Many people fall into agency life:
- Maybe you were a freelancer, very good at what you do. Your reputation precedes you and more work comes along. It’s too much work for you to do by yourself and so you engage someone else to help….3 years down the line you have a £250k agency, how did that happen!?
- Maybe you were working in an employed position and thought you could do a better job. You grabbed a couple of co-workers to join you and boom, a new agency is born!
- Or maybe, like me, you knew someone else with an agency. You had the skills to help out and you found you enjoyed it. Over time your workload increases and suddenly you’re 7 years in & the agency world is a big part of your life!
The situation may be different for everyone, but my point is that most people don’t really plan to run a £250k agency, it just creeps up on them. This isn’t a bad thing, getting stuck in and learning on the job can make for better owners. However, it is likely that there are lots of tasks that you never considered you would need to take care of yourself and one of those is finance.
The majority of people understand the need for compliance finance - filing the accounts each year, submitting VAT Returns and paying your taxes but what about the forward looking parts of agency finance? Cashflow, planning for profit, credit control, annual forecasting (usually followed by the annual re-forecasting because forecasting is such an inexact science!) and generally keeping track of the numbers.
These things are often forgotten within the madness of agency life, but assuming you are looking to review the finance side of your agency, let’s look at some of the things you might want to consider and why they are important 🙂
-- 1 --
Are the bank recs up to date and are the transactions coded in a logical manner?
You cannot make accurate, informed financial decisions if you do not have the full picture of where the agency currently sits. If you look into FreeAgent or Xero and see 150+ unreconciled transactions dating back several months, it is going to be very difficult to work out whether things are good, bad or ugly!
Similarly, if the person reconciling the transactions is just coding things to random places or doesn’t understand the difference between expense codes & liability codes then the accounts will not show a true picture of where the agency is at and could lead to you believing that there is a lot more money available than there actually is.
If you do not have either the time, the ability or the inclination to keep your books up to date, please invest in someone who does. This could be as an extra service from your accountant, via a freelance bookkeeper or even a team member who has the capacity for the numbers work. I promise you, the small investment needed to get this work done accurately and in a timely manner is worth it to avoid stumbling blindly into bankruptcy because no-one realised the spending had increased quicker than the pipeline.
-- 2 --
Does the agency use time tracking or scheduling software and are these things kept up to date?
Agencies sell time. However you price things, you are still selling time. Knowing how long something takes to do is essential both for ensuring you are charging enough money and for ensuring you have enough team members to service all of the work that needs to be done.
However you decide to keep track of the time used, make sure this information is updated regularly (and by regularly I mean preferably daily) and the records remain a true representation of the work completed.
It is useful to track or schedule both direct client-facing hours and indirect internal time across your different team members. This will provide you with a good overview of your agency’s activities, which is especially important for remote working.
-- 3 --
How much cash is the agency holding - is it enough for a few months’ expenses or are things a little tighter?
The scale of cash holding is generally a risk-thing. Being someone who is quite risk-averse when it comes to finances, I would definitely prefer to have at least a few months worth of expenses covered at all times. Other owners may be happy living more hand-to-mouth and that is their choice.
Either way, you should be aware of how much cash you have and how much of that cash belongs to someone else - generally the tax man.
You should also be aware of how the cash moves in and out of your business. Are the majority of invoices paid before salaries are due or are you scrambling each month if a client pays late? Do you need to put aside money for the quarterly VAT bills or the annual Corporation Tax payments? Is it best to spread costs across monthly instalments or take advantage of the discount for an up front payment.
These things seem pretty irrelevant when you have plenty of cash, but can soon become all-consuming if things get tight.
-- 4 --
Do your clients pay on time or is there a large number of overdue invoices?
Credit control is the bane of many an agency owner’s life. It’s hard to be the person who has to chase late payments, when all you want to do is to build up a rapport with a client so that they are encouraged to take on more work from you.
However, credit control is vital to your agency's survival. It should be as simple as sending an invoice & receiving payment on the due date, but we all know that it’s never that straightforward. Businesses fail because they run out of cash and a large number of overdue invoices will devastate your cashflow regardless of how good your turnover figure looks.
Someone needs to take responsibility for chasing overdue payments and they need to be persistent. It may feel like trying to get blood out of a stone, but it is worth the effort. There’s no point spending weeks tracking down leads, schmoozing prospects and producing brilliant work if you then forget to chase up the invoice payments when they are conveniently forgotten by the other side.
-- 5 --
How do you make decisions on pricing and how does that relate to the costs of the business?
It doesn’t matter how you choose to price your work - hourly rate, day rate, fixed fee, “value pricing” - but it is important that you understand why you charge the way you do. To ensure that the work that you sell is priced appropriately, you need to understand the costs that go into each hour / day / project.
The main cost to any small agency is its staff, but there are lots of other costs to consider, and these need to be covered when setting those prices. Go through your spending for the past quarter and make sure you are fully aware of all of the costs that contribute to the running of the business.
If your rates are only based on your staffing costs, you will soon eat into any markup you have added. Assuming your staff costs are around 60 - 70% of the total expenditure of the business, that leaves a reasonable amount of unaccounted costs if you only consider salaries & PAYE.
-- 6 --
Who is responsible for reviewing projects after they have been completed to see If the budgets were accurate?
The data you collect on each project is only useful if it is deployed to guide the planning of the next project.
In the same way as you may take the opportunity to review the work involved & deliverables of a project upon completion, you should also review the financials. Were your assumptions around time required accurate? Were there any additional costs that should’ve been factored in? What was the equivalent day rate and how can you increase it for the next proposal?
When generating project or proposal budgets we all have to use a certain amount of finger-in-the-air guestimates! By reviewing these at the end of each project, you will begin to build a picture of which assumptions are accurate and which require a little more tweaking. This leads to you being able to produce ever-increasingly accurate forecasts for your proposals and reduces the risk of underselling.
the round-up
So there you have it - 6 things that may be useful to consider when you finally get round to the “sort agency finances” note on that to-do list and you run out of reasons to bump it to another day.
Good luck!
