“Never take your eyes off the cash flow because it’s the lifeblood of business.”

- Sir Richard Branson

Here at MAP, we work with agencies of all different shapes and sizes. That can be anything from a close-knit team of 5, generating revenue of £300k per year through to teams of 50, bringing in £5m+ but there’s one consistent across all of them - CASH.

When your focus and attention is on running your agency it can be easy to overlook the importance of understanding your cash position, not just checking the bank balance, but understanding what this number means to your agency.

Why a forecast?

A cash flow forecast is a financial tool used by businesses to project the cash inflows and cash outflows over a period and is designed to be directionally correct.

A cash flow forecast typically includes:

Cash Inflows: These are the sources of cash, such as sales revenue, investments, loans, or other sources of income.
Cash Outflows: These are the expenses and payments that will be made, including operating expenses, salaries, loan repayments, taxes, and other expenditures.
Opening Balance: The amount of cash available at the beginning of the forecast period.
Closing Balance: The projected cash balance at the end of the forecast period, calculated by adding the cash inflows and subtracting the cash outflows from the opening balance.

By creating a cash flow forecast, businesses can anticipate periods of surplus or shortfall in cash and take proactive measures to manage their finances effectively. It helps in identifying potential cash shortages, allowing for adjustments in spending or seeking additional funding if necessary. Additionally, it aids in evaluating the financial health of a business and assessing its ability to meet financial obligations in the future.

Where do you start?

First, identify the sources of incoming cash and the drivers of outgoing cash. These should be documented and be as detailed as possible (Subscriptions may seem immaterial but it can be eye-opening when they are all listed together). All of these sources should then be collated into a clear summary - this should contain your opening balance, net cash movement, and your predicted closing balance. The period typically covered in a cash flow forecast is 13 weeks and it gives you a quarterly view.

There are many other considerations when building a cash flow forecast, if you have other financial forecasts in place these can give you a head start on pulling the data together, another key resource is bank statements as they are the source of truth.

Although the forecast is designed to be directionally correct, where you have got the information to be detailed try and include this where possible to minimise the risk of the forecast showing you a false projection.

Now with the build complete, the most important part is understanding it and keeping your eye on it.

Keeping your eyes on the cash flow

The best routine for reviewing the forecast is weekly or fortnightly and should be concurrent with credit control updates and supplier payment runs. The credit-control update should provide visibility of the immediate cash coming into the business, which should then help you decide which suppliers should be prioritised before making blind payment runs.

As with any forecast, reality can differ, maybe a customer hasn’t paid on time or a purchase invoice has been missing and requires payment immediately, this is why it is important to stick to a routine to review and understand what has driven those differences. This data will then help prioritise what to do with the cash available and this is also the point where you will quickly identify what is causing the cash strain and you can start to consider implementing changes.

I have my forecast, my eyes are on it, what do I do about it?

Experiencing a cash strain can be incredibly stressful, not only do you have the pressure of delivering for your business but now with an added worry if we have the funds to support it.

Some of the below suggestions may help consider which areas of your agency you can review, to help your cash position:

Cash Inflows

Efficient invoicing process, ensuring invoices are raised and sent as soon as possible
Consider alternate sources of revenue
- Can we take deposits?
- Can we invoice earlier on in the project?
- Are all recurring invoices automatically sent out?
Do we have direct debits set up, where possible?
Ensuring all recharged costs are tracked and recharged in full (unless the agreement states otherwise)
Strict payment terms agreed with customers

Cash Outflows

Take advantage of payment terms offered by suppliers
Negotiate payment plans where possible
Prioritise supplier payments that have the biggest impact on the operations of the business (does this directly generate cash)
Regularly questioning if your expenses are necessary

These suggestions should be regularly reviewed even once you’ve stabilised your cash flow situation to build resilience and avoid similar challenges in the future.

If you would like further advice feel free to get in touch with your regular contact at MAP.

As Richard Branson once said, cash flow is the lifeblood of the business. Why would you not want your eye on something so crucial?