Managing Cash Flow 101 for PPC Agencies
Happy Sunday night Y’all. Cashflow is the lifeline of business. If you cannot manage cash flow, you won’t be around for long. When determining what you need, keep in mind three categories : Money in, Money out, and Shortfalls (when expected money in does not arrive). My startup agency had a few critical moments with cashflow: Investment; Software Development; Failure; Reconstruction; Expansion; Software Development. I’ll be candid… cashflow nearly bankrupted our agency.
Every business has a breakeven point. If you don’t know what your breakeven point is, I’d stop reading and figure it out. Our first year was not great. We relied on investment funds we secured from a law firm in Houston. We had negative cash flow and negative profits. We let go go our development team. The development team had an annual salary of $300,000 (3 person team) and monthly non-salary expenses exceeding $11,000 (rent, computers, software, furniture, etc). After 6 months, the investors ran out of patience and asked us to restructure into a marketing company.
The hard lesson we learned was cash flow management. The developers were expensive, but it was the additional non-salary costs which created turmoil. Software, ergonomic chairs, $4,000 laptops, and rent in downtown Houston decimated our seed investment. We planned for a year of development, but non-salary expenses and a lack of progress (to show the investors to get more money) doomed the project. This was a valuable, albeit expensive lesson : always calculate in non-salary expenses into a project.
We remodeled into a PPC agency that develops software on the side. We hired a sales team of 2. The sales team had an annual salary of $130,000 and $3,000 in non-salary expenses. The sales staff generated 0 leads after 4 months. During this 12 month period, I had to collect receivables as soon as possible, offer discounts to customers who pay on time, extend payables to vendors as long as I could, and ask investors for more money. We still do all these things.
Around July 2016 we turned things around and reached breakeven point. I can write an entire article on how we did this, and I will later. It’s a fascinating story. All the things we expected would work didn’t… and all the things we didn’t think would work did. We implemented new policies from the top down. Cut software expenses to increase fringe benefits. And designated a person responsible for cashflow.
Hiring is the largest expense and the greatest danger to cashflow. We used several projections : monthly, quarterly, and yearly. Doing this allowed us to predict when we would have cashflow issues. We onboarded new clients 30 and even 60 days before we run into cashflow problems. We cut loose clients who asked for too much (given what they paid). One example was a client who paid $4,500 for a website but changed the scope into a $15,000-$20,000 project (that’s what the current company they are working with quoted). We spent 4 months working on the project with a change in scope every week. The client was let go and refunded the entire amount.
Sooner or later, you will have a situation where you have a shortfall. Understanding cashflow will help you survive it. Let me know if you have any questions.
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