Why do so many dreams turn into disappointment? Why do so many Agencies fail?
Maybe some agency founders aren't good enough designers/marketers/consultants or coders.
I have a feeling, completely lacking in evidence and entirely anecdotal, that most failures will be caused, not by a lack of core talent, but by a lack of wider business or commercial knowledge.
What are the things that new Agency founders need to know to get through the early years? Here are my favourites;
At some point when you start hiring people it will become crystal clear why new business is so vital. You have to cover your costs and then some. And you have to do it every month. You have to balance doing the work right now with investing some time with making sure there is enough to next month too.
It's easier when there are just one or two of you but as your team grows that fixed cost becomes more and more pressing. The work from your initial clients or contacts won't be enough and you will need to widen the net for new clients. Whether it is outbound, inbound, networking, alumni, events or clients who have moved on making sure there is a pipeline is vital.
You don't need to be a qualified accountant to be a success running an Agency. But you do need some insight into what your numbers mean and what they suggest you need to do and how quickly you need to do it.
If you do only one thing over and above looking at your Xero, FreeAgent or QuickBooks P&L then please, please do some reading about these metrics. How they are (simply) calculated and what they mean;
Revenue per head
Client Utilisation and Recovery
Luckily I have written a helpful book "Where Is The Money?" to help explain these basics. And more. Available free here.
This is where people can relax and get hit by a sucker punch. You've won some clients, employed some people and have plans for more of the same. A small word of warning here; this is where cash flow is absolutely vital. Paradoxical as it might sound it is possible to be profitable but be hit but poor cash flow. Kit has to be bought up front and salaries paid monthly but it might be several months before the cash from that healthy growth comes through. Just be (even more) aware of your cash flow and don't get carried away with your early success. Delayed gratification and a healthy caution will, literally, pay dividends later.
The best thing to do with a problem is to react quickly. Too often I see Agencies where a potentially fatal crisis has developed where earlier action could have avoided potential disaster.
Part of this is human nature; most founders are optimists who believe things will get better next month. But to make sure this doesn't happen to your Agency you need to do a couple of things.
First is to make sure you have a robust forecast. Let me repeat this; if you read this and take only one thing away from it is this; make sure you have a robust forecast. By robust I mean only include revenue you know is going to happen. Not what might happen. Not what you think might happen. What you absolutely, 100% for sure, know is happening. The other possible stuff goes into the pipeline. This will make it far, far easier to know when to react.
Secondly make sure you get good, clear and understandable figures from whoever does your numbers. And make sure you get them promptly. Good and early numbers beats perfect and late every single time. Whoever does your figures needs to get them to you promptly - ideally within 5 working days but certainly by 10.
If, for whatever reason, this isn't possible then it should always be possible to estimate the P&L based on forecast revenue, known salary costs and a pretty good estimate for overheads. It'll be a little rough, but it'll help you react.
Having any one client who makes up too high a % of your business is a risk. It’s attractive because, well, of the money but it is a risk. Any one client who can wipe out your profit with one phone call can sink your agency. The only way to mitigate this (apart from making sure they are happy with your work) is having a notice period and providing a service they need during that notice period. That and a decent pipeline.
Most businesses that fail will fail not because of lack of talent. They will probably fail due to one of the above reasons. The good news is that they are avoidable. A lot of the above risks can be measured and controlled using a decent forecast/pipeline/cost tool. Luckily, I am developing one – find out more at Agencymap.io.