STANDSTILL agencies make a profit
STANDOUT agencies generate cash
STANDSTILL agencies can make a profit, but they can also make a huge mistake. The operational activities of these agencies can make them look like successful businesses. Their revenue is growing. The have a spreadsheet with a P&L that shows they are profitable.
They can be lulled into thinking they are driving in the fast lane, the sun is out and they have the roof down. There is a problem though, they can quickly run out of road (or more importantly cash).
STANDOUT agencies live by the old adage “Revenue is vanity, profit is sanity but cash is king”. They focus more on profit than vanity billings, but they also understand that a business can be profitable but still go bust if it runs out of cash.
How can this be?
In basic terms, your P&L can easily show that you are invoicing clients and generating more revenue than your expenses. Your spreadsheet says you are a profitable agency.
Make sure you always check under the bonnet though. Whilst you might be making a profit, your bank account can tell a different story. What if:
– You don’t have a lot of cash reserves to start with
– Some of your clients aren’t actually paying you
– You have loan repayments or other outgoings that don’t feature on a P&L
– You have made some significant CapEx purchases recently
– You have a VAT bill coming up or need to pay your Corporation Tax and have not put money aside to do this.
All these things, and more, can mean that whilst your agency is showing a profit on monthly activities, your bank balance can quickly become dangerously depleted.
Unless you are lucky enough to have a healthy cash surplus, in these testing times its good practice to forecast cashflow regularly.
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