Marketing Agency Accounting: Tips and Best Practices

The financial side of running a marketing agency can quickly feel overwhelming. You likely started your agency because you love marketing and excel at it - not because you wanted to pour over financial statements and generate reports. But as an agency owner, you know that while handling agency financials isn’t the most fun part of your job, it's nevertheless a vital piece of your agency’s success.

Below we have listed financial best practices we recommend to our agency clients along with a few tips for you to improve cash flow management.

Long-Term and Short-Term Cash Planning

Dynamic forecasts are essential to gain perspective on the financial state of your digital agency. Forecasting helps you understand your current cash position and makes sure you have enough cash to pay your bills. This is where a short-term forecast is especially handy. A short-term forecast is a 6-12 week rolling cash flow forecast that illustrates cash inflows and outflows. Ideally, you would be looking at this forecast weekly to understand your current financial position and help you predict what is coming right around the corner. For example, you would be able to see how a client missing their payment due date will impact your cash position. If, for example, this causes you to not have enough cash to pay your employees, you may need to dip into your line of credit or pay a bill a little less early than you normally would. Otherwise, you could call the client and attempt to get the payment ASAP.

A long-term forecast is also essential. This forecast is a 1-5 year rolling forecast that helps you look your cash position in a long-term context and look into your overall financial health. You will want to review this forecast monthly unless a business-altering event occurs. In that case, you’d want to look at it immediately to review the impact of this event. Your long-term forecast is based on the amount of risk you are comfortable taking. For example, you could use this forecast to see what impact hiring three additional sales staff will have on your cash flow.

In general, forecasts are essential for making more informed decisions. Having a forecast takes away the need to use your “gut” to make important business decisions. Instead, you can have numbers on your side, allowing you to make data-driven decisions instead.

It’s worth noting that updating your forecasts regularly is vital. Without current financial data, your numbers won’t be accurate and thus can’t help you make better decisions.

How Much Cash Do I Need?

Businesses are built on money. Cash is ultimately king. Without it, your digital marketing agency can’t grow, and you can’t pay your bills. I guess you could say that money is the lifeblood of any business. That’s why it’s important to have a cash reserve.

We recommend that an agency have between 10-30% of annualized revenue saved in a cash reserve at all times. This reserve will help you cover your agency’s cash flow cycle and set aside money for important business decisions or outside forces that may impact your agency. Recessions, hiring more staff, clients leaving your marketing firm, launching new marketing services, etc. all require cash.

10-30% of annualized revenue is an estimated figure. Determining the exact amount of money you will need in your cash reserve can be calculated using a pretty easy formula. Take your daily revenue (annual revenue / 365 days) and multiply it by your usage (accounts receivable days–accounts payable days). That is the exact amount of cash you should have in your reserve.

Have Appropriate Bank Accounts

There are three types of accounts you will want to keep your agency’s financials in order. Keeping clean accounts will make it easier to generate forecasts, financial statements, and financial reports.

Your cash reserve should actually be divided between an operating account and a reserve account. The operating account should only have enough money in it to cover two payrolls. The rest of your money should be in the reserve account. The reserve account is typically a savings account set up with the same bank as your operating account.

A line of credit is recommended for one main reason: to be there for emergencies. We recommend that you get a line of credit that is equal to the amount in your cash reserve. Not all banks may approve you for this amount, but it’s a great starting point. A line of credit can be useful during times of recession, loss of major clients that prevent you from paying bills, and other extreme cases. A line of credit is not designed for day-to-day functions but should be considered a safety net.

Lastly, you will want a tax savings account. No agency owner wants to panic come tax time and scrounge around for the money to pay their taxes. It’s best to set aside 40% of your forecasted net income in your tax account on a weekly or monthly basis. This keeps it out of sight and out of mind, so you won’t be tempted to use it for other business initiatives.

Reduce Accounts Receivable Days

The days from which your agency issues an invoice to the time you receive your payment is called accounts receivable days. Reducing accounts receivable days to 15 can drastically impact your cash flow. Notice the example below. You can see that at 60 accounts receivable days, this company had to dip into their line of credit. However, by reducing AR days to 15, they were in a much better cash position.

It can be helpful to have a client contract in place that dictates how many days your client has to pay once the invoice is issued. This way, expectations are transparent, and your client isn’t surprised by the time they have to make a payment.

While this doesn’t cover what your entire financial strategy should be, these are fundamentals that every single agency should be implementing in their strategy. Do you have more questions about your financial strategy?

We’d be happy to help. Request a free virtual CFO consultation below.