One of the things that happens when economics get tight is that our clients begin to slow pay us.
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– Hey everybody, Drew McLellan here from Agency Management Institute. This week, I am coming to you from hot and muggy Orlando, Florida. One of the things that happens whenever we have an economic downturn, a recession, a crisis like we have never seen before, like the pandemic, one of the things that happens when economics get tight is that our clients begin to slow pay us. And what that means for us is a cash flow problem. And when agencies have a cash flow problem because most agencies aren’t sitting on a bucket of cash, we’ll talk about how much money you should be sitting on in a minute. But when agencies aren’t sitting on a lot of retained earnings, when clients start slow paying us, and we’re starting to see signs of that already, then what happens is 30 days turns into 60, 60 days turns into 90, which impacts how we pay our vendors and impacts how we pay our team, but often what happens is you find a way to pay everybody else, but you don’t get paid, and we need to avoid that. So a couple of tips. Number one, start doing cash flow projections. Doing a good job of really looking out 30, 60, 90 days to try and figure out where you’re going to get jammed up. So start paying attention to your clients’ patterns. Not only their patterns of the past, but the patterns since the pandemic started. Or if you have new clients, start talking to them about their payment terms and all of that. But the other thing is making sure that you have enough money in the bank to weather this storm, to weather this stretching out of client payments. It’s healthy for an agency to keep two months of operating expenses, so that’s loaded salaries plus all of your overhead inside the agency. Two months. Now if you have a gorilla client that’s 25, 30, 35, 40, or greater, percent of your AGI you may need to have more than two months ’cause if that gorilla client starts to slow pay you, boy, do you feel that in a hurry. The other thing you need to be doing is, ideally and maybe now is not the time, but as we come out of this and everyone gets stronger and more financially sound, one of the things I want you to start doing is building up a reserve outside of the agency, in your name. So pay it to yourself as a salary or a dividend, but keep it in a money market account so you can lend it back to the agency if you need to. It’s amazing how different decisions turn out to be when you have to lend the money back versus spending money that’s already in the agency checking account. So don’t keep too much in the bank account even now, all right? Keep an eye on your cash, make sure you keep getting paid. Talk to you soon.