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Cash Flow Budgeting for Agencies (Excel Download)

Brandon Crossley
Aug 28, 2017

In business, there’s no worse feeling than running low on cash. To say the least, it’s stressful.

And if there’s anything I’ve learned, the solution is definitely not harassing clients in a panicked frenzy.

It’s not a good look.

chasing down clients for invoices

Marketing agencies and other project-based businesses understand this predicament better than most.

(The cash flow part, not the harassing clients part)

In fact, a 2011 Hubspot study cited cash flow variability as the biggest challenge facing 19% of marketing agencies.

That’s a lot of cash flow concern.

So, how can we avoid anxiety, and creeping out clients?

Start with a Plan.

I know what you’re thinking: “I’m not a financial expert. This is what I hire my accountant for.”

This is true, but no one understands your business better than you. Also, who really wants to pay $150 an hour each time the plan changes?

In this post, I’ll walk you through the basic steps for creating a simple cash flow budget for your agency.

I’ll even throw in a free download to use as a starting point.

Cash Flow Budgets vs. Income Statements

Before we begin, we’ll want to distinguish the difference between cash flow budgets and income statements.

The differences lie in how we use each document. Income statements are good for understanding the financial health of the company over a particular period. The ultimate result of which is a net profit (or loss).

Alternatively, cash flow budgets match the timing of money we expect to receive against the money we’re spending in that same period.

clients paying on time vs late payments

With agencies, it’s common to provide clients a proposal, collect a little money, do the work (spend money), bill the client, then collect the rest of our fees. Agency cash flow budgets illustrate the differences that arise between doing the work and collecting the money.

In our example, we’ll take this budget a step further by tying our assumptions about cash flow to specific, measurable benchmarks we can adjust. Building accountability into our budget makes it an even more valuable decision-making tool.

When it’s all said and done, we’ll be better equipped to answer some of the following questions:

· Will I be able to afford to hire an extra producer?

· Do I have enough cash to bring on additional freelancers for that big upcoming project?

· Can I afford the debt service on a loan to buy a new agency?

· How many new projects should I sell to justify spending extra marketing dollars?

Now that we understand a little more about how the cash flow budget works, let’s dive in a little deeper.

Forecasting Revenue Collection for Agencies: Step 1

If we’re going to budget cash receipts, we’ll first need to forecast when we earn this money.

There are many ways to forecast revenue for agencies, but we’ll cover two methods that handle the most common scenarios. There will likely be some differences regarding when in the process you collect money from clients. However, the forecasting approach is no less applicable.

The important thing is we tie our forecasts to the specific underlying factors driving revenue for your agency.

For instance, let's say we’re forecasting $10K in revenue from a particular client in May. We then link this forecast with the assumption that we’ll complete a large project during the month. It’ll then be much easier to update our budget and develop a response if the project gets delayed.

Tying forecasts to testable assumptions better prepares us to adjust the budget as events unfold in real-time.

Forecasting Agency Revenue: Historical Performance

financial statements are in your rearview mirror

The easiest way to forecast revenue is to look at past performance and predict future revenue based on trends. If your agency has an established history with predictable income, this will be the path of least resistance.

To get the most out of our budget it’ll help to break revenue down to more granular levels. An example is forecasting revenue for each client account, or service category, instead of forecasting revenue as a whole.

forecasting revenue for agency accounts

Keep things like seasonality, and account size in mind. Do you have a plan to sell your customers a new service? Are you at risk of losing a key account? All of these considerations should be factored into your budget.

Lastly, you’ll want to tie each revenue stream to a leading indicator that tells you whether you’re on track to meet your forecast.

If you're driving revenue with a sales team, determine how many sales calls, or client meetings the team should generate to meet revenue goals.

Alternatively, if website traffic is important, use a metric from inbound sources, or form submissions as a bellwether.

Think about the factors driving revenue for your business. What can you measure to hold your forecast accountable?

Forecasting Agency Revenue: per Project

A more granular approach to forecasting revenue considers the number of projects you expect to complete each month.

Forecasting on a per project basis is ideal for scenarios with less consistent project flow, and allows you to track cash as projects come in.

This method has accountability built into it.

If you miss a project deadline, you’ll know your forecast has changed, and you can update your budget before seeing any financial data.

In the template provided (free download) we’ve already set up a tab to help you forecast revenue on a per project basis.

Here are a few scenarios for adapting the inputs to meet your needs.

1. Per Account

In this method use a single row per client account, and forecast the number of projects you expect to complete for that client each month.

You’ll want to use this method if you have a consistent client list with recurring projects throughout the year.

2. Per Project Type

Our next approach dedicates a single row to each type of service the company offers clients.

forecasting revenue by project type

Labeling each row by project type allows for further flexibility, since we can split the rows according to any groupings we’d like.

As an example, we could break projects down further into small, medium, and large buckets for a more detailed projection.

3. Per Project

Lastly, if you’d like to dig further into the details, we can plan for individual projects by dedicating a single row to each initiative.

forecasting revenue by project

What this allows us to do is set custom cash collection expectations for each project. As you can see in the example above, the row labeled ‘Hooli SEO Analysis’ has split the amount billed into two separate events. The first 30% is collected upfront, and the remaining 70% is collected upon completion.

(side note: you can add more rows by ‘unhiding’ rows 14 – 33)

Revenue vs. Collection

One more thing we’ll point out about the template is how to use the ‘Days to Collect’ column. This is where we detail the number of days between invoicing the client and collecting the money.

For situations where cash is collected immediately, we can leave ‘Days to Collect’ set to zero. If we’re working on retainer, or the client has agreed to pay up front, there may not be much of a gap between invoicing and collecting. In this case, we're expecting the transaction date and the invoice date to be the same.

In cases where there's a gap between the invoice date and collection date, set ‘Days to Collect’ to the number of days you expect it to take to receive the funds.

The whole point of the ‘Days to Collect’ field is to portray a realistic expectation of how long it takes client payments to show up in our bank account.

Estimate Expenses: Step 2

Now that we’ve estimated revenue collections, we’ll take a look at estimating our cash outlays. Expenses are generally split up into two categories: fixed, and variable.

Fixed expenses are the easiest to forecast and happen regularly at predictable intervals. These expenses include things like rent, leases, loan payments, insurance, and subscriptions.

On the other hand, variable expenses often change as revenue changes. For instance, with agency work, labor tends to make up a large percentage of costs. As new clients and projects are contracted, more labor is needed to complete each assignment.

Typical variable expenses include things like commissions, postage, freelance labor, licenses, and payroll.

fixed vs variable costs

Forecasting each expense requires an understanding of which items on the cash flow budget are variable, and which are fixed.

With fixed expenses, there may be a small degree of variability from month to month. In this case what you can do is average each expense over the last few periods, and assume that amount moving forward.

Variable expenses require we pay attention to the level of revenue, so we can assess how to allocate resources based on monthly activity.

The key consideration with expenses, as with revenue, is that we understand when cash is actually paid out versus when we receive a bill from vendors.

Often times a project needs to be delivered to the client before the money is collected. As we produce the work we still have to pay employees and other bills, which gives rise to the importance of managing cash flow in agency business models.

Making Adjustments: Step 3

Once your agency’s budget is complete, it's time to go back through the assumptions and see if there's an opportunity to save money or invest in expansion.

To assess your cash position, answer some of the following questions:

·      At what point is my bank balance the lowest? How can I better prepare for this period?

·      If key cash receipts are delayed, how long can I cover my costs?

·      Are there any opportunities to reduce expenses today?

If cash flow is healthy, and you expect a growing bank balance, consider how you might invest excess funds to fuel growth. Create a new version of your budget to reflect how those investments could affect cash.

If cash flow is too tight, consider taking some of the following steps:

·      Ask for credit card payments for projects under a certain dollar amount

·      Get on retainer with at least 30% upfront

·      Establish a cash flow buffer or emergency fund

·      Pay off revolving credit every month to avoid interest payments

·      When you hire someone, add at least 40% to their salary to estimate the true cost

·      Hire a “bad cop” to handle credit collections

·      Factor invoices to get money in the door sooner

Make Budgeting a Habit

To stay out of cash flow trouble it's important to revisit your budget, and update it to reflect actual collections and expenditures.

tracking actuals against the budgeted

As you get in the habit of managing the budget you will stay ahead of issues, and be better equipped to handle potential crunches with a well thought out strategy.

Free Excel Download

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About the Author
Brandon is Co-Founder and CEO of Poindexter. He enjoys questioning his own existence and convincing strangers we're trapped in a simulation.