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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.

 

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.

Accounting for Start Ups has never been easier but there’s still a vital role for a Finance Director

One of the many pleasant surprises I’ve learnt over the past 18 months or so as a freelance Finance Director is how much online accounting systems have moved on.

I’ve always counted my blessings I’ve worked more in Excel than Kalamazoo. The speed, ease and accuracy with which you can manipulate data has taken a lot of the drudgery out of the FD role.

The explosion of new, simple and exceptional value online products such as Xero, FreeAgent and KashFlow has had the same effect on accounting systems for the start-up entrepreneur. They enable anyone’s accounts to be on a robust platform from day 1.

Being able to log on wherever you are to check on the cash position or raise an invoice for work you’ve just done makes accounting easier, flexible and more relevant.

So far, so bleak for the accountant whose role could be marginalised to the annual accounts and tax computation. However there is a real opportunity for the Finance Director to become a trusted business advisor.

Naturally I’m a little biased here but no matter how simple and easy it is to process transactions or pay suppliers there is always going to be an important role for an FD who can explain not only why the numbers are what they are and ways they could be improved.

It is this added value role which can’t be replaced (yet) by software. In fact having the right software at the right time and cost should mean the time saved on the more day to day functions should mean a greater focus what the numbers mean.

Getting that advice and insight in a cost effective package is what I’m about. One of the things that can improve the chances of a small agency surviving and thriving is getting good, practical advice from an experienced, flexible and cost effective Finance Director. If this sounds interesting contact me.

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.