For many agencies, this title sounds like a joke or perhaps a nightmare. Agencies historically are a beacon of creativity and freedom, and accountants are, well, the opposite of those things (I can say this because I am one).
For me, this title was my reality at the start of 2015 as I left my job at a Big 4 firm to set up a proper finance function within a high growth agency. Fast forward six years later, and I am now leading an early-stage mar-tech company that I am also an investor in. During this journey, I learned a few key lessons around what’s needed to ensure the financial stability and profitability of a growing agency. It ultimately all comes down to proactively forecasting revenue on an ongoing basis to ensure cash flow and then reacting quickly, when needed, on expenses to maintain margin.
Setting it up
This article will start with the assumption that you have defined your revenue and profit goals for the year (if you want guidance on that topic see here).
Forecasting your revenue can be done within a CRM or simply a spreadsheet, or some combination of both. We found the combination of having a system with set rules/data parameters and a plethora of data points being automatically captured and filtered, along with export functionality for manual analysis was the best. I would always suggest starting small though, with a simple spreadsheet to decide what is needed within an automated solution and to build the important habit of routine upkeep of the forecast information.
I also want to point out the distinction between tracking secured revenue versus pipeline opportunities. Your forecast should always start with a calculation of known wins, by month, broken out by monthly recurring revenue (MRR) or retainer work and project work. We’ll talk about why this is important later.
Once you see how your secured revenue compares to your target, you can use this to assess the adequacy of your new business pipeline. This pipeline should be categorized by whether the opportunity is with an existing relationship or a net-new relationship. This is key as the probabilities associated with closing them are often different, so that has to be factored into the expected value of the pipeline. It is also important to track whether the opportunity is adding MRR or if its project work.
The stages of the pipeline and the likelihood of winning an opportunity that hits the stage also have to be defined upfront. Start with a conservative default and only a few stages like opportunity identified, pitched, verbal agreement, signed SOW, and build from there. Doing this will allow you to monitor pipeline health and allow you to weigh the potential and likely value of the pipeline against the shortfall in the target you are currently seeing.
Using the forecast
It is easy for the pipeline to become a ‘dumping ground’ of long-shots or vague opportunities. Be diligent in the review and set rules upfront of when items need to be considered for removal. This may include days of inactivity or days since the opportunity was created.
Also, build in the habit of a weekly check-in on the data. Circulate the data weekly and be transparent about what it says with your sales and accounts team members so they can positively impact results and understand where any sense of urgency or rationale for key decisions around revenue being made.
Fair warning you will likely at first hear team members talk about opportunities that are not in the pipeline or work that they think is secured but hasn’t met the criteria (e.g. a signed SOW). This is important as it highlights the inability to plan the agency’s finances and resources without having this information.
Also, make sure to maintain this set of data for at least 3 months in advance at any given time. You don’t want to be surprised by peaks and valleys in workload (those come up enough simply by the nature of agency life.
Resource Costs – The Heart of the Agency
Your people define who you are as an agency, and are part of what makes each agency unique. Similarly, managing resource costs is at the heart of profitability for an agency. Resources are typically the largest expense of an agency and also the most variable. The ability to keep this cost variable is important in order to match and maintain profitability as revenue ebbs and flows. In other words, resources are the bridge between how much work you have to do (based on the revenue forecast) and the expected profit margin.
Depending on the nature of your agency, a rule I often followed was that full-time employee costs should never be more than the MRR of your agency. In other words, I always wanted to make sure we knew we had enough revenue each month to cover our people’s costs.
As you build your revenue forecast, continue to increase the value of that forecast by layering in forecasted team hours available by skillset. Again this is often able to be done in an agency project management tool or can be built simply in a spreadsheet until more sophistication is needed. This arms you with the data to make people-based decisions in a timely and transparent way.
Maintaining Margin – How to Run Lean
Again this article will assume targets are in place (if you want guidance on that topic see here). One additional comment here would be to ensure you view the profit of the business as an ‘expense’ line item. Monitor and report profitability AFTER reducing the required target of income you want to maintain. The psychology behind this is fascinating but if you see a positive number you are less likely to react, even if it’s not as big as you want it to be. On the other hand, if you build your savings into your expenses for reporting purposes, seeing a negative number in profitability definitely creates a sense of duty to act.
The key to maintaining margin is knowing how to quickly react when you see variances in your revenue forecast, for better or worse. This means that there is a premium you may be willing to pay on expenses in order to maintain flexibility over your operating costs and cash flow. This premium may sit in something like resource costs. You may pay an extra 30%-50% for a freelancer, but the flexibility to only pay them for the work they do and be able to reduce that to $0 when needed is very valuable. This just requires a focus and skillset around project management with the freelancers. Always maintain in-house your core competencies and differentiators that you receive recurring revenue for, but all else can be outsourced and likely help your profitability.
Other than people costs, there are a few other key areas to look at regularly. Prioritizing ongoing monthly costs is important in order to make a long-lasting impact to help profitability, as opposed to nit-picking on one-time costs that have already been incurred. You can address these one-time costs by ensuring you have appropriate thresholds in place for requiring pre-approval to spend on any discretionary items.
Another tip I would provide is to negotiate pricing with vendors regularly. The old saying ‘you never know until you try’ is true in this case. You have to be reasonable and respectful in your approach with your vendors as you may need favours from them down the road, but if you just ask for that bit of discount or getting a few free extra accounts or users, it all helps. Having a format for a business case that is needed from your team to justify new expenses is also important. This would require the team member to explain how implementing the software would provide an exponential return to the agency, whether that be through time, people or financial savings, or net revenue growth.
Finally, make sure you have a well-defined employee offboarding checklist that includes removing access to various subscriptions they would have had. This will help maintain licensing costs on an ongoing basis.