The 5 Minute Finance Director

5 minutes to save money, gain critical insights and plan for the future? Seems way too good to be true doesn’t it?

Well, if you’re reading this and you’ve started up your own agency this is very possible. Even easy.How? Here goes.

You’ve probably made the decision to use a cloud accounting solution like FreeAgent or Xero. You may even have some external bookkeeping help from an accountant.

What I want to show you is how, in 5 minutes, you can work out a Finance Director insight yourself. You’ll save yourself money. You’ll understand how your business is doing and you’ll even begin to work out the big “What if” question when it comes to hiring the next employee.

How do you do this? Simple – you work out your revenue per head. For the month you’re in take your revenue, divide by your headcount and multiply by 12 and you’ve got your annual revenue per head. For the year to date performance take the cumulative revenue do the same calculation but divide by the number of months into the year you are.

Simple calculation but profound insight. If you know how much you should be generating you’ll have an insight into either how busy you are or how efficient (or not) you are at turning your team’s time into revenue.

For what you should be generating take your headcount and multiply by your daily rate(s) and by the number of working days in the month (or you can assume 20%) and finally by how much client work (as a percentage) you expect to do. This is a snapshot of your commercial model.

If you’re busy and your revenue per head is above target and you have a healthy pipeline then the next big step of taking on another employee is a little more comfortable.

If you’re not busy and your revenue per head is well below target unless you have a healthy pipeline you may have too many in your team already.

Now whilst there is still a vital role for consultants like me in looking at why the revenue per head is where it is and what you can do about it you can save yourself money in the vital early stages by looking at your business in this simple, insightful way.

If you’d like to build on this knowledge to manage your Agency better then you can sign up to order my forthcoming book “A Short Guide to Agency Finances” at www.novemberfriday.wpengine.com

 

 

 

 

 

 

 

 

 

How much extra revenue do I need to recruit?

For all the theory sometimes the simplest question is the hardest to answer. Can I afford to recruit?

It’s also the most important in the early years of any start up. When and if to take on the extra cost of another employee is the most important decision to get right in the early months/years of any start up. If your Agency is 100 people strong you can live with getting a decision to hire wrong as it will (on average) only increase your costs by 1%. When it’s just you you’ve doubled your cost. And more than doubled your sense of responsibility.

But you have also doubled your capacity. Assuming they are the right recruit that is.  There are two central issues to worry about.

i) What has been your past financial performance?

ii) What does the future look like?

The first one is quite easy to work out. You need to work out the revenue per head (RPH) you have generated over the past 3/6 months. I’ve written extensively about the importance of RPH but I make not apologies for bringing it into this decision. There are 2, easy, calculations to make.

i) Your RPH equals Revenue divided by your headcount multiplied by 12 divided by the number of months it took to generate the revenue. So, if in the last 3 months you have generated £40,000 and there are only 2 of you then your PRH = £40,000/2 x 12/3 = £80,000. In words this means each of you generates £80,000 of revenue per year.

ii) The second calculation is how much revenue you should be generating. For ease of calculation I’ll assume there are 20 working days in the month (on average there are, depending on holidays and sickness, 232/12 = 19.33 but that makes for messy sums). If your charge out rate is £500 then, if you were charging for every day, each person should generate 20 x £500 x 12 = £120,000. How much downtime or non client work there is will affect this figure but it’s an important part of your commercial model. Let’s assume that you expect everyone to work 4 days out of 5 on client work. Therefore your target RPH = £120,000 x 80% = £96,000.

With these 2 simple calculations under your belt you’ll need to turn to what you think the world will look like in the future. If you’ve more work than you can cope with and you’ve got a full pipeline of future work then the decision will be quite straightforward.

If your historic RPH is below the target it points to you either having some spare capacity to take on extra work without recruiting or you are not charging enough. It’s always best to focus on these 2 issues first rather than recruiting. It’s always better to grow profitably rather than having to grow to increase profits.

Another factor will be the need to free up some of your time to help grow the business. Maybe by freeing up some of your time to focus on marketing you will be able to grow more quickly. Again this can be calculated by taking that percentage out of the historic performance.

Whatever your historic performance or plans for the future you can put a figure on how much extra revenue you should seek to bring in to cover the extra headcount.

Ultimately recruiting is going to be about your confidence in the future. The above calculations should help you avoid obvious mistakes though and take a little of the risk out of the process.