It's a rare thing to find someone running a small creative agency with a financial background, in fact this is true of most small businesses. We start a business, typically, because we are good at the "thing" the business does and we feel there is an opportunity to start a business exploiting that skill and not because we want to learn about cash flow.
It's not often you hear "I started my agency because I freakin' love looking at financial statements!"
That being said, anyone running a creative agency will need a certain level of financial skills, or financial literacy, if they are to succeed. So, with that in mind, let's take a look at some of the core financial skills you'll want to have in your role running a creative agency.
1. READING FINANCIAL STATEMENTS
Pages of numbers may have once made your eyes glaze over, but those days are over! First up, what are financial statements? Typically there are two that you'll need to be looking at on a regular basis:
- balance sheet - this is a snapshot at a point in time which shows everything the business owns (the assets) and everything the business owes (the liabilities). Anything deemed 'current' is due to become cash within 12 months, or needs to be paid out within 12 months, anything 'non-current' is happening later than 12 months. When you take the liabilities away from your assets, you get your net asset position which will match the equity in your business. The equity is typically made up of two things - issued capital (i.e. what you paid for the shares initially) and retained earnings (i.e. unspent profits).
- profit & loss statement - this report shows all of the agency's income and expenses for any given period of time (e.g. monthly, yearly). Not much to explain here!
You're going to want to become very familiar with these statements, both of which are just a click away if you're using cloud-based accounting software. If there are things in there that you don't understand, ask your bookkeeper or accountant to explain them to you. After a while you'll find that you're able to analyse these statements, compare them to prior years, and start to get an idea of the health of your business.
2. DEBTOR MANAGEMENT
Another report that you can easily get from your accounting software is your debtors report (aka trade receivables). This report lists all of your clients that owe you money and is typically displayed using an 'ageing' format so you can see which debts are the oldest.
It's a must that you run this report regularly, preferrably once a week, so you can see who owes you money. Anyone that has stopped paying not only needs to be chased up promptly (more on that here), but you also need to alert your team to stop work so that you're not throwing good time after bad.
3. CASH FLOW
Cash is king and nowhere is that more true than in a lumpy business like a creative agency. What do I mean by lumpy? The income for these types of businesses tends to be irregular during the year, with large projects and new clients landing unnannounced. There tends to be a lack of regular, small work that's easy to predict. For this reason managing cash flow is especially important in a creative agency because whilst you may be flush today, the same might not be true tomorrow.
You're going to want to have robust systems in place to help you manage and plan the cash flow in your business. This will include:
- good debtor management
- tight cost control
- ensuring staff don't have loads of excess capacity
- sufficient working capital in the bank
- not relying on credit cards
A simple cash flow document will help you track all of your incoming and outgoing cash for the foreseeable future (say 6 months) and will allow you to see disasters well of into the distance meaning you can plan for them accordingly.
Last, but certainly not least, is forecasting (aka budgeting). Before the start of the financial year you should sit down and review the year that has been and decide on what you want the year to come to look like. Think about your plans for your staff, products/services, marketing ... everything ... and factor all of this into your budget. Once complete, you've now got guidelines not only for your spending, but also for your sales and marketing efforts.
Once created, the budget can be uploaded into your accounting software so you can easily report on variances. These reports are really useful, especially when it comes to holding yourself and your managers accountable.
Getting the hang of these things won't take you long and you should be able to get all the training and support you need from your bookkeeper and accountant - if they can't help, might be time to find someone who can. Armed with these basic financial skills you'll be well equipped to drive your agency to a successful future.
Here at Generate we work with a huge range of agencies, big and small, and we love helping owners get a good handle on the finances of their business. If you'd like to have a chat about your agency, why not drop us a line? We'd love to help.