Creative agencies understand the importance of freeing up cash flow to stay afloat and grow. CEOs and directors are very concerned about this, but it requires a fine-tuned strategy to succeed. It’s crucial to get this right for creative agencies of all types – digital, advertising, and media, and agencies need far more than an accounts receivable strategy to free up cash flow.
Just getting paid on time and invoicing faster will not solve the myriad of challenges agencies will face in 2023. Let’s take a closer look at a few powerful client-based tactics that agencies can deploy to achieve a winning formula.
Target and attract the right clients
One of the wisest moves a creative agency can make is to attract good clients, and of course, finding those ideal clients isn’t always easy..You may be tempted to cast a wide net when looking for clients to increase your chances of success. If you aren’t careful, this strategy can backfire – some clients are not a good fit for your agency! That’s why it’s important to establish a baseline of your ideal target audience. An effective sales strategy considers the following factors when determining who to target:
- Who are your competitor’s clients? Are you looking for the same type of clients or are you trying to attract a specific segment? Is there another niche you should consider?
- How does your product or service benefit your clients? Who did you have in mind when you came up with the idea?
- Does your ideal client have any particular demographics? Is there a minimum revenue that would best be matched to the cost of what you’re offering? Is there a particular location that would be better served?
Qualify your clients
Your agency’s success depends on having the right clients, but you also have to do your homework to qualify them before taking them on. You don’t want to be too selective and turn down a good business opportunity, but you also don’t want to overextend yourself for a client who poses a credit risk for your agency. As a matter of fact, the homework done to qualify clients might also provide clues as to whether they will pay on time. Your cash flow problem may be caused by clients who are unable to pay their invoices on time. The most important question to ask yourself when considering hiring a new client is whether or not they have the resources to pay for the services they’re requesting. It may be time for your agency to hire a credit manager to determine the credit worthiness of your clients.
A credit manager will be able to:
- Establish a credit policy for new clients
- Review credit worthiness for all new and existing clients
- Ensure that all credit applications for clients are approved
- Specify payment terms for client contracts, including upfront payments
It is possible that your clients are fighting their own cash flow challenges, even with a monthly retainer. Therefore knowing the risks before taking them on, could prevent future cash flow issues for your agency.
Client retention and upselling
Keeping your current clients and upselling services to them is a highly effective strategy for optimising your cash flow. Even though the customer acquisition vs. retention cost debate will run forever, upselling to existing clients could be to your advantage and will likely cost you less than the new customer acquisition cost. Persuading clients to purchase a more expensive, upgraded, or premium version of the chosen item or other add-ons, will not only improve your cash flow, but it will also increase customer loyalty.
Review and evaluate your agencies pricing model
Establishing a pricing model that suits both your clients and you is one of the most challenging aspects of building and scaling an agency. Because agency pricing varies widely based on a number of factors including the type of service you offer, your niche, and the size of your clients, knowing how to price your services effectively can mean the difference between a profitable, scalable agency and one that struggles every month.
- Just raising your rates is not good enough. There are setbacks in doing this – no one likes surprises and loyal clients could take offense
- An Aged Receivables analysis can inform decisions around pricing models. For example, if clients who purchase certain services end up being lower margin clients, it may be time to increase prices.
- We see more agencies switch to subscription-based pricing models over project-based or hourly rates, in order to help improve stability in terms of cash inflows. By charging the same fee month after month, clients will be more likely to automate their payments.
- Although the hour-based model is the simplest and the most popular among the agencies, it has its drawbacks: the hourly rate model prioritises time spent on a project over the value delivered to the client, and it disincentivizes smart work. Did you complete your projects in less than the forecasted hours? Your efficiency could lose you money.
Scope creep – be friendly but firm
Scope creep can kill your project’s profitability (and timeline – which will cause a knock-on effect and impact other income areas). Most creative agencies have SOPs in place, but the difficulty can sneak up on you without you realising it. We have seen this often occur during Project Calibration Phase, when account managers pass along all their knowledge about the client project to the project manager. The goal is to keep the project on track by ensuring good communication from the beginning. Communicate often, even when client conversations are tough, and build a human-to-human relationship.
Final thoughts on improving cash flow…
Accounting is not your core business. And even with automation and implementing best practices, you’ll still need to devote a considerable amount of time to refine other, more creative cash flow strategies. Square Mile Accounting can help digital, advertising, and creative agencies with optimising your accounts receivable process, with adjusting and correcting your pricing model, and analysis of your current accounting practises to introduce a better way of managing your agencies accounting.