Cash flow is the lifeblood of any business. You can’t survive without it, but with it, you can make considered commercial decisions from a place of strength.
A business generates cash by being profitable first and foremost, and then by managing its cash flow cycle.
In order to manage (an improve) the cash flow cycle, it first needs to be understood:
- How do your customers pay?
- How do you pay your suppliers?
- What is your invoicing policy?
- What are your credit control processes?
- What funding/credit facilities are in place?
Once the current processes are understood, we can work on where the opportunities to improve exist.
#1 Understand the variables
First and foremost you will need to be clear on some of the things we touched briefly on above, so really get under the skin of your agency and understand the numbers and what drives them. Make the necessary changes, review and put processes in place.
For example, your agency may operate under a retainer model. A simple yet effective change may be to start invoicing at the start of month rather than the end and to incorporate direct debit systems to receive payments.
Another example may be to review your agencies invoicing policy on projects. Splitting invoices has its benefits. Invoice a large portion upfront and a smaller portion towards the end, leaving as little as possible at risk.
#2 Build and run rolling forecasts
Now that you have the processes and policies redefined and are working effectively, the next step is to build a rolling forecast. Start by listing out all of your outgoing cash commitments. These should include tax liabilities and loan obligations.
The next step is to forecast cash receipts. Start this by listing out invoices that have been sent and plotting these along your timeline with expected dates.
When it comes to forecasting cash receipts (usually the most difficult), a good tip is to always make sure you provide a client with a clear statement of work which includes a clear billing timeline before you start on any project.
Now either on your spreadsheet or forecasting tool, you will have complete visibility of your cash position and this will aid in making better decisions.
It’s important to make sure that you’re regularly reviewing your cashflow forecasts against actual cash in the bank balance (I’d recommend this is done on a weekly basis).
#3 What’s next
Now that your cash flow forecasting is running like clockwork, you have visibility of what’s ahead. You will now be able to see when and where you can start to generate cash at a level above your target balance.
An agency should strive to hold at least three months worth of Overheads + Taxes + Loan Obligations in cash. Excess cash above that target balance is not really working hard enough for your agency. It’s dormant cash earning a minimal return in interest from the bank.
Being in this position now gives you the confidence and the opportunity to devise a tax planning strategy to mitigate your tax position as much as possible.
First and foremost I’d recommend speaking to your advisor to make sure that you are reviewing the activity of your agency and what specific reliefs you may be eligible for. Research & Development tax credits are one of the more popular schemes available but there are a number of other Creative Industry tax reliefs that can be just as lucrative:
- Animation tax relief (ATR)
- Children’s television tax relief (CTR)
- Film tax relief
- High-end television tax relief
- Video games tax relief (VGTR)
These reliefs work similarly to the R&D scheme in that you are receiving an enhanced deduction for corporation tax purposes and taxable losses can be surrendered for tax credits. Yes, that means cash in the bank!
The tax legislation is huge and the opportunities available to you to minimise your liabilities are vast.