There are different stances on the state of the economy as of Q2 of 2022, but the general consensus is that everything that went up, must come down at some point in the foreseeable future. Since a downtown is foreseeable, you have no excuse as an agency owner to not get your house in order to weather the storm as effectively as possible.
Let’s talk about five ways you can get your house in order.
- Plan with Your Known Cash Flows
- Focus on Improving Your Cash Flows
- Avoid Taking on New Debt
- Know Your Liquidity
- Solidify Your Relationships
1. Plan with Your Known Cash Flows
Your objective is to create leverage in your projected cash flows to keep you afloat until the recession subsides. In other words, plan for the worst, hope for the best.
- Know your expected cash flows for the next 2 years based on current revenues, current rates of client attrition, and current rates of client acquisition.
- Project your expenses at a higher rate than they are at now in 6 month intervals to account for inflation.
- Identify the clients that are at risk of pausing or cancelling work with your agency due to recession pressures on their own business and omit them from your forecasted revenues.
- Upsell clients based on expectation of economic downturn/recession. Your upsell play will look different depending on the niche you serve, but do something now to add more value to clients in ways that give them more business assurance of their own heading into the downswing.
Decide now what your retention strategy will be for clients who ask to pause work or cancel.
- Do you have options where clients could downgrade or upgrade?
- Can you guarantee results that would keep them from changing course?
- Can you work with them to defer payments for a limited time?
- How will you address any new potential account payable situations?
Determine how you will respond to these scenarios before they crop up so that you can communicate expectations with your client facing team members.
2. Focus Your Attention on Improving Cash Flows
Have retainer alignment conversations with clients sooner than later. It’s better to reduce the scope of work for the same rate before the major downswing occurs so that you can delight the clients in the midst of harder economic times.
Know what your utilization of each employee is. Since the typical agency spends 60% of their revenues on payroll, it’s ideal that each employee is managing client revenue at a 3:1 income to employee expense ratio and your employee utilization rate should be 85%+. If you can’t achieve this without overworking your teams or damaging your culture, then you have another set of challenges to overcome. If your payroll costs already exceed 60% of your known revenues, don’t hire more people; invest time in helping non-mission critical team members to find stable jobs elsewhere.
Payoff Debts Now to Remove Debt Servicing Costs from Your Future Balance Sheets. Both in your personal finances and your agency finances, the existence of debt when heading into a recession is a big red flag. Before investing in something new, pay off your debts!
Invest In Marketing Your Agency. Increase your sales velocity to improve your future outlook by positioning and promoting your value to the marketplace intentionally. Marketing agencies are notoriously bad at marketing themselves well, but your agency can be the outlier.
Download the prescriptive guide on how to scale your agency, get more clients, and get more cash.
Each component of the Momentum Framework compliments the needs of creative agencies to increase search engine visibility for their content and services, build relationships with the people who will matter most, keep a keen eye on profitability over uncontrolled revenue growth, and build a team of leaders to support a first-class agency, worthy of accolades.
Be content navigating some “inconveniences” rather than overcommitting to solve for them. Remember, cash flows is the number one predicter of your business’s ability to survive a recession, so keep your liabilities (cash outflow) to a minimum before the brunt of the recession hits.
Your can prevent overcommitting to key agency liabilities by:
- Waiting longer to upgrading softwares in ways that would be “nice to have” and paying for the features that you truly “need to have” only.
- Prioritizing your team’s existing efforts instead of over hiring by saying “not right now” and “no” to certain good ideas that can’t take root without you risking the security of your cash flows.
- Establishing strategic business partnerships for lead routing.
- Referring business out that would puts your cash flows at risk due to over hiring.
- Putting serious prospects on a waiting list to have some cash flow in the wings and prevent liabilities from over hiring.
- Maintaining and servicing your existing equipment with existing savings to preserve the equipment’s longevity before the money gets tight.
- Training employees on how to spend agency resources wisely, especially the employees that you already trust to make purchases.
- Committing to ignore the urge to spend on credit to get the things that you want now. Spend cash that you have saved right now only.
- Reduce COGS. If your agency services incur a high cost of goods sold, evaluate ways to reduce those costs or cut service offerings that are not popular and take your team’s focus away from profitable projects.
- Getting onto month to month payment terms wherever possible. Flexibility and agility is crucial when on the cusp of a recession because only God knows when and what extent the downturn will occur.
Avoid Taking On New Debt
I’ve mentioned this multiple times already in this post, with reason. Much debated is whether it is better or worse to tap into avenues of working capital before a recession. Especially given the nature of services provided by most agencies, there simply should be no need to operate on debt.
I stand by the recommendation NOT to tap into sources of credit before a recession. Instead, manage your cash flows appropriately in planning for the worst, hoping for the best, NOT the other way around. Your future self will thank you.
Know Your Liquidity
Know the liquidity of every asset on your balance sheet. Liquidity is the measure of how quickly an asset can be converted into cash. Your current assets, like cash and accounts receivable are the most liquid because you could leverage their value in under a year. Your non-current assets, like equipment, inventory, and real estate are still moderately liquid, but generally you wouldn’t be able to convert them to cash in less than a year unless they were sold off at a significant discount. A 2:1 ratio of current to non-current assets is considered a good benchmark.
Build up long term savings (for your business and personally). If you do not have 6 months of businesses expenses saved up right now, make it a priority. This focus on building up your savings will help you achieve that 2:1 ratio of current to non-current assets as well.
Make a plan for asset acquisition. If you arrange your house properly before a recession, you may have the freedom to purchase assets for your business during the downturn. Define before the brunt of the recession what kinds of assets would be beneficial to your agency if you were able to scoop them up at a discount. A little bit of financial planning will take you farther than making financial decisions on a day by day basis.
Solidify Your Relationships
Be sure to differentiate your brand and prepare for more competition to crop up from a recession as the job market gets worse and people take initiative to carve their own path up.
Create communication plans to reassure employees. When recessions occur, fear mongering continues and can destroy foundations of trust by no fault of your own. Create a plan to keep employees informed of your decisive financial actions and assured of how the company’s financial outlook translates to their own personal financial outlook.
Create communication plans to reassure clients. Take initiative to help clients get their businesses in order as well. Focus on delighting your customers even more in the months leading up to a recession and be sure the decision makers know, both by logic and emotion, that their relationship with your agency is not one that can be shirked come harder times.
Building a successful marketing agency takes grit, a focus on your value, and sometimes a *loving* kick in the pants.
Needing an ally as you achieve your long-term goals?
I’d be happy to help.