How to Optimise Working Capital for Project-Based Agencies

Managing cash flow in a project-based business feels like juggling while riding a unicycle. You've got multiple clients at different stages, invoices outstanding, team members to pay, and somehow you need to keep everything moving forward without running out of cash.

The challenge? Your bank balance doesn't reflect the health of your business. You might have £100K and still struggle to make payroll next week. Or you could be profitable on paper but unable to invest in that new team member you desperately need.

This is the working capital puzzle that agency owners face every day. Getting it right can transform your business from reactive firefighting to strategic growth.

What is Working Capital in Agencies

Working capital is simply the difference between what you have readily available (current assets like cash and what clients owe you) and what you need to pay soon (current liabilities like supplier bills and payroll).

For agencies, this calculation becomes complicated because your assets are tied up in time. You deliver work today, invoice next week, and get paid 30-60 days later. Meanwhile, your team needs paying every month, your software subscriptions renew automatically, and your freelancers expect payment within days.

The gap between when you spend money and when you receive it creates what we call the cash conversion cycle.

The Cash Conversion Cycle Explained

Your cash conversion cycle measures how long your money is tied up in operations before it comes back to you. 

For agencies, this typically involves three stages:

1. Time to invoice: How long after completing work do you actually send the invoice? Many agencies wait until the end of the month or even the project, which extends this unnecessarily.
2. Payment terms: Your invoice says "payment within 30 days", but what does that actually mean? Some clients interpret this as 30 days from invoice date, others from month-end. Some take 45-60 days regardless of what your terms say.
3. Collection time: Even after the payment is "due", how long does it actually take to hit your bank account? This includes any back-and-forth about queries, approvals, and payment runs.

Let's say you complete work on the 5th of the month, invoice on the 30th, offer 30-day terms, and the client pays on day 40. Your cash conversion cycle is 65 days. During those 65 days, you've already paid your team, your overheads, and potentially your suppliers—all before receiving a penny from the client.

Multiply this across multiple projects and clients, and you can see why agencies struggle with cash flow even when they're profitable.

Common Working Capital Challenges

The retainer paradox

Retainer clients provide predictable revenue, which sounds ideal for cash flow. However, many agencies structure retainers poorly—delivering work throughout the month but only invoicing at month-end with 30-day terms. This means you're effectively providing 60 days of credit to clients who should be your most stable revenue source.

Project-based cash holes

Large projects create significant cash flow challenges. You might have three months of work ahead, but you're paying your team monthly while the client pays in stages. Without careful structuring, you're funding the project from your working capital.

Scope creep costs

When a project expands beyond its original scope, you're often delivering additional work before formalising the change in writing and getting approval for extra costs. This free work erodes your working capital without you realising it.

The growth trap

Landing a major new client should be cause for celebration, but it often creates a cash crisis. You need to resource up before revenue arrives, and if this client has long payment terms, you might be several months cash-negative before seeing any return.

How to Optimise Client Payment Structures

The foundation of working capital optimisation lies in how you structure payments with clients. Don’t even think that you’re being difficult. This is about you setting up clear structures for your agency. 

1. Upfront deposits: Every project should require a deposit, typically 30-50% of the total value. This isn't just about securing the booking; it's about clients demonstrating commitment and sharing some of the financial risk. The deposit should cover your initial costs and resource allocation.For retainer clients, consider requesting the first month (or first quarter) upfront. This immediately improves your working capital position and filters out clients who aren't serious about the partnership.
2. Payment milestones: Break large projects into stages with payment tied to each milestone. This ensures cash flows throughout the project rather than all at the end. Your milestones should align with deliverables but also with your cost profile—if you're spending heavily in months one and two, structure payments to reflect this.
3. Monthly retainer timing: Invoice retainer clients at the start of the month for that month's work, with payment due within 7-14 days. This means you receive payment before or during the period when you're delivering the work, rather than 30-60 days afterwards.

Some agencies worry this approach will put clients off. In practice, professional clients understand and respect clear payment terms. Those who resist reasonable payment structures often become problematic clients in other ways too.

Improve Your Invoice-to-Payment Cycle

The faster you move from completed work to cash in the bank, the healthier your working capital position. Several practical steps can dramatically improve this cycle.

Invoice immediately: Don't wait until month-end to invoice completed work. If you finish a project phase on the 15th, invoice on the 16th. This simple change can cut your cash conversion cycle by two weeks.

Crystal-clear invoices: Ensure your invoices clearly reference the project, deliverables, and agreed terms. Include the purchase order number if there is one. Ambiguous invoices sit in payment queues while finance teams seek clarification.

Proactive communication: Send a heads-up email before the invoice arrives, particularly for large amounts. This gives the client time to prepare and reduces the "surprise" factor that can delay payment.

Payment terms that actually work: "30 days" is vague. Does it mean 30 days from invoice date? From receipt? From month-end? Specify "Payment due within 14 days of invoice date" to eliminate ambiguity.

Multiple payment options: Make it easy for clients to pay you. Accept bank transfers, direct debit, credit cards, and payment platforms. Every barrier you remove shortens your cash conversion cycle.

Follow-up system: Establish a consistent follow-up process. Send a friendly reminder at 7 days overdue, a firmer one at 14 days, and escalate at 21 days. Many late payments happen simply because the invoice was overlooked.

Managing Outgoing Payments Strategically

If you think working capital management is just about how to get money in faster, think again. One important thing about this is how you manage money out more strategically. This doesn't mean paying suppliers late or being difficult; it means being intentional about payment timing.

Where possible, align your payment of freelancers and suppliers with when you expect client payments. If you know a major project payment lands on the 15th, schedule related supplier payments for the 16th or 17th. This synchronisation ensures you're not depleting your reserves unnecessarily and reduces the risk of short-term cash shortages.

Just as you set payment terms with clients, you can negotiate them with suppliers. Many suppliers offer 30-day terms as standard; some will extend to 60 days for reliable customers who pay consistently. This creates breathing room in your cash flow without damaging relationships. The key is being upfront about your needs whilst demonstrating you're a trustworthy partner who honours commitments.

Business credit cards and payment platforms can give you 30-45 days extra before money leaves your account. Used strategically and paid off in full each month, these tools improve working capital without costing anything in interest. However, discipline is essential—these facilities should extend your payment cycle, not fund spending you can't afford.

Then, separate essential and discretionary spending. Ring-fence cash for essential payments like payroll, HMRC obligations, and critical suppliers. These non-negotiable expenses should never be at risk. Only commit to discretionary spending when you have clear visibility of incoming payments. This separation ensures your core operations remain stable even when client payments arrive later than expected.

Client Relationship Dynamics

Perhaps the most important thing about all this is keeping up with the relationship with your clients. This requires honest conversations with clients about payment terms and expectations. These discussions are easier when approached from a partnership perspective rather than an adversarial one.

1. Set expectations early: Discuss payment terms during the sales process, not after work begins. Professional clients respect clear, upfront communication about commercial arrangements.
2. Explain your reasoning: Help clients understand why payment structure matters. Most business owners appreciate that you need to pay your team and can't fund their projects from your reserves.
3. Be consistent: Apply the same payment terms and processes to all clients. Inconsistency creates confusion and makes you appear unprofessional.
4. Address issues promptly: When a client pays late, address it immediately. Letting it slide once sets a precedent that their late payment is acceptable.

Making Changes Without Disrupting Existing Clients

If you're reading this thinking "I need to change everything", don't panic. You can improve working capital management progressively without disrupting existing client relationships.

The simplest starting point is to implement improved payment terms for all new clients from today onwards. This immediately begins strengthening your position without requiring difficult conversations with existing clients. New prospects have no expectations about your payment structures, so there's no awkwardness in setting appropriate terms from the outset. Within six months, you'll have a growing proportion of your client base operating under healthier payment arrangements.

For existing clients, use natural transition points to introduce better terms. When renewing contracts or expanding scope, build improved payment structures into the new agreement. Frame this as part of your business evolution and professionalisation rather than a response to cash flow problems. You might say something like: "As we've grown, we've refined our payment processes to ensure we can continue delivering exceptional service. Going forward, we'll be invoicing at the start of each month with payment due within 14 days." Most clients will accept this without question, particularly if they value your work.

If you genuinely need to change terms mid-contract, approach the conversation from a value perspective rather than a financial necessity angle. Perhaps you're introducing enhanced reporting, dedicating senior resource to their account, or offering faster turnaround times. Position the payment structure change as part of this elevated service level. Clients are far more receptive to paying differently when they understand they're receiving more value in return.

What Should You Do?

Start with your problematic clients—those who consistently pay late or resist reasonable payment terms. These relationships often cause disproportionate stress and damage your cash flow more than others. Address payment issues directly and professionally. If a client continues to pay late despite clear terms and reminders, sometimes the healthiest decision is to part ways. Losing a client who creates cash flow problems often improves your business more than keeping their revenue. The capacity freed up can be filled with clients who respect your commercial arrangements and contribute to stable working capital rather than undermining it.

Building a Sustainable Working Capital Practice

Your working capital position directly affects your ability to serve clients well, retain talented team members, and build the agency you envision. When cash flow is healthy, you can focus on delivering exceptional work rather than juggling payments. You can hire that brilliant strategist without worrying about covering their salary before client payments arrive. You can invest in the tools and training that elevate your service. You can turn down problematic clients because you're not desperate for their revenue.

Get working capital right, and everything else becomes easier. The stress lifts. The difficult conversations about money become rare. The growth you've been planning finally becomes possible. This is the foundation that allows your agency to fulfil its potential.

Struggling with cash flow despite being profitable? 

Book a strategy call where we'll review your situation, identify where cash is getting stuck, and create a clear action plan you can implement immediately.

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