This article explores the critical importance of maintaining healthy cash flow and reserves, and the deceptive allure of big-name clients who may inadvertently contribute to financial instability.

Back Story

Albiet based on anacdotal evidence, but it seems that studios and freelance audio professionals are feeling squeezed by cashflow issues right now. Some are reporting that previously good payers are now taking longer to pay their outstanding invoices. Here are some examples from some of our community when asked how things were going with getting paid;

“I’ve had a few clients stating they may be able to pay me jobs I did in October no sooner than March. A few others known for paying right when I send them the invoice have been later with payments (a few days / a week). A job for an American company took almost 2 months to be paid, when the promise was for payment when I delivered.”

Another said;

“’I’ve gone from getting paid between 1 and 2 weeks from my regulars to 4 to 5, and that’s with chasing. These are people I’ve an existing relationship too. New business is taking forever, sometimes 4 to 8 weeks with chasing. I’ve had one not pay and stop contact and I’ll just end up taking a hit on that and not work with them again.”

Large companies seem to be the worst offenders at settling their bills;

“Only with the large clients. The small/independents all have been paying when they get invoiced. The large ones I ALWAYS have to chase and 90-120 days is not uncommon.”

“The larger businesses I work with all seem to have 45 or even 60 day pay cycles for freelancers. The midlevel ones are often 30. The smaller companies I sometimes get paid immediately.”

I’ve left the worst until last. A conversation took place with a friend last week about current money owed. He is currently owed £43,000. He feels like closing the doors and doing something else. In his words it’s the disrespect that bothers him most.

When people pay late then real people suffer. Most small studios and freelancers don’t have a huge pot of savings to fall back on. One of their largest costs is people, so if money runs out they have to start getting rid of people, often friends with homes and families.

And I’m writing this because I’m not immune to this either. Currently our late payments span two months worth of turnover. One company who we helped out during the pandemic by giving them extended terms to prevent them closing down has now recovered. Now back in their feet they owe us money, several months later, nothing. Now the CEO is ignoring our emails asking for payment. It seems he has a short memory.

There is a serious cost to small businesses by late payers.

The Lifeblood of Business: Cash Flow

Business Insider says that of all the reasons businesses fail, 82% experience cash flow problems, or to put that another way 4 out of 5 business fail because of cashflow issues. That’s a staggering figure. In the UK Government “Payment and Cash Flow Review Report” published in 2023, they say this;

“Too many small businesses struggle to survive because they are not being paid on time. Whilst there is evidence of improvement in payment practice in recent years, late payment remains stubbornly widespread.

Small businesses have had to contend with a global pandemic, which disrupted both daily life and global supply chains, the war in Ukraine and rising costs. These events have put pressure on the UK’s small businesses.”

The fact is that this is a global problem.

Cash flow, the net amount of cash being transferred into and out of a business, is the lifeblood of any small studio. It’s not just about profitability; it's about survival. A common misconception is that as long as the business is profitable, it’s secure. However, profitability on paper doesn’t pay the bills – cash does. Many small studios fall into the trap of ignoring their cash flow, focusing solely on their creative output and assuming that the money will follow. This oversight can lead to catastrophic outcomes, including the inability to pay rent, salaries, or suppliers, ultimately crippling the business. For freelancers running a small audio company or studio this can mean losing everything, including their home.

The Importance of Cash Reserves

Cash reserves act as a buffer against unpredictability. They’re akin to a safety net, providing financial stability and the flexibility to navigate through lean periods without resorting to drastic measures. Think of reserves as your studio’s emergency fund; they can cover unexpected expenses or tide you over during slow business periods. Without this cushion, you’re at the mercy of your next invoice being paid on time – a risky position that can escalate into a full-blown crisis with just a few missed payments.

It’s tempting to think that when there’s a pile of cash in the business that it’s a good time to spend it on some dream audio equipment or a top spec computer. It may be wiser to put it on a deposit account as reserves.

The Allure and Risk of Big Clients

At first glance, securing a contract with a big company like a film studio or record label seems like hitting the jackpot. It promises substantial revenue and the prestige that comes with high-profile projects. However, this golden opportunity can quickly lose its lustre. Big companies often have lengthy payment cycles, extending 60, 90, or even 120 days. As outlined above in some of the comments from real audio freelancers, it’s often the big clients that don’t pay in a timely manner.

While waiting for payment, small studios must continue to cover operational costs, including staff, utilities, and rent, without the incoming cash to support these expenditures. This delay can strain the financial health of a small business, leading to a dangerous cash flow gap.

How To Safeguard Your Studio Business

To safeguard your studio from the perils of poor cash flow management, consider the following strategies:

1. Financial Planning: Regularly monitor your cash flow with detailed forecasts that account for incoming and outgoing funds. Planning ahead provides a clearer picture of your financial health and helps identify potential shortfalls before they become emergencies. You don’t have to be an accountant to do this, it’s simply a list with two columns. On the first it shows all the money coming into the business and the other all the costs. These need to cover the flow of cash, not the invoices, as often invoices don’t get paid for months. The list will show how much cash you will spend and how much cash will come in.

2. Maintain Cash Reserves: As outlined above, aim to set aside a portion of your profits as a financial buffer. This practice might mean sacrificing some immediate gratifications for long-term security, but it’s a worthwhile trade-off to keep your business afloat during challenging times. Don’t forget to include money to cover any taxes that need paying, those can end up being large sums.

3. Diversify Your Client Base: While big clients are valuable, relying too heavily on a few can put your studio at risk. Diversifying your client portfolio ensures that if one payment is delayed, your business won't be immediately endangered. Don’t get too comfortable with one client, they may stop using your services and if 90% of your income comes from one client that can really hit the cashflow.

4. Negotiate Payment Terms Upfront: Before taking on projects, discuss and agree upon payment terms that are favourable to your studio's cash flow. Consider requesting a deposit or milestone payments to mitigate the risk of extended payment terms. We suggest this being compulsory with new clients who have no track record with you.

5. Implement Efficient Invoicing and Follow-Up Processes: Prompt invoicing and follow-up can significantly shorten the payment cycle. Clear, professional invoices, coupled with timely reminders, can help ensure your payments are prioritised. There are plenty of great applications like Freshbooks, Quickbooks and Xero that many small freelancers use. They often include payment gateway connections to give your clients the chance to pay using things like credit and debit cards or Paypal.

Stay Alive

The story of a small studio’s success is often romanticised, filled with Instagram posts about cool clients or award wins. Yet, without a solid foundation in cash flow management, these dreams can quickly unravel. Entrepreneurship in the creative sector is fraught with challenges, but with sound financial stewardship, the perilous impact of cash flow issues can be mitigated. Remember, it’s not just the quality of your work that sustains your business, but the health of your cash flow too.