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Good and early beats perfect but late

I’m sure, in life, there are plenty of occasions when perfection has a role to play. In management reports less so.

What managers of any Agency want to know, as quickly as possible, is how is my business doing?

So, what is more useful to an Agency? A good set of management reports delivered quickly after month end or a marginally more accurate set delivered a week later?

It’s a rhetorical question obviously. More important is how do the CEO and FD work together deliver the right information at the right time? Here are a few ideas;

  1. Make sure there is a robust revenue forecast. If the business doesn’t take it seriously problems will end up with the Finance department to sort out which will take far longer. If it is a priority for the CEO it’ll be far more accurate far earlier.
  2. Most of the tricky assumptions are about revenue. By contrast most cost assumptions in an agency should be a little more straightforward and can be made quickly. Salaries are usually paid before the month end so will be known; freelancer days can be counted and costed; overhead categories should be relatively stable with sensible judgements about any one-off costs.
  3. Finance Directors by nature don’t like to guess but a report based purely on best estimates gives them licence to talk earlier about likely outcomes. With an accurate forecast they should be able to provide a “Flash” P&L far earlier than the normal one. 80% of the benefit for 20% of the effort.

All CEOs should know that their monthly P&L is not 100% accurate – it is the end result of many assumptions but with the right preparation it is possible to get a pretty good picture of how your

Business is doing. Then you can get onto the interesting stuff – the hows and the whys.

Consolations of Philosophy – Lessons for an Agency FD

As a latecomer to philosophy I’m struck by how much I’d have gained at an earlier age by an earlier study of the subject. Even at my more mature age there is still plenty to learn from the greats of the ancient world and whilst there’s nothing about revenue recognition there is a surprising amount that can apply to managing an Agency. Here are a few examples.

 

Employ your time in improving yourself by other men’s writings, so that you shall easily gain what others have laboured hard for.

Socrates

Wisdom begins in wonder.

Socrates

Agency Finance Directors can get a little insular. You’re likely to be in a minority of one. However, help is at hand, as the odds are that someone else has come across any problem you encounter, whether it’s technical or commercial. Reading around your subject, talking to peers, keeping a sense of curiosity about your business and your industry is vital. Socrates knew what he was talking about.

No man ever wetted clay and then left it, as if there would be bricks by chance and fortune.

Plutarch

A self-evident but well expressed truth. Building a successful finance department or a successful agency is not going to happen by chance. It requires knowledge, direction and hard work. Working out the key drivers of your business and building a strategy and culture that delivers profits year in and year out is the target.

A good decision is based on knowledge and not on numbers.

Plato

This looks like an odd one to pick out for a Finance Director. However numbers are useless without context and knowledge. Together they are a powerful combination but you can’t run your agency on numbers alone.

Luck is what happens when preparation meets opportunity

Seneca

Enjoy present pleasure in such a way as not to injure future ones

Seneca

Luck has little to do with making your Agency successful. Hard work, a clear strategy and talent are the basic ingredients. Throw in careful and prudent cash management and you should also be able to avoid Rapier’s fate.

Man is most nearly himself when he achieves the seriousness of a child at play.

Heraclitus

Big results require big ambitions.

Heraclitus

Character is fate

Heraclitus

You cannot step into the same river twice.

Heraclitus

Heraclitus of Ephesus was a self-taught philosopher who had a tendency to misanthropy and had a shaky hold on DIY medicine. He died shortly after treating himself for dropsy by covering himself in cow manure and baking himself in the sun. Dodgy physician but insightful philosopher.

Agencies must keeping changing in order to keep ahead and must have an ambition and a passion. As an FD it might be your job to temper that ambition with some reality but better that way around.

We are what we repeatedly do. Excellence, then, is not an act, but a habit.

Aristotle

Aristotle was a polymath who wrote about physics, logic, linguistics, ethics and biology as well as writing poetry, plays and music. Apart from putting most of us to shame he put his finger on an eternal truth. Call it practice makes perfect; calculate that it takes 10,000 hours of practice to become an expert but we have to put the preparation in. Mastery of the subject matter is under our control, whether it’s a Board meeting or a procurement negotiation.

So, as well as democracy, science, oratory, art and straight roads the ancients have also given us some clear hints at running a successful agency. Read widely, prepare thoroughly, don’t take yourself too seriously and have the enthusiasm to think big but keep enough cash tucked away for a rainy day. Follow that little list and the ancients will help your agency today.

The author has been helping Agencies make more money for nearly 20 years now. To have an initial chat how this can be done please contact him.

Year on year comparisons are too useful to be left to the year end

Accountants love to compare numbers. It’s trained into us early on in our careers. Call it analytical review and you’ll always have something to say at Board Meetings.

Don’t misunderstand me, I love comparing annual financial performances as much as the next accountant. I’m just not sure it should be a once a year treat.

Management reporting by its nature tends to focus on the monthly and cumulative annual results. If we’re sensible we will compare it to budget and get to explain why it is up or down against target.

What we don’t do enough of though is compare the year on year (YOY) performance. YOY looks at the results for the 12 months up to present and compares it to the 12 month period before that.

Looking at the monthly numbers and comparing it to budget are important but if you want to understand the long term trends in your business nothing will beat looking at the YOY performance, especially if there is any seasonality in your business.

Changes in revenue, staff costs and overheads really pop out when you look at them over a longer time period. Individual months can be affected by a single issue, project or unexpected cost. Over a year the importance of those issues get flattened out and you are left with the trend.

It is by focussing on those trends and the reason for them that management reporting can come alive by linking the numbers to the reasons. With an understanding of the reasons comes an opportunity to do something to improve future performance.

Whether it is a change in revenue from an activity or sector; additional resource cost or an increase in property costs it becomes clearer and more understandable when you compare the effect over a rolling 12 month period.

If you want to lift your management reporting out of the routine and link it to the real operational performance of the agency then start looking at the longer term trends affecting your business. Start thinking about what you need to do now to affect the figures in a years’ time.

The author, Simon Collard, is a chartered accountant with 20 years’ experience running and advising on Agency finances. If you’d like to improve your agency management reporting, talk about ways to increase the long term value of your agency please email simon@novemberfriday.wpengine.com.

 

The paradox of choice

Walking to work the other day I noticed a shop sign advertising that they stocked over 30 types of Dutch salt liquorice. This sparked several thoughts. Firstly I didn’t know salt liquorice existed nor did I know that the Dutch specialised in it to such an extent that they produced over 30 varieties at least.

It also made me think how choice can be confusing. The paradox of choice is a well know theory. Intuitively it makes sense to me; faced with too much choice it becomes more difficult to make a choice. Which type of Dutch salt liquorice is the best one? Too many alternatives can make decision making more difficult and increases the chances of not making any decision at all.

Now, to stretch the point a little, the same can be true of agency finances too. There are so many numbers, metrics and ratios to look at that it’s tempting to be put off and either settle for what you have now or to look at everything equally. There is so much you could look at that a large part of what makes a good FD is knowing what to focus on.

Beyond the staple of the Profit & loss report (although there are always good and bad formats but that’s a different story) there are several numbers that absolutely must form part of the management reporting. They link the financial performance to the operational performance.

Firstly keeping track of headcount will enable you to look at revenue per head. This vital number drives profitability encompassing as it does information about the volume and nature of paid client activity. It’s also a really good, quick insight into how you compare to your peers.

Secondly staff compensation to revenue is the commercial ball game. It’s about how efficiently you can turn client revenue into profit. If you were a hotelier you would obsess about occupancy. If you were a dairy farmer you would focus on yield. If you run an agency you have to care about the ratio of staff compensation to revenue.

Whilst there are many, many varieties of Dutch salt liquorice there is a comfortingly small number of fundamental numbers that you have to focus on. There are others that are really useful but if you get thrown by the paradox of choice then focus on managing the two measures above and you’ll not go drastically wrong.

The author, Simon Collard, is founder of November Fridays which advises Marketing Services Agencies on ways to improve profitability. He is also Head of Operational Performance at Ciesco Group. If you would like to talk to him about helping increase value of your Agency by improving operational performance please email him on simon@novemberfriday.wpengine.com

 

Vanity Project or Value Driver?

Agencies need to constantly innovate and change in order to survive. Doing what you’ve always done isn’t always good enough.

Maybe it’s a geographic expansion or a complementary service. Whatever it is there are always a few questions the Finance Director should ask to ensure that these start up projects add to rather than destroy value.

Start-ups by nature are lean. Agencies generally start with little money but lots of enthusiasm and talent. This is balanced by the freedom of being your own boss and the promise of future riches.

However, if you need to bring someone in to manage a start-up you need to weigh up carefully the balance between basic remuneration and bonus/equity. Try to replicate the initial hunger for success in the start-up. Keep running costs to a minimum and try to incentivise with bonuses/ownership. M&C Saatchi built an international network by offering 20% equity to local management.

If you don’t need anyone else to manage the start-up you still need to ask whether the opportunity cost of people’s time is worth the potential upside. There is always a risk the core business gets neglected. At the same time the start-up won’t succeed with time and effort from senior managers.

You need to retain the ability to pivot and change direction quickly. This could mean stopping and starting again, perhaps in a totally different direction. The decision to cancel a start-up shouldn’t leave you with lots of long notice periods to pay out. Again, keep it lean.

You’ll also need to build in multiple review points early on so you can track progress. Think creatively about what metrics are important in the early stages of a start-up, it’s unlikely to be just about the P&L.

Business plans that are either too optimistic about sales or take too long to cover their costs should be questioned – you should be making money by the end of the first year if not sooner if you’ve done it right.

If it’s geographic expansion the risk increases as you’ll need to think about the local market, local support and reporting as well as the system changes needed. Don’t burden your start up point person with admin – they need to network, to sell, to develop, they don’t need to worry about payroll.

It’s also here that corporate vanity is a risk. You need to be realistic about whether your proposition will work and give you a competitive advantage especially if you’re going into a mature market. If you’re going into a less mature market you may need to repackage your offer to fit in with that market’s needs. Wherever you go you need to do your due diligence here; but more importantly there. Visit, talk to clients, partners, anyone you can network with.

Understand the proposition, who your customers are and why they need your service; what is the going rate for the new market; how you are going to find your customers and sell to them and how you are going to resource the business. Most importantly make sure you go over with some client cover from day one.

I’ve been surprised over the years at how some of these fundamentals seem to be overlooked sometimes. Maybe these simple, hard-nosed questions are hiding behind the marketing jargon but it is the FD’s job to make sure there are good answers to them.

Inevitably this is about entrepreneurial management. Without enough talent and drive good management won’t be enough whilst without proper management the entrepreneurial flair won’t translate into enough profit. Balance both by weighting rewards to success and focusing on measures that are appropriate to a start-up rather than a mature business.

Business as usual may get less interesting over time but it has to be protected. Done properly a new venture can add great value to the existing business. It should drive greater revenue, greater efficiency and more profit. Done in an unfocused way it will eat up time and cash and put the core business at risk.

During the last 20 years I’ve helped Agencies grow organically as well as through well thought out start-ups. If you’d like help with either then email me on simon@novemberfriday.wpengine.com.

What should management accounts do?

 

I’ve seen a lot of management accounts in my time. Bad sets of accounts can be too short or too long, too simple or too complicated. They can focus on the wrong metrics and they can lack context. They can be produced so late that everyone has already moved on. Sometimes they can focus entirely on the profit and loss and ignore the balance sheet entirely. Most importantly they can entirely lack any insight into why the numbers are what they are..

To be useful accounts need to meet the following criteria;

i)     They need to be produced quickly within a maximum of  7/8 working days, ideally fewer.

ii)    They need to show the overall financial position including current and future trading, balance sheet strength and cash flow.

iii)   There should be enough detail to inform but not enough to confuse.

iv)  They must include words of explanation and insightful analysis not just numbers.

v) They should summarise with more detailed analysis available if needed.

Sounds simple doesn’t it? Not surprisingly I think good management accounts and sensible advice from your FD is a vital part of growing your agency profitably. To have accounts quickly makes them more relevant and speeds up decision making. Monthly accounts should always focus on the balance sheet and cash flow as much as the P&L as careful management of cash is integral to growing your agency.

Striking the balance between detail and summary is difficult. There is always so much detail that could be reported. One way around this is to deliver at both levels so there is a summary P&L which just has the headlines with detail, if required, on the inside pages.

It’s also important to recognise that whilst accountants are number focussed not everyone shares this fascination so a narrative which includes an explanation of the events of the month is a good idea. What client activity has driven revenue up or down? How have leavers or joiners affected staff compensation? Have any one-off overhead costs affected the profit? Not least what light can they shed about the immediate future and how can they inform the conversation about what to do next.

At a conservative guess I’ve prepared just over 200 sets of management accounts as a Finance Director of Marketing Services Agencies and more importantly have had to explain them at least twice as often to everyone from Managing Directors to Interns. Anyone who would listen basically. Take a look at your next set of accounts to see if they meet these criteria. If they do, congratulations. If not why not drop me an email on simon@novemberfriday.wpengine.com and we can chat about how I could help improve the quality of your accounts and how they can make your agency more profitable..

 

 

“It measures everything, in short, except that which makes life worthwhile”

Robert Kennedy on GDP

Why you need more than a P&L to understand Agency profitability – Part 2

Part 1 made the point about how you need a broader set of metrics than just a P&L to order to understand why an Agency is profitable.

Beneath the comforting familiarity of the revenue and costs of a typical Agency P&L there are forces at work which will influence long term success. A Finance Director needs to measure these factors in order to help manage long term Agency profitability.

I covered the importance of the pipeline and conversion for new business success and longer term revenue generation. Keeping tabs on the reasons for staff churn can help retain client and agency knowledge and keep recruitment costs down.

Beyond these metrics there are some other really useful measures that will help you understand the shape and direction of your Agency.

Something as simple as an Excel Invoice register will enable you to analyse your revenue in a number of really interesting ways. It’s easy to get carried away but here are a few simple but powerful measures that will add depth and insight to your monthly reporting.

i) Building long term, profitable client relationships is vital but if you don’t measure it how can you manage it? Average client tenure is a simple way to track if your clients are still happy enough to continue paying you.

ii) What percentage of the total revenue do your 5 biggest clients contribute? It’s always easier to grow off the back of a single, strong client but the trade-off is over dependence on one relationship. Having a wider spread of clients is always safer. A sensible target is having about 50% – 60% of revenue from your 5 biggest clients and no one client accounting for more than 20% of total revenue.

iii) The split between retainers and projects is easy to track too and tells you a lot about your agency. This is a nuanced area and will vary from sector to sector but generally speaking it is helpful to have a solid base of monthly fees topped up by additional project activity. What the optimum split should be is something that needs a little thought – I’ve seen 80:20 both ways work OK.

iv) Measuring growth in revenue between new business and net organic growth is also pretty straightforward. Winning new business and then growing that business through performance is the goal. Having both contributing equally to growth is ideal – a year on year 50:50 split is a good target.

The above are by simple to measure. Simple organisation of revenue in a click and filter spreadsheet and a few Sum if formula can make a powerful difference to the insight you can bring to bear on the monthly reporting.

I’m an experienced FD of marketing services agencies. If you’d like an initial chat about how I could help your agency be more profitable then please contact me on simon@novemberfriday.wpengine.com .