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If you’re an agency owner with big growth goals but don’t have a business plan to achieve them, I encourage you to keep reading.
Many of the agency owners we talk to set goals like, "We're going to grow revenue by 10% by the end of next year." While we love this goal for our clients, many agency owners don’t have a business plan to execute this goal. The diagnosis to fix this problem? Measure specific metrics and KPIs to build a concrete strategy.
My team uses profit-focused accounting to help our agency clients draft plans to reach their agency goals. Our team designed this system to break revenue down into financial and non-financial drivers—things that can be controlled and set through SMART goals (specific, measurable, achievable, relevant, and timely). For instance, completing a certain number of client projects in 30 days. These drivers help our clients figure out which key metrics they need to track to stay on course to their business goals.
By the way, we like to refer to metrics as "levers" since you can "pull" them to move towards your goal. So, when we talk about levers later, just know it's the same as a metric.
The main metrics categories we recommend for agencies are:
- Cash
- Production
- Financial
- Pipeline
While this blog post will focus on cash metrics for agencies, you can stay tuned for the three other blog posts in this metrics series (production, financial, and pipeline metrics will be covered in the coming posts). Just a quick note—any graphics or tables are for example purposes only and shouldn’t be taken as industry averages.
Cash KPIs and Metrics
Cash is the lifeblood of any business--including agencies. Without it, an agency simply wouldn’t survive. That’s why cash-related KPIs are arguably the most essential metrics to monitor. Before diving into the cash strategies your agency can use to achieve its goals, let's first look at some basic cash management best practices.
Agencies should maintain a cash reserve of around 10% to 30% of their annual revenue. This is a general guideline (easy math if you will), but there’s a specific formula you can use to determine the exact amount you should set aside (see below for the formula).
The amount of cash you keep in reserve will depend on how much risk you are comfortable taking. For example, keeping 10% in reserves would cover approximately two months of expenses while 30% would cover around six months. You might decide that you’d rather land closer to 30% if you’ve had some problems meeting expenses lately. Below is an example of a company with $3,497,232 in revenue and the recommended cash reserves they should aim for, based on their level of risk tolerance.
Agencies should maintain three separate bank accounts: an operating account, a cash reserve account, and a tax reserve account.
I’d also recommend securing a line of credit. This can be essential in times of great emergencies or unexpected opportunities. A simple rule of thumb is to match the amount in your line of credit to your cash reserve, if your bank allows it. It can also be beneficial to see if your bank will give you your line of credit on a two-year cycle rather than one-year.
Keep enough cash in your operating account to cover about two payrolls, with the rest allocated to your cash reserve. Storing this cash reserve in a high-interest savings account, money market, or CD can help protect your funds while earning some additional income.
Set aside 40% of your net income (your profit after expenses) for taxes. Move this money into your tax reserve quarterly to keep it separate and avoid last-minute stress. A higher tax bill is actually a positive sign—it means your business is thriving and generating strong profits.
Now let’s dive into the cash levers you can pull to reach your business goals!
Improve Payment Terms
If you're struggling to set aside enough for your cash reserve, the first step should be adjusting your payment terms. Without changing your pricing or offering more services, you can improve cash flow by collecting payments faster. We recommend reducing your accounts receivable (AR) days from 60 to 15 days (or 30 days if 15 doesn’t seem feasible). This will help stabilize cash flow, eliminating the need to rely on your line of credit during shortfalls. The graphic below illustrates how one agency avoided using their line of credit in March by reducing AR days to 15.
Timely payment collection is key to maintaining steady cash flow. It's helpful to build a good relationship with your client’s accounts payable (AP) clerk and ensure they have all the necessary details to process payments without issue. Clients are more likely to pay on time when they know due dates are monitored and overdue payments are promptly followed up on. Additionally, businesses tend to prioritize timely payments when they have strong relationships with key contacts at your company. You can ask your account managers to follow up on any first missed payments, setting a precedent that late payments will be promptly followed up on.
AR Policies
It's also important to establish a formal AR (accounts receivable) policy and inform clients of it upfront. For example, you could require invoices to be paid within 15 days of the issue date, with the possibility of pausing services if payment isn’t received on time. While setting the policy is crucial, enforcing it is even more critical, and we strongly recommend sticking to these terms without compromise.
Although strict payment terms may seem daunting, these measures are designed to ensure consistent cash flow for your business.
If you're interested in learning about additional levers, such as pipeline, financial, and production levers to achieve business goals, sign up for our blog notifications—we’ll be posting about these topics soon.
For more information on how we help agency clients reach their goals, consider booking a virtual CFO consultation. We help clients set KPIs, pull the right levers when needed, and establish SMART goals.
