Making Smarter Agency Finance Decisions Part 8 – Too Much Information

Simplicity Is The Ultimate Sophistication – Da Vinci

We instinctively feel comforted by information. So it’s only natural that, when faced by a decision, we take refuge in information.

It seems counter intuitive that, in these days of big data, growing computing power and access to almost every written word at the click of a mouse to worry that too much information is a bad thing for decision making. However the cognitive load of too much information means we have to have a plan about which information to concentrate on. To illustrate…..

These days I rarely go anywhere without checking out hotel reviews. This could be a very lengthy process but I focus on the worst reviews for the best hotels I want to stay in. If they can be dismissed as the ravings of a professional complainer I’ll book. That’s my KPI to save getting swamped by too much information. Focus on the nutters. It’s worked so far.

Surely more information will mean better decisions for Agency finances though? Perhaps, but I would argue that it’s counter productive when making decisions for Agencies. Let me explain.

The longer I work in Agencies the more and more I try to make things as simple as possible. One reason for this is practical – I have to explain what the numbers mean so it helps if they can be understood. To paraphrase Albert Einstein – if I can’t explain something simply enough I don’t know it well enough.

The second reason is I believe better, smarter decisions are made not by information but with insight.

Here’s why. Agency profitability is the long term outcome of decisions about how much to charge clients and how much to pay your team.

The effect on revenue and costs of each decision brings a clarity to the process. How much revenue will you gain or lose following the decision. How much additional cost will you incur or need to save. These are the questions to ask when faced with pitch pricing questions or the loss of a client. Simple questions with limited data required.

Looking at the standard ratecard and working out the margin based on salary and overheads and factoring in the discount that may be asked for to figure out what your margin might be is a spreadsheet too far. There are too many variables, too many assumptions that obscure the reality of the problem. Money in, money out. Figure that out and move on to the next decisions.

The same will most likely go for your P&L – to get what you need you only need a few figures; revenue, staff costs, overheads and headcount. The good stuff (profit, revenue per head and compensation to revenue ratio) can be worked out from those 4 figures.

Case Study

Too many accountants have over complicated too many sets of accounts. Agency finances may have their complications but at heart it is a simple exercise.

Probably the worst example of over complication was a client whose previous FD had tried to design a system based on a huge data dump of timesheets which somehow was supposed to work out the revenue. No, me neither – I didn’t understand it.

Instead of trying to follow the logic I went back to basics. Invoices, trial balances and a talking to people about revenue recognition. From having no information at all for 5 months they are now getting their simplified but helpful management accounts on the first day of the month. Much simpler. Much better.

Conclusion

Life can be confusing. There’s no need to make it more confusing. In this chapter the examples I have looked at have been revenue and cost based. But it holds true even in more complicated areas – try to find trusted advisors who can deal with the detail but explain your choices simply.