The 10 Question Guide to Financial Stability for Agencies Part 1

Posted by Deltek on April 8, 2020

agency financial stability part 1

In times of economic uncertainty, agency and creative team leaders ask themselves what can I do to help my business not only survive, but also thrive once this is all over? Vincent Dong of Ad-Vice Software tackled this question by sharing some strategic moves and financial best practices in a webinar, Recession-Proof Your Agency: Best Practices to Weather a Financial Storm. Here he shares some additional advice for agency leaders:

How should I manage my cash reserves for a recession?

Determine what it costs to run you agency monthly and then determine what free cash you have to understand how many months of cash flow you have left. From there cut back or delay down in overheads first and salaries last. In addition, do your best to collect your receivables. Do your best to stretch payables. Contact both the client and the vendors to keep the channels of communication open.

If I don’t have the necessary cash reserves, should I take out a business loan or other line of credit?

It depends. Like these and many other questions I field in the business, I often ask questions to the question. Why isn’t there at least three months cash in the business? Does the company earn a respectable profit to begin with? Is this more of a lifestyle-based agency where the owner treats the agency like their own personal bank account?

Once those questions have been answered and if the business is in fact, a going concern, you should exhaust all other options for cash including loaning your own money to your company. This cash crunch for the next three months largely impacts the largest expense to your agency. Salaries. Applying for the Fed’s paycheck protection program (PPP) is a must.


Recession-Proof Your Agency: Best Practices to Weather a Financial Storm

Learn the strategies and best practices needed to help your agency survive a recession.

Watch the Webinar


Should I tap into my line of credit to cover some of my lost business?

Assess the nature of the lost business. Is it forever lost? Will it come back? If so, how long should staff idle by until the client resumes business with you? LOC’s are typically used to fund uneven flows in cash.

This time is very different. It is not a period of uneven cash flows. It is a period of uncertain cash flow. Attack your expenses as diligently as possible before using your LOC as you don’t know when the business will come back but you do know that payroll hits twice per month.

What income statement indicators do I need to focus on ahead of a recession?

The industry standard is 50% salaries and benefits against adjusted gross income (gross billing less direct reimbursable costs) (AGI), 30% overheads against AGI leaving 20% for profit. When your AGI drops, you have to address salaries and overheads if you are at all interested in maintaining your profit percentage. That may mean that you as the owner significantly reduce your salary in order to protect your staff salaries if the work is still there.

Also, this is the time to prepare an AGI forecast not only for the next three months but also for the balance of the year. This time with sensitivity analysis by creating different AGI scenarios using worst case to most optimistic to realistic in order to decide on whether to reduce staff or burn through your remaining next egg of cash.

What tasks should I have my CFO prioritize now and often should I meet with him/her?

Determine what it costs to run you agency monthly for salaries and benefits and overheads. Then, create a three month cash flow for April 2020 – June 2020 reconciling back to the March 31 actual bank balance.

It is important to conduct this exercise for the actual amounts covering October 2019 – March 2020 to see how your collection and payment patterns outside of your overhead expenses are, i.e. Production and Media expenses. From there cut back or delay down in overheads first and salaries last.

This exercise determines what free cash you have monthly to understand how many months of cash flow you have left. While it is important to apply for each and every Fed subsidy, grant and loan program possible, it is not possible to determine the timing of these receipts. This should be reviewed DAILY.

Stay tuned for Part 2, where Vincent answers five additional questions about how agencies can achieve financial stability.