There is an old adage that ‘cash is king’. In the age of credit it may seem an anachronism but now, more than ever, it is true.
Despite it forever being on everyone’s list of business problems, mine included, cash flow is only really your ability to manage the amount of money coming in against the amount being paid out. Understanding that simple truth, then measuring and managing cash flow is how we learn to live with it.
At times we all want to hide under the sheets and ignore our cash flow, but doing so can sink even the sturdiest company. There are plenty of stories where a company’s business has been good, delivering projects to very happy clients, but because they haven’t been sending out or chasing up invoices on time, they have gone bust. On paper they may have been profitable but their bank was not prepared to extend a loan. While you might trust your clients, the bank probably won’t.
Unfortunately for most creative people, there is a tendency to see the whole area of cash flow as secondary to actual work and, quite frankly, a boring headache. However, managing cash flow is far less of a pain than ceasing to trade.
As a way of running from the issue, many are tempted by factoring. Factoring is where a bank will pay you a percentage of the invoice and charge you high interest until they are paid by your client. I have so often seen businesses go down this road and for it all to end in bankruptcy. This has often been because the reason clients aren’t paying is because they aren’t really happy, and having a bank in to factor your invoices probably isn’t going to change that!
So there are some very simple principles to observe regarding cash flow. To start with, at the beginning of a project make it a condition with the client that you will bill on a monthly and intermediate basis, whatever the stage of the project. They should accept this principle as it is common practice and if they don’t, be suspicious.
It may seem obvious, but I have always fixed payment terms at 30 days. This is perfectly normal and I make it a priority to have those terms bold and upfront on each and every client invoice. If a client doesn’t pay on time I’ve always found it best to contact them straight away. Ask them if there is a problem as it is better to know than not, especially if they are likely to default on you.
One piece of information I have always kept to hand is when the last day a client’s accounts payable team will accept an invoice. That way you can make sure you always beat that submission date. Until you trust a client, ideally after a long trading history together, it’s best not to get sucked in to being asked by your client to pay suppliers on their behalf because ‘their paperwork is too difficult’ to expedite. I’ve found that it will often come back to bite you.
I have also always tried to build up a reserve of at least three times my monthly outgoings. That doesn’t mean cash in the bank but a calculation on the difference on what you owe and what you are owed, if everyone paid each other. So if your monthly overheads of salaries, cars and rent are £10,000, you should try and have a trading surplus of £30,000 if you paid everyone and everyone paid you.
While I understand this might be very difficult for some, it is also very worthwhile, especially if someone goes bust on you. In that respect, when your agency does have a good month try not to go out on a spending spree. Always remember things can go up as well as down, and cash in the bank is a safety net that should remove a weight from your shoulders.
Finally, the key to many of my dealings has simply been to build good and open relationships with suppliers. It shouldn’t amaze you to know that if you build goodwill by paying them promptly, then if you’re having a cash flow problem, they may well support you with temporary credit. You’ll be surprised how accommodating other companies can be towards a valued customer!
PROCTOR AND STEVENSON
As distinguished CVs go, few in the creative industries will rival that of Roger Proctor; MD of Proctor & Stevenson, Fellow of the Royal Society of Arts and Member of the British Empire to boot.
Illustrated By Chris Malbon
- One Thing I Know