You Bake With The Flour You Have (Danish Proverb)

It’s a homely image. After all baking is a lovely thing. Everyone loves baking. It also makes some sort of sense. A touch obvious maybe.

Less obvious is the connection to my favourite subject, Agency finances.

I always thought there was a kernel of an idea there, if you’ll excuse the pun, that could illustrate the important point of maximising your profits whatever the size and shape of your Agency.

This became a lot clearer during a meeting I had recently with an Agency owner. It was a new business meeting so I was on my best behavior and trying to impress. I needed something more than my ongoing obsession to make sure everyone knows the importance of the compensation to revenue ratio.

They described their problems with their clients who were price driven and paid a flat project fee. There were substantial 3rd party elements – both freelancers and suppliers.

Thrown into this difficult mix were competitors who would undercut their prices (and suffer a loss if necessary) for the promise of future, more profitable, work.

My proposed, improvised, solution was to use their numbers (I always want to use numbers) to figure out their strengths. How much of their work went out to freelancers. Was there enough to hire in more cheaply? For skills they could not or did not want to bring in-house could they get a better deal by offering volume? Could they approach their clients with a sliding scale volume discount scheme that would help them secure the savings they needed whilst getting the better service from their preferred agency partner?

The meeting ended with smiles so the ideas weren’t too far off the mark. Food for thought at worst; a solid plan to improve margins up at best. Not revolutionary but a better combination of proposition, buying and selling approaches.

Walking back to the tube after the meeting it struck me this was just a better way of baking with the flour you had. Every agency has assets. They could be cash, they could be intellectual property or they could be a range of strong client relationships.

Too often we do what we did before. Before some Maverick dropped some yeast (I suspect whilst making beer) into their flour and noticed some interesting results all bread was flat. Suddenly we had loaves.

Whatever our assets I convinced we can do something better than we did before. Make our cash work harder for us. Leverage our client relationships to guarantee work volumes and lock competitors out. Use our IP to work smarter. Drop some yeast into the mix if things aren’t working.

Too often we overlook the assets we have and look longingly at those we think we need. Sure it would be nice to have a Head of Artificial Intelligence and that might help you become more profitable. Might. What definitely will is maximising your existing assets. Start by baking with the flour you have.

 

Clarity of Purpose. Flexibility of Process

Or beware consultants with a fixed view. 

There is a world of difference between the purpose of your Agency and how you go about it. The purpose should be to solve business problems for your clients. Whether it’s to help them sell more, influence more or promote their brand more effectively that should be your purpose. 

How you do that will vary. Anyone with a fixed process will find themselves going backwards quickly; overtaken by nimbler competitors. 

What is true of how you work is also true of how you charge for your services. This is not about value pricing versus timesheets; plenty of that another time. No, this is about the need to remain flexible when it comes to pricing. 

I came across just such a case recently. A small agency, recently set up and initially profitable had hit a major problem with one client that nearly broke them. They were in recovery but they were living hand to mouth from project to project with a constant cash flow struggle. 

I wasn’t charging them for my time; I was doing it as a favour. Occasionally I feel generous. I’d looked at their numbers and was explaining what they meant and how they could use them. I was on my hobby horse about the need for an accurate forecast and a new business pipeline. About how the hot prospects on the pipeline could change the next few months if the deals were closed. 

I asked if any of the pipeline deals were price sensitive. The answer was, yes, this one definitely was and this one probably is. Do you have any capacity in the month after next when your forecast dips rather alarmingly? Again the answer was positive. 

“Could you close the jobs if you did a deal on the price?” In the current situation with debts to pay and payroll to meet it seemed to be obvious plan. 

The reply prompted this blog. They had spoken to a consultant who advised them never to discount their rate; it sent out the wrong message and undervalued their worth. A fixed approach to pricing. 

Probably sound advice if you were successful, had money in the bank and had more opportunities than you could handle. To a start-up who had little or no money though it was potentially disastrous. 

Some things are absolute; advice about how to price Agency services are absolutely not. 

In the early years you have to be flexible. In terms of tasks you take on; in terms of work that you do and certainly in terms of how you price your services. 

Be prepared to negotiate. Always think in terms of the extra revenue a job will bring in and what extra costs you will incur. Using up the available capacity you have already paid for is a far more successful tactic to survive and prosper than a refusal to negotiate on price which leaves your team twiddling their thumbs. 

One of the (many) challenges of starting and running your agency is sifting through well-meaning advice of consultants. What could be wrong with seeking help from experts in their field? Nothing really just beware if you get a fixed, absolute point of view about something as subjective as what you should charge. Context counts.

Why Your Agency Will Fail

If you google failure rates for creative agencies you will find various statistics. None are definitive but a survival rate under 50% after 5 years looks about right.

So why the high attrition rate? Why do so many dreams turn into disappointment? Maybe some agency founders aren’t good enough designers/marketers/consultants or coders.

I have a feeling, completely lacking in evidence and entirely anecdotal, that most failures will be caused, not by a lack of core talent, but by a lack of wider business or commercial knowledge.

What are the things that new Agency founders need to know to get through the early years? Here are my favourites;

New Business

At some point when you start hiring people it will become crystal clear why new business is so vital. You have to cover your costs and then some. And you have to do it every month. You have to balance doing the work right now with investing some time with making sure there is enough to next month too.

It’s easier when there are just one or two of you but as your team grows that fixed cost becomes more and more pressing. The work from your initial clients or contacts won’t be enough and you will need to widen the net for potential new clients. It’s not my area of expertise but I have seen inbound marketing work, I have seen networking work as well as intermediaries and that old favourite, ex clients who are advocates.

Whatever the source make sure you keep an up to date pipeline. If you like spreadsheets I have a pipeline spreadsheet to help you get started – just email me and I’ll send you a template.

Financial Insight

 You don’t need to be a qualified accountant to be a success running an Agency. In fact the opposite is probably true but you do need some insight into what your numbers mean and, more importantly, what they suggest you need to do and how quickly you need to do it.

If you do only one thing over and above looking at your Xero or FreeAgent generated P&L then please, please do some reading about these metrics. How they are (simply) calculated and what they mean;

  • Revenue per head
  • Client Utilisation and Recovery
  • Cash cover

Luckily I have written a helpful book “Where Is The Money?” to help explain these basics. And more.

Managing Growth

This is where people can relax and get hit by a sucker punch. You’ve won some clients, employed some people and have plans for more of the same. A small word of warning here; this is where cash flow is absolutely vital. Paradoxical as it might sound it is possible to be profitable but be hit but poor cash flow. Kit has to be bought up front and salaries paid monthly but it might be several months before the cash from that healthy growth comes through. Just be (even more) aware of your cash flow and don’t get carried away with your early success. Delayed gratification and a healthy caution will, literally pay dividends later.

Reaction Time

The best thing to do with a problem is to react quickly. Too often I see Agencies where a potentially fatal crisis has developed where earlier action could have avoided potential disaster.

Part of this is human nature; most founders are optimists who believe things will get better next month. But to make sure this doesn’t happen to your Agency you need to do a couple of things.

First is to make sure you have a robust forecast. Let me repeat this; if you read this and take only one thing away from it is this; make sure you have a robust forecast. By robust I mean only include revenue you know is going to happen. Not what might happen. Not what you think might happen. What you absolutely, 100% for sure, know is happening. The other possible stuff goes into the pipeline. This will make it far, far easier to know when to react.

Secondly make sure you get good, clear and understandable figures from whoever does your numbers. And make sure you get them promptly. Good and early numbers beats perfect and late every single time. Whoever does your figures needs to get them to you promptly – ideally within 5 working days but certainly by 10.

If, for whatever reason, this isn’t possible then it should always be possible to estimate the P&L based on forecast revenue, known salary costs and a pretty good estimate for overheads. It’ll be a little rough but it’ll help react.

Most businesses that fail will fail not because of lack of talent. They will probably fail due to one of the above reasons. The good news is that they are avoidable. A little care and a few well designed spreadsheets should make sure your Agency survives.

 

“Down With This Sort of Thing”

No apologies for hijacking Father Ted’s mild mannered protest against The Passion of Saint Tibulus to complain, mildly, about some of the irritants and bad practices that I’ve come across over the years.

In no particular order I’ll hold up my placard to protest the following

– Sending RFI’s out to a ridiculous number of agencies. Please do some research, ask peers or apply some common sense. Otherwise you will create a mountain of paperwork, an avalanche of emails and very little goodwill.

– Not sharing budgets. Add this to poorly written briefs and there is really little point in asking Agencies to respond in any detail. Having to guess what clients need for an unknown budget is a strange and unproductive game. You’re either going to underestimate their ambition or overestimate the depth of their pockets. Either way is not a good start to a relationship.

– Articles about how the Agency model is broken. It’s a constant source of debate and there is always a place for innovation in commercial relationships but I see precious little evidence there is enough flexibility and desire to radically change the model. I always come back to one question; Don’t Agencies deserve to be paid for the services they provide?

– Over complicated job costing systems. Wood for the trees here. I want to record the costs and revenue for a job in one place. I want to produce simple reports that enables me to understand what is happening in the business. I don’t want a hybrid pipeline/CRM/HR system no one will have the time to master and gets in the way of the basics. I want to manage the Agency not the software.

– New Marketing Directors = Pitch = Previous Agency appointed. A tired cliché.

– Evergreen contracts. So, I didn’t keep a diary reminder that I had to give you notice by last month and that means I have to carry on with your service for another year? A racket. Have a proper termination clause in contracts, with a sensible notice period. If you are providing an excellent service you don’t need evergreen contracts.

– Cost plus spreadsheets. Nothing against them in principle but in the hands of someone who doesn’t know marketing services they are dangerous. No one buys time; they buy the output of talented, knowledgeable professionals. That won’t fit into an Excel spreadsheet.

– 120 day credit terms. Tedious, money hoarding that may give a one off boost to the quarterly PLC Cashflow but slows the pulses of vibrant agencies and can limit their growth. That said it may be a trade-off you have to swallow to get that big client. Always ask for something in return though.

– Waiting for Purchase Orders. Interminable. If I had a pound for every time I’d been told the PO was somewhere “in the system”, well, I’d still be working but would have a nicer pair of shoes. If it’s in the system find out who needs to do what and give them a reminder so your Agency knows they will, at some future point, be paid.

– If there is some attribute that you need your Agency to have like, say, a New York office then only talk to Agencies that have a New York office. To use this as a reason at the end of the pitch process is, how can I say this, extremely frustrating.

I’m sure there are plenty more complaints out there. Many varied and valid complaints. And I’m sure Agencies have their own special client irritating habits. If it helps to share them please let me know.

In Defence of Timesheets Part 1

Timesheets are not, never have been and most likely never will be, popular. A necessary evil maybe. Alternative value pricing models are seen as the way forward. The argument is usually presented as an either/or but I believe this is a misleading argument for a number of reasons. Namely;

1). The majority of clients aren’t ready to accept pure value pricing and risk/reward sharing.

2) Most Agencies can’t measure the true value of a specific piece of marketing activity.

Without both it could leave Agencies punting a succession of pricing structures to indifferent clients who have a limited and fixed budget to spend and a powerful cost concious procurement department to keep happy. Maybe one day we will have the tools to measure our value and the commercial relationships to take a fair share of it.

It has always been like this. Agencies have always tried to charge a premium for their services on the basis of the value that they deliver. The more valuable the service is perceived to be the greater the premium.

I have spent most of my career trying to maximise Agency profitabilty so I would love nothing more than to adopt a value pricing model if it delivered a fairer share of the value.

However the argument goes that clients pay agencies on a time and materials basis which doesn’t reflect the value they generate.

At this point I have to point out that very, very few clients pay on an actual time and materials basis.

What they pay for is an estimate of the time it will take to complete a project at a charge out rate calculated, more often than not, on a cost plus basis I.e the total salary, overhead and agreed margin divided by a number of working hours or days. This is just a fixed priced estimate.

The timesheets versus value pricing argument is mislabeled. Even if you are entirely value price based you can, and I think you should, do timesheets.

Only with timesheets can you look at client profitability accurately.  Otherwise it is just instinct.

Only with timesheets can you manage your most precious resource more efficiently. Otherwise you are guessing about freelancers or recruitment needs.

I believe the real argument is between value priced estimates and fixed price estimates which use rate cards calculated on a cost plus basis.

Nowhere near as catchy I’m sure you’ll agree.

There is nothing stopping you value pricing and still doing timesheets. It may be linguistic pedantry on my part but the distinction is vital to understand as models evolve. We don’t charge for time; we charge for the value we can deliver. We use timesheets to measure and manage the business.

In Part 2 I’ll look at the challenges and tactics of incorporating elements of value pricing into your model.

The 10 Numbers Every Agency CEO Has To Know

Most Finance Directors like a good list. Here is one every Agency CEO should be interested in.

  1. Client utilisation. How busy are your staff and how much of their time is spent working on client business is a vital piece of information in a business which charges for time.
  2. Recovery rate. Mathematically it’s the ratio of what you have charged against what you should have charged for the time spent. Commercially it shows whether you’re over servicing. Why that is and what you can do about it is the game in a nutshell.
  3. Revenue per head. Spending time making sure you have an accurate headcount (including freelancers) means you can rely on the revenue per head calculation. This figure, more than any other, shows the success of your agency. How much new business you win, how accurately you estimate and how efficiently you deliver are all rolled up into this figure.
  4. Compensation to revenue. The accountant’s favourite with good reason as it determines how profitable you are. Less than 50% and you’re doing exceptionally well. Between 50% and 60% pat yourself on the back. Between 60% and 70% you should be ok unless you’ve got fancy, expensive offices. Over 70% your net margin is getting squeezed into single digits and you should start to worry. Above 80% and you should be looking urgently at your commercial model.
  5. New business pipeline. It is the life blood of the Agency so what is the pipeline potentially worth? Look at the weighted value of the opportunity (the closer to signing the contract the greater the weighting) as well as the total value. This is of enormous value once you start looking at the next few months.
  6. Pitch Conversion rate. Knowing how successful you are at pitching should, at the very least, start a conversation about pitch approach from pre-qualifying leads through to the level of innovation in the agency.
  7. Biggest (5) client (s) %. It’s no coincidence that the Agency profit target of 20% is also the ideal limit to your single biggest client. The bigger your client and the lower your margin the more disruptive and damaging would be the fallout from losing that client.
  8. Working Capital. Often overlooked but making sure you have a buffer of 3 months’ worth of running costs in working capital means you will have a more secure financial platform. It means your first worry isn’t likely to be about cash so more energy can be spent managing and improving your business.
  9. Staff Churn. Your people are your most valuable asset so you should be measuring how many are leaving and why. Some change is good, too much and your corporate knowledge and intellectual property is walking out of the door.
  10. Year on year comparisons. Rolling 12 month comparisons of revenue and profitability are a really good way of making sure of the overall growth (or otherwise) trends behind your business. It takes out the ups and downs of a specific month.

5 top tax tips for smaller Agencies. Including 1 you won’t have heard of (probably).

Tax avoidance has been much in the news. Mainly because people, generally, don’t like paying taxes. But, in these straightened times, aggressive tax avoidance is frowned upon,

But, if there is a legal way to minimise the tax you or your employees pay you’ll take it, right?

Below are some of the most common ways to minimise the amount of income, corporation or even value added taxes you have to pay. No offshore trusts. No complicated tax planning vehicles. All are standard, HMRC approved tax breaks.

R&D Tax Credit

Heavily favoured by government, R&D relief is a lovely scheme.  A new improved and updated version means you can now obtain a 225 per cent tax deduction for qualifying R&D expenditure. It’s not about conducting experiments in lab coats. More and more Agencies have found that some of what they do falls under the qualifying definition of R&D. It’s certainly worthwhile taking a closer look at this relief to see if you could also qualify.

Flat Rate VAT scheme

One for the smaller company or lone operator. If your turnover is less than £150,000 you can join this scheme. You can’t claim any VAT back – that’s the downside. That could hurt if you’re buying a lot of taxable items. If you don’t and your turnover is mostly fees then this is a no brainer. You charge the normal 20% VAT but only pay over 13%\14%\15% depending on your trade. Sounds too good to be true then check out the HMRC page www.gov.uk/vat-flat-rate-scheme/overview

Pensions

Pensions have been in the news recently. Never has it been easier to get at your money (from 55). Which means that with the generous tax breaks it has never been a more attractive option. As an Agency owner setting up a Self Invested Pension Plan (SIPP) should be very high on your finance planning.

Dividends

If you are a shareholder it makes sense to be paid by dividends rather than salary. It’s not even close. It is far more tax efficient.

If you are worried about the general anti abuse rules (GAAR) and you have different types of shareholder (active or investor) then it’s possible to set up different classes of shares to pay different dividends.

Staff Suggestion Scheme

This hidden gem can pay up to £5k to any staff member tax free for a useful suggestion. There is a £25 tax free amount for a suggestion. The larger amount relates to the actual savings or revenue a good suggestion facilitates. There are, of course, some rules but nothing too onerous. Check out the details at www.gov.uk/vat-flat-rate-scheme/overview.