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Help Manage The Future

The role of the Finance Director has evolved significantly over the years; due in part to technology but mainly due to changes in expectations.

No longer is it enough to report on what has happened. More and more the focus is on Finance’s role in strategy – what is going to happen.

Only by having the basics sorted can a good FD shift the conversation from “what has” to “what could” happen.

The first and most important requirement is a robust forecast. Based only on booked work for the next month or quarter this will give you a clear starting position. Because it includes only booked work it will also be the worst case scenario.

If we add in the running totals for staff costs and overheads we will then have a very simple forecast P&L. Depending on the nature and volatility of your Agency’s work you will either have a vaguely comforting feel or a downright scary vision of the future.

So far, so easy. To make this into a simple planning tool we need to add some “what if” tools to help manage that future.

Again they break down into the main components of the forecast;

Revenue. What is in the pipeline that is likely to be signed off quickly enough to affect the numbers? Be realistic. Assuming you are going to win that big contract that you are pitching for as 1 of 8 is a surefire way to walk into trouble. However if a client has verbally agreed to start the project next month there’s a good chance it will happen. Depending on the client obviously.

Staff. What changes are already planned and known about? Leavers, joiners and reviews should all be planned in.

Freelancers. Ifyou have freelancers supplying core activities on a regular basis then you need to include them at a realistic level. If needed though you can take a zero based approach if the forecast activity is expected to decrease so that workload is shifted from freelancers to staff members. 

Overheads. Are there any discretionary costs planned in the next quarter? Consultants, training and entertaining should all come under scrutiny if the forecast looks bleak 2 months out.

With a simple analysis of each of the above that feeds into your main forecast you have a very simple but effective tool that helps you know what levers you have and how hard you need to pull on them.

How the “SUMIF” formula can make you more profitable

I’ll come clean. I do love a well-constructed spreadsheet. Done properly they are simple, logical and informative.

That said, use the wrong formula, and you’ll fall out of love with them soon. Too simple and they will be too much manual interference. Too complicated and you’ll end up managing the spreadsheet rather than the agency.

This is perfectly illustrated for anyone using Xero or FreeAgent. I’m a big fan of these online accounting systems. They’re really easy to use. Intuitive. They’re also really good value. What they aren’t so good at is organising your accounts in a way that is insightful into your business.

Faced with a P&L which has every account from the vital (Revenue, Salaries) to the less important (Postage, Books and Journals etc) it’s understandable to skip to the bottom line to see if you’ve made a profit and loss and move swiftly on.

This would be a mistake. With a little effort up front it’s possible to turn this long list into a useful P&L which would give you the key metrics for your business and, therefore, a vital clue how to manage your business better.

“SUMIF” is the magical little formula that can make this happen. If you know and use it already my apologies for preaching to the choir. If not here’s how you can make it do most of the work for you.

To produce an insightful summary P&L it’s my opinion that you need only 6 numbers. These are

1)   Sales

2)    Cost of Sales

3)    Salaries

4)    Freelancers

5)    Overheads

      6)    Headcount

With these numbers you can look at revenue, staff costs and profit per head to see how effective your commercial model is and a big pointer to what you need to improve.

In order to get that insight you’ll need to do a little initial setting up work in Excel but believe me it’ll be worth it.

Here are the 4 steps needed to transform your P&L.

1)    Export your system generated P&L into a CSV file

2)    For each account assign a category from the 5 above (excluding headcount) and insert into a column next to the value

3)    Set up a simple P&L format like the one below  

Sales                                  £X

Minus Cost of Sales £      £Y

Equals Revenue                £X – £Y

Salaries                             £XX

Freelancers                       £YY

Overheads                        £ZZ

Profit               =  £X – £Y – £XX – £YY – £ZZ

4)    For each of the categories above use a “SUMIF” formula to add up all the amounts in your original P&L that fit into that category.

Now for a science bit. The format of the “SUMIF” formula works like this; =SUMIF(range of categories, category name, range of values of categories).

This may sound difficult but that’s more down to my inability to translate formula into English. Basically you are asking Excel to add up all the numbers that have “Sales” or “Overheads” in the category column.

You can extend this logic to both your balance sheet and an analysis of your overheads. For both the balance sheet and P&L you need an extra category to split your trial balance (a list of all of your accounts and their balances) between whether its a P&L or a Balance Sheet account. For overheads you’ll need another category field to break them down into useful sub totals. My personal preference is

a)    Property

b)    Legal & Professional

c)     Marketing

d)    Other Staff

e)    Office & General

That should cover most eventualities as well as giving enough information to investigate if there is any unusual spending.

Once you’ve set up the columns you should be able to cut and paste in your new numbers monthly and you should have a really useful, simple and quick to produce P&L and Balance Sheet.

Why is this worth it? It’s probably the most lucrative hour or so you could spend. Knowing what you’re charging per employee and how the cost of your staff compares to your revenue is the first step to improving your margins. All from a SUMIF formula. Now you know why I love it so.

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.

What is your Agency’s most important KPI?

The business world is not short of key performance indicators. I have books with hundreds of them in to measure every part of every business. In the Agency world we probably have more than our fair share.

However this blog isn’t about a list of useful KPIs and how to use them. It’s about a realisation I had when talking to a couple of Agency heads recently that usually there is one KPI that resonates; one which affects the performance of the Agency in a direct and profound way. This KPI either has a clear connection to the profit margin or can touch every aspect of how the business operates. Focussing on and managing this single KPI can provide a long term path to sustained profitability.

Sounds fine in theory but what how does that apply in real life? Well, this will depend on the nature of your agency (and the strength of your management team).

If you have a high volume, low(er) margin business then you need to monitor your compensation to revenue ratio very carefully; set your team a strict budget based on accurate short term forecasts.

If, however, you have a low volume, high margin project based Agency (and yes, there are still a few around) then I would make sure you manage your pipeline very carefully.It’s easy to get caught up in delivery of a large, profitable project and forget to look for the next one.

More likely you fit somewhere in between these two extremes. In this case the one KPI that might be most useful is revenue per head. Now I’ll admit this is a slight cheat as there are a lot of operational and commercial factors which go into this particular KPI. How accurately you estimate a project, how efficiently you deliver and how well you manage client’s expectations and demands will all affect your revenue per head.

Whether you’re an Agency FD failing to get traction with your numbers or a CEO looking for an effective way of using numbers to galvanise your business it’s worth thinking about the one KPI that resonates most and how it can improve your Agency’s profitability and it’s long term value.

If you’d like my help to improve the long term performance of your Agency please contact me for an initial chat about your business.

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”

 

Why you need more than a P&L to understand Agency profitability. Part 1

Robert Kennedy’s quote was a pretty good response to a recent think tank proposal that costed the loss to the British economy of a bank holiday. Seemed to sum things up nicely. It also made me think a little about how successful management accounts are at measuring what makes agencies profitable.

In order to understand why an Agency is profitable the P&L is the tip of the iceberg, the starting point. Revenue minus costs is the easy part. Trying to figure out and explaining why revenue and costs are what they are should be the challenge facing Finance Directors.

That’s not to say the humble P&L can’t offer you some instant insight into the fundamentals. Starting with revenue, staff compensation and operating profit numbers you can easily work out your per head metrics. This will give you a direct comparison with your competitors and will highlight areas of strength or weakness.

Even armed with information on your relative performance won’t enable you to answer the fundamental question about profitability. It will point at where you should be looking at improving performance but what drives revenue and costs?

Building long term, profitable client relationships with a happy, well-motivated team is the answer to a profitable agency but how do you measure this?

The lifeblood of an agency is the new business pipeline and the value of this pipeline over time along with the conversion rate are key drivers for any agency. In addition tracking the reasons for failure will help sharpen future proposals. What weight you put against a proposal is up for academic debate but as long as you are consistent it is the trend over time you’re interested in. It’s such a simple thing to measure and vital to your future profitability but it needs to be front and centre in reporting.

A happy, well-motivated team is vital to the intangible culture of the agency as well as saving time and money by not having to constantly replace people who leave along with the client and agency knowledge they’ve accumulated. Whilst some churn is not a terrible thing if it gets too high it will eat into your bottom line. Short of polling everyone whether they’re happy each week you can and should measure staff churn. I would also go a step further and measure churn of your star performers who have left to go to a competitor as well as total churn. Learning why people who you would want to keep have left to go to another agency has to be important to know – is it money, career prospects or culture that drove them away or attracted them?

The above are by simple to measure. As an FD making the time to sit down with the new business team or the HR manager to measure these pipeline and people metrics is as important to the long term health of the agency as the monthly accounts.

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 .