
#4 You’re flexible and poised for growth
Finally, it means you’re well positioned to make the most of any opportunities that are out there. In today’s fast-moving digital world it can be a huge advantage to be able to bring in new technology or quickly pivot the business and begin offering a new service.
It could be an investment in equipment, people, or a specific marketing campaign to get in front of your target market, but if you have the cash reserves available to do that it leaves you one step ahead of the competition who may need to explore funding.
Setting goals for cash and profit and planning our your financial systems are all part of our MAPPING service. Read more here.