Recognize the Difference between Cash Flow and Profit

While I know that this topic may be very basic to many of you, I recently had a lengthy discussion with an agency principle explaining the difference between Cash Flow and Profit. This got me thinking that sometime we need to revisit the fundamentals to reinforce our foundation.

Too many agency principals think that just because they are getting checks for their work they must be profitable. The fact is, they are losing money—even though they have cash in the bank.

Successful and highly profitable agencies recognize the difference between cash flow and profits. These agencies realize that just because they get a check for $50,000 from the client, spending $100,000 worth of billable time on the job means the job is losing $50,000. While this is an extreme example to make the point, I have seen agencies lose tens of thousands of dollars on a job. These losses are primarily time investments, which many agency principals don’t view as a cost to the agency – which is an animal we will address in another post.

I have had agency principals look me straight in the eyes and justify this loss by saying, “We have to pay our staff anyway.” While this may be true, I would put forward that it is a better investment of their extra time to focus on the agency’s new business efforts, social media and sales materials.

By managing your billable hours will free up time for your own marketing and business development. These efforts will result in either new clients or new opportunities with existing clients. This provides new and more expanded revenue.

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