Running a digital agency can feel like a never-ending roller-coaster of exhilarating highs and frustrating lows. Too many business owners are trapped in a cycle of ups and down patterns of successes and failures, which can threaten a company's long-term growth.
Their companies wobble between successful booms of new customers and cash inflows, followed by miserable lows where opportunities and cash are scarce.
This roller-coaster is commonly known as "the feast or famine" cycle. It can make it hard for you to pay your bills or even cover expenses when the number of projects or paying customers have dwindled.
Whether you're already caught up in a feast and famine cycle or are a new business owner trying to establish a footing in the market, this post is for you. In this guide, you'll discover the various strategies you can employ to beat the feast and famine cycle.
But first, let's address the root cause of the problem.
Why Do Businesses Have a Feast and Famine Cycle?
Businesses stuck in a feast and famine cycle are characterized by flourishing periods of business followed by times when sales are quite low.
Small businesses in particular, are more susceptible to these problems as they're yet to build a large pool of repeat customers. These businesses also lack the manpower and systems to forecast demand and have a unified view of their current and future cash flow.
Other factors contributing to a feast and famine cycle can include.
- No true annual expense forecasts
- Poor tracking of overdue invoices
- Inconsistent sales activities
- Pricing that's too low
- Poor business positioning
- Over-reliance on legacy systems that are prone to errors
- Lack of cash flow and sales forecasts, leading to blind spots
Luckily, there are things you can do to beat the feast or famine cycle.
How to Reduce the Peaks and Valleys in Your Digital Agency
Here are a few steps you can take to beat the never-ending cycle of feast and famine in your agency and generate more profit.
1. Set Your Pricing Right
Cash flow—or lack of it thereof—is the main culprit for the feast and famine cycle. To beat this cycle, you must keep your cash flow in check, cutting off anything that may, in one way or the other, reduce your inflows. And that starts with your pricing.
If your prices are too low, you may have to take on more work than you should just to earn enough to cover your bills.
Low prices can help you generate a quick turn-around job but over the long term, it can lead to a constant drag on your business, poor clients and an inevitable spiral downwards.
For an in-depth look at pricing strategies, check out our article “How Creative Agencies will Price their Work for Success in 2023.”
2. Stay Disciplined with Your Spending
When everything is working out, it's easy to let your spending get out of control.
But if you can manage your spending, you'll be able to save money during the "feast" period to help offset the lean times, which can be tricky when you are eager to grow. The key is to forecast your cash flow over the coming months to ensure that you'll be flush and are able to spend.
In order to make those decisions, you'll need a unified view of your monthly expenses, cash flow, and sales projections to better manage your finances and predict upcoming peaks and valleys.
Additionally, it’s useful to set clear revenue goals. Having these goals will help you truly understand the sales you need to generate to have a banner year.
3. Keep Good Records of Who Owes You What
Staying on top of your accounts receivables will keep your business in check and prevent you from having periods when there are no cash inflows. That means you'll have cash even when "famine" kicks in, and you'll be equipped to pay your bills.
It’s critical to maintain cash flow forecasts based on a prediction of when cash will likely come into your business versus relying on the due date on your invoices. The truth is that, for most companies, invoices are paid late over half of the time.
4. Anticipate Future Demands
Use a combination of past history, current trends, and robust forecasting software to anticipate upcoming periods of feast or famine.
Predicting upcoming peaks and valleys ahead of time allows you to prepare adequately for the future. For instance, if you anticipate an upcoming low season, you can negotiate with clients on upcoming projects to adjust start dates, phases, and payments to help keep a steady flow of income when jobs are low.
5. Add More Revenue Streams
Depending on what your digital agency sells, it might be that peaks and troughs are inevitable.
If you know, based on the nature of your business, that this is inevitable, you can break the feast-and-famine sales cycle by diversifying your income streams.
Don't just rely on one source of income. Having additional income streams will help you smooth out the ups and downs. For instance, if you deal with a product whose demand is seasonal, you can add a passive income product that can be sold all year round.
The goal is to add a product that will have its highs when another one of your products is low in demand. This will ensure consistent income throughout the year.
For an agency, this might mean finding a market of smaller, quick jobs that you can use to backfill slow periods. Or, if your bread and butter jobs are smaller projects that tend to be sporadic, you may want to begin the move up market so that at least a portion of your projects are large, multi-month jobs that can set a foundation of revenue for the year.
The feast and famine cycle can frustrate many business owners, but you can rise above it.
Since cash flows are the main culprit to this cycle, your strategies for beating this problem should start with proper cash flow management. You can start by adjusting your pricing, then implement strategies to control your spending and finally, develop sales processes that are repeatable and reliable.
Additionally, you'll need to devise ways to predict upcoming peaks and valleys to better handle the lows when they hit. Don't forget to add additional revenue streams, as this can help you easily smooth out the ups and downs.
Dryrun automatically draws in your accounting data, including your regular expenses, big bills you need to pay, and your invoices, so that you know who owes you what and what's overdue, so that you can see the flow of money into your business as far out as possible.
Fight 'Feast or Famine’
Model the future of your cash flow, sales and scenarios in a single source of truth, to smooth out your revenue and achieve a steady stream of income.
Spot the peaks and valleys ahead of time so that you can adjust your capacity, backfill sales, and pick and choose the best projects, generating more money with the same team.
Book your DISCOVERY CALL to learn about the Dryrun advantage or start your FREE TRIAL today!