July 13th, 2020 / Insight posted in Articles

Media agencies: cash flow and funding – ensure yours is fit for the longer term

Our recent survey of independent marketing services businesses revealed that 25% of those surveyed did not hold enough working capital. This shows that agencies have little headroom to deal with unforeseen, but inevitable, problems that occur throughout the business cycle: economic downturns, the loss of major client accounts, slow payment from clients etc.

The fact that such a large proportion of agencies do not hold sufficient fluid working capital is worrying. The economic impact of Coronavirus means that pressures on cash flow have become more pronounced.

It’s no surprise that cash is one of the things currently keeping agency owners awake at night. Even with government help, many businesses have been forced to dig deep into their cash reserves as fee income has been postponed, cancelled or rescoped. One of the problems with insufficient cash reserves is that businesses can be forced into making short-term decisions for the sake of cash flow rather than based on the longer-term health and prosperity of the business.

Be in control

We recommend that agencies keep at least three months’ worth of overheads in cash and cash equivalents. Having sufficient cash reserves puts you in the driving seat. It’s important to take a structured approach to cash flow management to avoid this and ensure there are no surprises.

With the right approach, cash flow can be managed and you can improve your chances of rebuilding and thriving during the new normal. There are four key steps that are crucial to achieve clarity on what to do:

  • Understand your situation – your cash flow forecasts are more important than ever.

Prepare a 13-week rolling cash flow forecast for short-term management of cash flow. This will allow you to identify any impending pinch points and take timely action to avert them.

Many of the businesses we work with have sensibly taken decisions to defer tax, rent and creditor payments. When these fall due, can the business afford to repay these on top of any loan repayments kicking in from CBILS or bounce back loans? These are likely to crystallise at the time when trading is picking up with the consequent increased demand on working capital, creating a perfect storm of cash requirement that you must ensure you have planned for. The right tool here is a 24-month integrated financial model that covers forecast profit and loss accounts, balance sheets and cash flows. This will show the longer-term impacts on cash flow of the actions that you have taken and give you clarity on the implications of the choices you will have to make.  We regularly help clients build these. In doing so, we always make sure that they can be flexed to help explore the impact of varying decisions and scenarios.

By using such a model, you will also be able to take appropriate steps to ensure your resourcing levels are matched to your future income expectations, your overhead base is sized right for the new trading environment and that you prioritise the investments you require to return your business to growth.

  • Prepare for uncertainty

The only thing most creative businesses can be sure of now is that the future is uncertain – with 40% of our survey respondents showing only one month’s visibility on fee income levels. With this uncertain short and longer-term outlook, you must also prepare both upside and downside scenarios – to ensure your working capital can fund an improved environment without over trading and that in a downside scenario you have the flexibility to remain solvent. It’s really important to have a model with flexibility so you can play with the impact of different possibilities and decisions. This will help you to consider all the options and what actions might be needed well in advance. Again, having this “playbook” provides much better clarity on how you will react to changing circumstances.

  • Monitor your situation

Things are likely to be fluid and evolve so it’s important to revisit forecasts and keep them up to date and incorporate “actual” results as you move forward. Obviously this applies to your 13-week rolling cash flow forecast as well as your longer-term forecasts and scenario plans. They must be monitored to ensure they remain fit for purpose and your assumptions remain valid. As new clients and projects are won and your pipeline becomes clearer, you should revisit your long-range forecasts and bring them up to date with your latest intelligence.

  • Ensure that you have identified all options for funding

You may have taken advantage of the government support available during this crisis. However, we can work with you to help you consider what other sources of funding and cash flow may be available to you:

  • If your existing bankers haven’t been supportive, having been through a proper cash flow modelling exercise, explore your options with tertiary lenders who are also able to provide CBILS funding. Other options include asset-backed lending, such as confidential invoice discounting.
  • Understand your shareholders’ ability to support your business. Is there potential for a cash injection, personal guarantees or other temporary measures to reduce outgoings?
  • Renegotiate incentives and remuneration with your staff. As furlough begins to wind down, you may be able to agree that short-time working or salary reductions continue until you are in a stronger position to increase them. This can help retain more talent for the longer term without having to resort to redundancies. If redundancies are inevitable, ensure you plan them well in advance of furlough ending. Many agencies may find their existing EMI option schemes are now under water due to reduced company values and may wish to revisit these to ensure key talent remain incentivised.
  • Review your insurance policies. They may include business interruption insurance that you could claim against. While many insurers are trying to avoid these types of claims, there may be an opportunity to challenge these positions.
  • Review your position with your landlord – they may allow you to switch to monthly rather than quarterly payments, some of our clients have been able to get rent reductions or holidays. Also consider your longer-term space requirements and discuss these with your landlord as they may prove to be a bargaining chip especially if a break clause or the end of your lease is coming up.
  • Discuss your tax planning with your advisers, as there may be cash flow opportunities, such as accelerated loss carry-back claims, R&D tax credit claims (more creative businesses are eligible than you might think!) and capital allowance claims on recent office refurbs. Also, review the method by which owners are extracting cash from the business to ensure it’s in the most tax-efficient way.

Talk to the experts

We are working with clients on all of these issues and planning opportunities daily. We can quickly help you with all of these steps and get you to a position of clarity with a clear and relevant action list.

If you are unsure of where to start or would just like to check you have covered all the bases, we are happy to explore how we can help you survive the current downturn and rebuild to thrive in the future. Call us for a free no-obligation chat.