By now, you have been more than aware of the damages that the Coronavirus is causing across all industries in the US and around the world.
Did you know that many emerging and developing economies were already expecting weaker growth before this crisis?
Many marketing agencies whose main industry focus were Airlines, Restaurants, Hotels, Cruises, Oil & Gas Drilling, Auto Parts, or Retail (other than Supermarkets) have seen a huge impact on their revenues and cash flow.
So, what does this mean for your marketing company?
Growth will slow down for a while
Even though, we are not sure when the virus will slow down or end; there will be a point in time when things will slowly start getting back to normal. However, the different industries will not be able to recover as quickly as possible. For many industries, it will take one year or more to stabilize their cash flow situation, but unfortunately, many companies will not recover at all.
On another note, the influx of imports to the US from other counties have slowed down which could create opportunities for US manufacturing companies. So, you should pay attention in finding those companies that are entering the market with new products or services.
Marketing Agencies Should Then Focus on Managing their Cash Flow
According to a recent market agency research done by HubSpot, the top five pain points of marketing agency owners are:
- Finding new clients
- Not having enough time to focus on administrative tasks
- Finding the “right fit” employees
- Profitability
- Maintaining good levels of cash flow.
You are probably thinking that cash is king, right?
Well, you are correct.
Companies will have hard time to survive if they don’t build proper cash reserves. Even if companies have credit lines available, banks could start closing those loans or credit lines if the company is not projecting sustainable cash balances.
Game Plan
So, during the COVID-19 pandemic challenges, I recommend marketing agencies to:
Optimize working capital:
The simple definition of working capital is Current Assets minus Current Liabilities. What I mean is looking at your accounting reports and adding all your cash balances, total invoice balance owed by clients (Accounts Receivable), Office Supplies balance, and Prepaid Expenses then reducing total invoices that the agency owes, taxes to pay, payroll to pay, committed media adds to pay, client deposits, and credit cards to pay.
This total must be positive and if it is not; then it is recommended to hire a professional quickly to help identify the reasons why is negative.
Most of the banks follow this metric closely as it helps visualize how liquid the company is.
Tie each credit card expense to a specific client or project:
This is an area where a lot of marketing companies are busy and have potential risks of what I call “profit leakage” given that many times you are managing multiple projects for multiple clients at the same time and not having enough to properly maintain clean records. So, there are lot of prepaid expenses that are incurred such as photo footages, video footage, outsourced web development, outsourced designing, etc. So, it is extremely important that each of these expenses are tagged to each individual client to understand the clients’ profitability.
It is also highly recommended for you to maintain a separate credit card for personal expenses, this will save your accountant a lot of time when reconciling the credit card activity.
The agency’s credit card expenses should be consistent week over week unless the revenues are proportionally growing as well.
Prepare and review a 13-week cash flow on a weekly basis to ensure week over week consistency:
Once you have full understanding of the working capital and the credit card expenses have been tagged properly; it should be fairly simple to build a weekly cash flow forecast to give you visibility into the future of how the agency will be doing.
This is extremely helpful during the current COVID-19 times. This model can then be adjusted with specific assumptions to let you pivot your agency quickly and avoid running out of cash.
Ask for an advance or prepayment and never be late when invoicing clients:
To continue optimizing your agency’s cash flow, it is key to be proactive and ask any new client to prepay or pay a deposit for the project that the agency is going to be working on. This cash flow should help offset any expenses that are going to be incurred for the client.
Also, you should offer incentives for clients to pay you the invoice balances quickly by offering a 2% or 5% discount. As you remember above, cash is king! So, it is better to give away a little bit of the margin instead of waiting to get paid.
- Lastly, do not be afraid to do annual client reviews and assess price increases when needed:
Annual client reviews are very important as it lets you assess each individual client and determine if the client is very demanding and if a price increase is due. I will cover this topic in another article in the future.
As explained earlier in HubSpot’s research, profitability is an issue that many agencies have which can be resolved by properly pricing each deal properly.
Hopefully, we are getting to the end of the Coronavirus and will be able to go back to normal. But in the meantime, we need to fearlessly manage our businesses, specially our cash flow; to make sure that we stay afloat during this season and be ready to take advantage of business opportunities.
Every challenging economic season always brings new opportunities.
Be prepared, be agile, and be mindful!