This is the final part of my 4-part series on ‘Agency Blockers’ – why some agencies seem to ‘bounce’ up against an invisible ceiling.
You’ve probably seen it before – the business grows until things start breaking, only to contract back to its original size. Then grows, and contracts, and grows, and contracts. Bumping up against this barrier that we can feel but can’t quite define.
This series discusses some of the most common reasons that I’ve seen, both in my time as CEO of a large independent agency, and now as a consultant and advisor to agencies of all sizes.
Part 4 is focused on Finance. Earlier parts are linked below:
Let’s get into it.
Love it or loathe it, a solid grasp of the books is essential to helping an agency go from good to great. This isn’t about cost cutting to pay the largest possible dividend, but good financial management and therefore investment in the things that are going to have the most positive impact on your business and the likelihood of achieving your vision.
Something interesting I’ve found in the marketing industry is that there seems to be a real aversion to the financial/accountancy side of the business, even amongst senior employees (or owners). I personally think that this is a shame given it’s such an important part of running a successful business – and really everything else around us as well.
I’m certainly no expert on finance – far from it. One of the things I wish I did much earlier when I was CEO of an agency, was bring in a virtual CFO. A good advisor like that can be one of the best investments you make. If you don’t have a great CFO-type person in the agency or in your supplier list, my simple recommendation is to get one! There’s plenty of great, industry specific advisors around, and I’d be happy to make introductions to some that I know.
A note: I won’t be going through specific financial challenges (eg poor cashflow management etc) – more the cause of those sorts of challenges.
The 3 Financial blockers to agency success are:
- Accumen
- Utilisation and Profitability
- Broken Pricing Models
Article Structure
Blocker: A short summary of an identified blocker to agency success.
Symptoms: Sometimes it’s hard to see the forest for the trees. The symptoms are the trees – see enough of the same sorts of trees and you’re probably in a forest.
Next Steps: Obviously every business is different and the details of these challenges are unique. Broadly though, I’ve outlined some next steps to explore to help you get out of that forest.
1: Financial Acumen
Blocker:
Most people don’t start an agency so that they can spend more time pouring over management reports, utilisation metrics, and financial KPIs. It’s no wonder then, that a lack of financial acumen or comfort when it comes to the finances can be a real blocker to agency success.
Symptoms:
If no one in the business has ‘finance’ in their remit, and/or they’re not comfortable reading/understanding/forecasting P&L, Balance Sheet, or cashflow reports, that’s a big red flag. When the agency is small and the finances are pretty simple, you can get away with ‘not much’ – but as you grow, it becomes more and more important to have good habits and systems when it comes to your finances.
More generally, if you, as the owner/leader, have any feelings of uncertainty about the financial status of the business – or any of the aforementioned big 3 reports – you should look to rectify this.
Further, if you’re at the point where there’s delays in payables, over reliance on debt facilities, low CAB with uncertainty as to why and so on, it’s time to do something.
Next Steps:
The ‘simplest’ way to resolve this, is to bring in the right 3rd party. A Virtual or Fractional CFO can embed in the business with you in order to help you manage the finances, create the right processes, and upskill you. There are some great industry specific companies around doing this, and getting one on your side could be a good move.
In addition, it’s worth considering whether to bring on a formal or advisory board to help you oversee the business. This allows you to continue to maintain control over the business, but lean on the expertise of others in areas where you might be lacking. This can also go further than finances – that’s just one of the things in the remit of the board. A board could help you in developing strategy, business development, People and Culture, and compliance.
2: Utilisation and Profit
Blocker:
Lack of understanding around the interplay of utilisation & price (revenue & profit).
Symptoms:
In a people business like an agency, the cause of low profit is often down to one thing – high payroll costs relative to revenue. In agencies, nominally 50c of every $ of revenue goes to payroll. Sometimes less, sometimes more, but this helps to illustrate how significant an expense it is.
Because of this, it’s important to keep a very close eye on how much of your team’s time it’s taking to generate your revenue.
A red flag here is not knowing metrics like utilisation rates, or having a considered pricing strategy that takes into account not just your costs but the value generated for clients.
Generating more revenue in an agency does not always mean more profit if your payroll costs increase at the same rate. Agency owners should be able to answer questions like:
“Will bringing on a bunch of new clients mean you need to hire more people?” “How many?” “How do you know that?” “What’s the impact on utilisation across the business? Profit?”
Next Steps:
The only way to increase profit is to decrease expenses or increase revenue. But if your costs increase at the same rate as revenue, it’s all for nought.
Getting this right in a way that’s scalable will take a bit of work, but it’s worthwhile. Start with working out the current revenue generation capacity of your team against their costs. Do you need to find margin by increasing prices? Or is your team simply too expensive for the prices you’re able to command for your work? Or do you simply need to increase the output of your team to match their true capacity?
This is an interesting but time consuming activity, and it’d be well worth talking to a Virtual/Fractional CFO that understands the industry. It is possible to set up your systems and processes to automate a lot of this work going forward, saving you time and earning you money.
3: Broken Pricing Model
Blocker:
The way you price your work isn’t conducive to hitting the profit figures you want, nor is it suitable for your clients.
Symptoms:
You might be struggling to be as profitable as you’d like, and have determined that it’s not a utilisation issue. You may also be able to see that you’re consistently coming up short in profit across a range of clients/projects, despite the work remaining in scope and delivered on time.
Externally, you may be facing disagreements with clients around the value of the agency’s work, or there may be difficulty in selling engagements to new clients. There might be pressure to reduce rates/prices based on things like competition, seniority of staff, employees staffed on account, etc, or your clients might be focusing on the ‘wrong’ things like timesheets/hours rather than value delivered.
This is a pretty varied range of symptoms, and they can be indicative of all sorts of problems – issues with your pricing model is just one of them.
Next Steps:
First, it’s good to be aware of the pros and cons of however you’re pricing your work. This isn’t an exhaustive list, but for example for pricing based on hourly rates:
- Pros: Can build in appropriate margin for every single hour. Ensure you’re capturing 100% of the output value from your team.
- Cons: Focus on input (hours) rather than output/value. Disincentive for the agency to find efficiencies. Commoditises your work.
There’s no silver bullet here, but understanding how you’re pricing and the relative strengths and weaknesses of it will help you to make more informed decisions.
The next step will be to review clients who have complained about price/value and find the common thread. All outgoing clients should have a post-mortem conducted to determine what went wrong.
If relevant, once you’ve reviewed your pricing model consider if you could shift the focus from input (hours) to output (deliverables) or outcomes (value).
Again, if relevant, review how your sales team is positioning the engagement (eg “you’ll get X hours of senior time per month”).
That’s it for my series on common agency blockers and why agencies ‘bounce’. Let me know if you have any feedback or if there’s another blocker you think it would be worth discussing. I hope they’ve been helpful.
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