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5 Songs and 5 lessons for an Agency FD

Reading the stats about how people come across your blog is fascinating. You learn first-hand about the long search tail. Quotes have proved to be a popular route to my thoughts on the role of the Agency FD and in the hope of repeating this here are some lessons drawn from song titles.

 

Everything is free – Gillian Welch

Probably the biggest change I’ve seen in marketing has been the rise of social media. It has changed many of the basic parameters not just of marketing but also the business model of many industries, especially music. Not especially fertile ground for songwriters you’d think but this defiant paean for the creators makes it clear everything shouldn’t be free even though if it is she’ll still carry on writing and singing.

The threat and opportunity to marketers is how to harness this power and how to make it pay. Free content, paid for content and earned content should all amplify the client’s brand. The FD’s challenge is to make sure that content providers and Agencies can make it pay. Whether it is using social media to respond to customer service issues or generate links to boost your page ranking there has to be a solid commercial model behind. Everything isn’t free unless there is a very dramatic change happening.

2 + 2 = 5 – Radiohead

Not the best known Radiohead song but the only one to have such a blatant arithmetic error in the title. But yet…….

The ultimate goal for any Agency is to be greater than the sum of its parts. It can be frustrating for an FD but not every decision can be decided by a well-constructed spreadsheet. In the balance between magic and logic in an Agency it’s the FD’s job to be on the side of logic without dismissing the creativity, the passion, the magic that can make the Agency stand out.

Money Changes Everything – The Smiths

Yes I was a student in the 80s and have an unashamed nostalgic warm spot for Morrissey and Marr. Not least for some of the longest and most poetic of song titles of which the above is one of the simpler examples. I was tempted to include You Just Haven’t Earned it Yet, Baby

It is axiomatic that money does usually change everything. This is why it’s a golden rule for every Finance Director to make sure that everyone knows up front how the money works. Who owns what, who earns what and how it’s worked out. You’ll need to be transparent and explain regularly and clearly how this works. This is especially true for company bonus schemes where simpler is better and updates must be frequent. If not the bonus scheme won’t be the good news or the incentive that it should be.

Brand New Day – Van Morrison

Famously the grumpiest man in music this optimistic tune always cheers. It also serves as a reminder that what has gone has gone and what matters is what happens today, yesterday has gone.

In finance terms the link is that we should always concentrate on future costs and revenue and not historic ones. What is best to do next? Asking this question backed up by accurate and up to date historic data is key to maximising profit. Providing systems that means every manager in the Agency can answer the question is transformative.

Every Little Counts – New Order 

Firmly dating my formative musical years the lesson here is fairly straightforward. Anyone who has worked with me will have heard my favourite personal cliché that, yes, it is only x thousand/hundred pounds but it still matters. I’d still like it in the bank account.

Every little cost saving or extra billing is marginal profit. The quickest money an agency will make or lose will be through these kinds of decisions; especially at the estimate stage.

Making sure you have a sound commercial model, understanding that not every decision can be backed by a spreadsheet but when a decision has been made to be transparent about regular with updates. Recognising the emotional impact of money and instilling good disciplines into costs and revenue opportunities without risking client relationships. These are 5 valuable lessons for any Agency FD.

Over the last 20 years as an Agency Finance/Commercial Director I’ve commuted to work listening to music, some of it even post 1990, and tried to put these lessons into practice.  As a virtual or part time FD specialising in the independent sector I’m using these lessons to help Agencies grow. If you’d like an initial chat email me.

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 .

Are your Bonus schemes working for you?

Bonus schemes can be a mixed blessing. Handled well they can incentivise good performance and improve profitability. Handled badly and they can become a focus for unhappy employees.

I’ve helped set up many schemes. Most have worked well and rewarded people for performance which has improved profits. Others, not so much.

What separates the good from the bad? Here are some basic principles.

  1. Reward people only on what they can control. If the bonus is for the CEO then company net profit performance is a pretty good target but can a Business Director control overheads? You want them concentrating on maximising profitable revenue. Likewise a department head can’t usually bring in revenue so for them it’s about performance and efficiency.
  2. Communicate clearly and communicate early. People take an interest in bonus schemes so get them out before the year starts and get all the awkward questions sorted in advance.
  3. Tell people how they are performing against their targets regularly. Bonuses should be about improving performance, finding out about performance and discussing how to improve it is the main reason for bonus schemes.
  4. Balanced approach. Incentivise purely against revenue and you could motivate people to discount quotes to buy business. Make it about margin as well and you’ll guard against the risk of bringing in unprofitable business.
  5. Align to company performance. Ideally you should build your bonus schemes into your budget planning so that revenue and margin targets are in sync with company targets.
  6. Allow a discretionary element. Life is complicated and can take unexpected turns. Through no fault of the employee circumstances could dramatically change and you might want to reward an exceptional performer who was just in the wrong place at the wrong time.

Done well bonus schemes will more than pay for themselves. Done badly they can be counterproductive. If you need help incentivising your employees please contact simon@novemberfriday.wpengine.com. The author has over 20 years’ experience of devising bonus plans.