Retained work is the lifeblood of any agency. Monthly retainers might not be particularly exciting in terms of varied work but they help agency owners to sleep at night knowing that part of their monthly overhead costs is covered by contracted work. Most owners would love their retainers to cover their monthly overhead costs, however, in reality, most agencies are working at between 30-50% retained work with the balance coming from projects.
The Project Problem
So with project work so heavily relied upon the cash flow constraints are obvious. You agree on milestones, you complete these milestones (often with delays outside your control), you invoice the client and you get paid a number of days later. In the timeframe between doing the work and getting paid you’re out of pocket. You need to pay staff & other overheads and you’re sweating on the money coming in. Crazy!
It doesn’t have to be this way! The key to your cash flow worries lies in Deferred Revenue. Simply put, Deferred Revenue is the value you’ve billed to clients in advance of actually doing the work (also known as pro-forma or up-front billing). It’s how effective you are at staying one step ahead of your delivery schedules. Whether it’s billing part of a project up front, billing a project milestone ahead of working on it or both (aka cash flow heaven), you’re ensuring that your financial needs are being put right up there alongside the need to do a fantastic job for the client.
Get Your Team Thinking Commercially
Getting your sales team to understand the importance of Deferred Revenue is absolutely essential to making it happen. Target them on getting sign off on projects with up-front billing included and report on how they’ve done. Work on different techniques to help the client understand why you need timely payments and keep your delivery team connected with progress on payments through effective account management.
At My Accountancy Place, we go beyond the compliance and help you to create accurate forecasts to predict revenue, profit and cash. Get in touch here.