The situation
When we first met the founders of a 15-person marketing agency based in Manchester's Northern Quarter, they were running a business that looked healthy on paper. Revenue had grown from £850,000 to £1.2 million in two years. They specialised in performance marketing for ecommerce brands, with a strong roster of clients using Klaviyo, Shopify and Google Ads. The team was young, ambitious, and the founders had built a reputation for delivering measurable results.
But the founders were stressed. Their bank balance was swinging wildly. Some months they had £80,000 in the account; others they were scraping to make payroll. The problem was their revenue model: they had moved from a mix of retainers and project work to almost entirely project-based billing. The shift had been driven by client demand, brands wanted fixed-scope campaigns, not ongoing retainers. But the cash flow consequences were brutal.
Retainers had given them predictable monthly income of around £70,000. Projects brought in larger invoices, typically £15,000 to £40,000, but with long payment terms. Their average debtor days had stretched from 28 to 62. They were winning more work, but the cash wasn't arriving fast enough to cover wages, rent on their Northern Quarter office, and the £25,000 monthly payroll.
The founders had tried factoring invoices through a finance company, but the fees were eating into margins. They'd also taken a £50,000 overdraft facility, which they were using almost every month. The interest was manageable, but the psychological toll was real.
The decision
The founders came to us with a single question: "Should we go back to retainers, or is there a way to make project billing work without the cash flow cliff?"
They were worried that returning to retainers would slow growth. Their clients liked the flexibility of projects. But the current model was unsustainable. We needed to model what a hybrid approach would look like, and whether it could stabilise cash flow without killing revenue.
The founders also wanted to understand the tax implications. They were paying themselves and their co-founder through a mix of salary and dividends. The company was profitable on an accrual basis, around £180,000 net profit, but cash-poor. They were worried about corporation tax bills arriving when the bank balance was low.
What we modelled
We built three scenarios using their actual Xero data and a cash flow forecast in Float. The numbers were based on their last 12 months of trading:
- Scenario A: Full return to retainers. Assume 70% of revenue from monthly retainers at £8,000–£12,000 each, with 30% from projects. This would give predictable monthly income of around £65,000, but we estimated a 15% drop in total revenue because some clients would resist committing to retainers.
- Scenario B: Hybrid with milestone billing. Keep project billing but break each project into three or four milestone payments. Invoice at 30% upfront, 40% at midpoint, 30% on completion. This would reduce average debtor days from 62 to around 35.
- Scenario C: Hybrid with a retainer core plus project upsells. Offer a lower-cost retainer for ongoing management (£5,000–£7,000 per month) with project fees for campaign launches. This would give a base of £40,000–£50,000 monthly recurring revenue, topped up with project work.
We also modelled the tax impact. Under current rules, the company paid corporation tax at 25% on profits above £250,000, but their profits were below that threshold, so the rate was 19% on the first £50,000 and 25% on the rest. With net profit of £180,000, the corporation tax bill was around £38,000. If they switched to retainers and revenue dropped, the tax bill would fall, but so would their ability to reinvest in the team.
For the founders personally, they were taking a combined salary of £24,000 (the personal allowance threshold) and dividends of £80,000 each. The dividend tax rates for 2025/26 are 8.75% for basic rate, 33.75% for higher rate, and 39.35% for additional rate. With the dividend allowance now just £500, they were paying significant tax on those dividends. We modelled whether retaining more cash in the company and taking smaller dividends would improve their cash position.
The outcome
The founders chose Scenario C: a hybrid model with a retainer core and project upsells. It felt like the least risky option. They kept their existing project clients but shifted new business to the retainer-plus-project structure. For existing clients, they offered a discount on the retainer if they committed to at least six months.
They also implemented milestone billing for all new projects. The 30-40-30 split became standard. Within two months, average debtor days dropped from 62 to 41. Within four months, it was down to 33.
The cash flow stabilised faster than expected. The retainer base gave them a predictable £45,000 per month, which covered payroll and overheads. The project fees became the profit engine. They stopped using the overdraft entirely after three months.
On the tax side, they decided to keep dividends at £60,000 each rather than £80,000. That saved around £6,000 in personal tax per founder and left an extra £40,000 in the company. They used that to build a cash buffer of £80,000, equivalent to roughly 60 days of operating costs.
Within four months, the cash position was stable. The founders reported sleeping better. They had a clear view of the next three months' cash flow, and they were no longer chasing invoices to make payroll.
Revenue did dip slightly, from £1.2 million to around £1.1 million in the first year of the change, but profitability improved because they were spending less time on admin and chasing payments. The net profit margin went from 15% to 18%.
What others can learn
- Retainers aren't dead, but they need to be structured right. A lower retainer base combined with project upsells gives predictability without locking clients into rigid commitments. It's a compromise that works for both sides.
- Milestone billing transforms cash flow. Breaking projects into three or four payments with upfront deposits reduces debtor days dramatically. It also forces better project management, you know exactly when cash is coming in.
- Tax planning is cash flow planning. Reducing dividends to retain more cash in the company can be a smart short-term move, especially when you're building a buffer. Just make sure you understand the dividend tax rates and the £500 allowance.
- Don't let a growing top line fool you. Revenue growth can mask cash flow problems. If your debtor days are climbing, you're effectively lending money to your clients. That's not sustainable.
- A cash buffer of 60 days is a minimum for agency businesses. When you're project-based, the gap between winning work and getting paid can be six to eight weeks. Having two months of costs in the bank means you can say no to bad deals and yes to good ones.