STANDSTILL agencies walk a tightrope
STANDOUT agencies have a safety net
STANDSTILL agencies walk a tightrope every month. They have limited cash reserves meaning any major issue or disruption could lead to disaster. This is often a reality of running a startup agency, but if you’re more than 3 years old and still living hand to mouth each month, you have a problem. You’re either not making enough money or you’re spending too much of it (usually its both).
STANDOUT agencies have a cash safety net. At least 3 months running costs as part of Net Current Assets on their balance sheet.
Of course, some agencies need more than this. Their owners are more risk averse and want a bigger cash buffer and/or they are working with clients on extended payments terms or on large projects with significant cost of sales.
As many business owners have found out to their cost, you can still be a profitable business but go bust if you run out of cash. Hence the old saying “Turnover is vanity. Profit is sanity. Cash is king”
My advice is always to establish a cash safety net of 3 months running costs i.e. if all clients suddenly stopped working with you today, you could still survive for 3 months. Then I would aim to start building this up to 6 months cover.
What’s the first step to doing this?
You might be surprised to find out its not “generate more cash”. The first step is actually to understand exactly what your monthly running costs are.
Do you know your monthly breakeven point?