The creative industry is all about standing out. But even the best-performing digital and design agencies don’t just continuously look outwards to find their profits, they also look inside the business – keeping a close eye on their finances through regular management information.
Pro-active vs. Reactive
If you run a business in the creative industry, you’re probably more passionate about social media strategies than you are about spreadsheets – and I think anyone could understand that!
But it means your approach to the ‘serious’ side of the business may well be more reactive than pro-active – chasing debts only when cash is tight, paying suppliers only when chased, and ramping up your marketing activities only when work is slow.
Being better informed will inevitably lead to bigger, better profits – and improved management information is an ideal way to up your game and achieve that.
For instance, Management Accounts, which are interim financial reports prepared at regular intervals, give you a clear picture of the current shape of your business. They’re not compulsory, but they can have a huge impact on your bottom line.
An accountant, can be used to prepare management accounts, utilising the real-time data from your accounting software, such as Xero.
This data and software can also be used to set budgets and targets, cash-flow forecasts and KPIs (Key Performance Indicators), which can then be used as discussion points at regular meetings.
The reports that arise give you an excellent basis on which to make more informed business decisions – and provide the insight that allows you to plan confidently ahead for the future.
The better you understand what’s going on within your business, the more effectively you’ll be able to make the right decisions about everything, from which products to develop, to which staff to promote.
Management accounting offers the advantage of current and relevant numbers that show which parts of your business are profitable and how your overall financial performance has unfolded over time.
Cash Forecasts and Management
An accurate cash flow forecast plan will aid the recognition of potential problems which may arise in the periods ahead, and help businesses make the necessary decisions as early as possible to rectify funding issues, if possible.
Profits are the driver for anyone entering into business, but cash management is vital for employees and suppliers to be paid, so operations can continue to produce those goods and services needed to generate the required revenue, and the return on those assets invested.
Cash flow forecasts are therefore important:
- In identifying potential shortfalls in cash balances;
- In enabling you to foresee when these cash shortfalls are likely to occur and to then plan ahead;
- In ensuring you have enough cash resources to meet those financial commitments, to pay suppliers and employees, and on time;
- In identifying the timing of tax receipts and payments and their effect
Forecasting is key; you need to be disciplined and have a handle on the numbers, to know when money will be coming in and when its needed to go out!
The most crucial element of cash flow forecasting is to understand what you’re looking at and address any cash flow issues that you may face. Cash flow problems won’t go away on their own, they need to be managed.
If you’re confident on the profitability but having cash flow difficulties it may, depending on the size of the problem, be just enough to tweak your credit control measures, look to reduce your cost base, or perhaps seek advice from your accountant. But cash flow planning and forecasting is key to identifying these areas and the impact they may have in the short to long term. Suppliers may not always play ball!
Cash flow management should identify any requirement to perhaps increase a current loan facility or a need to obtain additional borrowing.
Customised Management Information
In addition to standard accounting reports, your management accounting can track and use information about any aspect of your business that can be quantified. Some examples of KPI’s: –
- Project margins: A vital part of creative services is knowing how much of your cash can be allocated for a project. With the fact that payment may not be received until after completion, this KPI will protect your business from overspending on a given task. Factor in materials used and how much you should invest in them.
- Revenue per client: Sometimes just a handful of clients bring in a large chunk of a business’ revenue. Other clients work almost as a bonus income as these core clients are such big hitters. Break down how much revenue each existing client brings in and calculate how many clients, on average, you need to secure per month.
- Efficiency: In the creative world, efficiency is key. Let’s say you’re spending an average of five hours on each project. Suddenly a project comes in at double that time, so you need to work out why this has happened. Were the appropriate materials available?
- Profit per time period: Freelancers can save you money as they can be hired by the project. Can you find a cheaper material to work with that’s easier to source? Little things can make a huge difference to your revenue
Whatever information you’re gathering and evaluating, your management accounting offers the advantage of knowing as much as you can about your operations, and then making decisions based on accurate numbers.