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Consistency the key to a useful forecast.

I’m assuming that every Agency has a forecast. That may be optimistic of me, it’s my nature, but if there are any hold outs around let me quickly run through the many and varied reasons to have a revenue forecast.

– This isn’t your birthday or Christmas. No one likes surprises at work. Generally. And certainly not unpleasant ones.

– How do you plan without one? Investing in big stuff like people or property is scary enough if you have an accurate forecast but even smaller, discretionary, costs like training or awards feel a lot more settled if you know you’ve got the income to cover them.

– Completeness. With the best will in the world it’s always good to have a list. You can check for gaps. You can check you’ve billed everything. It’s not a particularly complicated reason but it is a very valid one.

Hopefully I’ve done enough to convince even the hard core hold outs to see the error of their ways and start a revenue forecast. So, what should a forecast look like? What revenue figures should go in?

In my experience once you have more than one person involved in the forecast there will be in difference in approach. It’s human nature. Some people are optimistic, others fear the worst. Put them together in the same spreadsheet and you’ll get wildly different approaches. So whilst you’ll have a forecast in reality it’s not one that should enable you to sleep soundly.

So in addition to the exciting prospect of being able to check a list I’m going to throw in in some rules to help make the forecast a consistent and reliable companion.

– If you want a consistent forecast figure you need to take human nature out of the equation as much as you can. I would do this by only putting booked revenue into the forecast. Leave the ifs and maybes out of the picture entirely. For the moment anyway; they do have a place but that comes later.

-Have a deadline to update the forecast. This will vary from agency to agency but let everyone know when their forecast needs to be up to date.

– Extend for the whole year if you’d like but bear in mind forecasts deteriorate quickly. Next month should be pretty much spot on: the next 3 months less so. If you only put booked work in it will look pretty depressing in the long term but don’t panic because you’ll also be looking at what could happen.

– You need look at the pipeline as part of the exercise. Ideally in the same spreadsheet but on a different tab keep an up to date record of all of the pitches, upsells, RFIs, RFPs conversations and negotiations that are going on.

– Again you’ll need some rules. A pipeline is a good idea. A weighted one is better. Negotiations about the scope and cost of a project is a better asset than a pitch. A pitch is better than a RFI and so on. I don’t mind what percentage or odds you put on each stage in the process from prospect to client but be consistent.

– Now the overall forecast will give you the guaranteed level of income (or the worst case scenario) as well as a stratified layers of potential business. This will give rise to loads of “what if” scenarios particularly around resource but that in many ways is the crucial Agency challenge. Matching resource to activity. This way though you’re doing it based on facts and not guesswork. Rules and process not emotion.

How do you do your forecasts? I’m always interested in different formats and method. If you need any help with forecast please let me know, always glad to help.

“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 .