Managing your cash flow and factoring in flexibility are the best ways to survive when the going gets tough, says Bryan Wilsher
As chief financial officer of Loewy, I am frequently asked about the pitfalls of growing and developing a company like ours. Having spent 25 years on the financial side of the design industry, I would say one of the biggest risks is the unpredictable nature of clients – they can put a hold on work or even pull out at very short notice, without any immediate negative impact on their own business.
I have seen it time and time again – design businesses facing ruin as a result of losing several clients in quick succession. Consultancies should therefore avoid over-reliance on any one client or sector. It seems obvious enough – if a client commands, for instance, 60 per cent of your consultancy’s revenue and it decides to leave for any number of unforeseen reasons, you may find it difficult to adjust your commitments and then face a cash crisis.
The same can happen if your group is over-exposed in any given sector and that sector experiences a downturn. So keep a diverse revenue base. Having any one client command a third of your revenue starts getting risky; ideally your biggest client should command no more than 20 per cent of your total income.
The ability to be flexible and act immediately and decisively in any adverse trading situation is another essential factor in mitigating risk. Once revenue drops, your profit – or indeed survival – depends completely on your ability to reduce committed overheads. It’s almost always your people who are first to go. Yet, the quickest way to lose a client (and suffer a downturn in revenues) is to produce work that is not up to standard because you’ve got rid of talented staff, or to upset the client because its key point of contact has moved to another consultancy. Therefore, holding on to and motivating your people is key. It’s best to maintain a core of well-motivated and rewarded staff and then support them with freelances for busy periods. That way, you avoid the financial drain of having too many permanent staff during the slower months.
The cost of your other major commitment – your premises – is not so easy to reduce, except by sub-letting space if your lease allows. So avoid long-term leases with inflexible restrictions, as they will only increase your exposure to risk. If possible, try to include a ‘tenant-only’ break clause in your lease, which will allow you the flexibility of re-evaluating your lease after a specified timeframe – typically half-way through the term of the lease. This should allow you to reconsider your space and reduce costs if necessary.
This brings me to cash. If you’re not collecting your debts and managing cash flow, you could find yourself going bust. In fact, a loss-making company can survive a long, long time by managing cash well, giving you breathing space. Conversely – and perversely – a rapidly expanding business can run out of money if it has to pay staff, freelance and supplier bills that are increasing quickly in line with extra work. So having a good grip on cash flow and collecting debts in a timely fashion is essential to keeping a business solvent.
At Loewy, we take a proactive approach to collecting payment and work with all our clients. So make sure that every time you complete a job, the invoice is sent out quickly, and have someone track it, checking the client has received it and working with the client on when it will get paid. That way, you’ll get your money faster and you should have enough cash to get through the tough (or the good) times.
Monitoring your design group’s exposure to financial and economic risks, like interest rate and currency fluctuations, is also important. For example, some businesses may think it makes sense to borrow in euros because of cheaper interest rates. However, if currency rates move against them, this could wipe out any potential benefits. The risk is simply not worth taking. Unless, that is, you already have billings and revenues in euros, allowing you to service your debt in the same currency. That way, you can benefit from the lower interest rates, while containing any exchange-rate risk.
In the end, if you’re a creative business, you should be innovative in all areas – even ‘boring’ finance. That’s where your real advantage could lie – particularly as we all now face a less certain economic outlook.
Bryan Wilsher is chief financial officer of Loewy
Take some precautions
• No client should command more than 20% of your income
• Hold on to, and motivate, talented staff
• Use freelances to cope with busy periods
• Look at leases that allow sub-letting or ‘tenant-only’ break clauses
• Manage cash flow – as soon as a job is completed, send out invoices promptly and track their progress
• Minimise exposure to currency fluctuations