The Perfect Trio
Effective financial reporting in your agency is essential to give you as the owner the best chance of making decisions promptly and driving the desired performance across the business. Without clarity on the financial position and implications, running your business can be very difficult and akin to driving a car with the windscreen covered in mud.
When it comes to reporting, there are three key tools and processes that are invaluable in giving you as the agency owner the required insights. A budget – built as a financial plan at the start of each year, monthly management accounts to track results, and a live forecast so you project forwards and make adjustments ahead of time.
In this blog I’ll talk through the key principles of each one and what we have learnt from our experience of working with growing agencies.
The first step of the process is to understand from you as the business owner what the bigger picture objectives are and what that means for you personally. Amongst all the noise of running a business day to day, this is the annual opportunity to take a step back, challenge the reasons why the business exists and understand if you are on the right track.
Initial time should then be spent analysing the prior years and the trajectory in which the revenue, costs and profit has changed. There will be learnings to take away, both good and bad, which will factor into the budget being built for the next 12 months.
A base budget can be built based on the ‘as-is’ position so that before anything else we can see the total cost base and the break-even point. From there you can make adjustments and run different scenarios. It may be that you want to make 4 new hires in the year or invest in a particular marketing campaign which involves a higher spend than usual. You can see the impact those decisions will have on both profit and cashflow.
From the cost analysis exercise, you will have an initial view of what the required revenue is to cover breakeven and then to deliver a certain level of profit. The reliance on external costs and freelancers will need to be considered at this stage and from that the anticipated Gross Profit margin.
When it comes to the profit figure being targeted, it is important not to fall into the trap of building a budget based on ‘last year plus a bit more’. Ultimately the profit target should be generated from the bigger picture conversation of where you want the business to be in x number of years and what that means for your personal wealth or the business valuation. You can then work back from there.
The next step is to map out what the revenue looks like. You will have a level of confirmed work already which becomes the starting point. Any shortfall to target can then be built up by understanding the clients you work with, if they are on retainers or projects, and what the numbers need to look like in terms of new client acquisition and average client spend. You can then give feedback on how that feels and what is achievable. At this point it is also useful to consider what the key drivers are to the financial results, and what KPIs should be being tracked throughout the year.
Some further thought will now be required on any alterations required to costs. From building a capacity plan, we can see if the team you have is capable of delivering the revenue target. Based on the new business requirement it shows, it may be that the marketing budget needs some tweaking to generate enough new leads.
Ultimately a budget should be the right level of ambitious but realistic. The aim is for you to go away from the process feeling excited and clear on what you need to do to achieve the figures – but also why the targets exist and what it means for you personally. That is what gives you the purpose and the drive to deliver on it day to day.
With your budget in place and clarity on the route map to achieving the financial goals of the business, monthly management accounts can then be used to track progress. Accounts should ideally be produced within 2 weeks of month end, to give you as the business owner prompt insights so that any learnings can be implemented quickly.
At MAP we’re advocates of a simplified management accounts pack which includes an overview of the financial KPI’s, a Profit & Loss and a Balance Sheet. All too often do we start working with agencies who have an extremely detailed management accounts pack in place. Whilst data is important, often the wood can’t be seen for the trees, and it’s very difficult to understand what the key takeaways are. Your accounts pack should be simple and effective. For any areas where more detail is needed then that information is always available behind the scenes and additional reports can be run.
The key function of your Profit & Loss is variance analysis to the budget that has been set. Whilst the numbers and the margins can be looked at generically and benchmarked against industry standards, the best insights come from tracking against your own budget and what good looks like for your agency specifically, based on the trajectory you are on.
Each row should be considered in isolation – from revenue differences and through each of the cost differences you are seeing. If you are down on revenue or profit, challenge what can be done in the coming months to get things back on track.
Whilst your P&L is a report of the financial performance over a given period, the Balance Sheet is a snapshot of the financial position and the Assets and Liabilities you have at a given date. Often it can be overlooked in favour of the P&L but is equally important.
Learnings should be taken on how robust the business is through key ratios such as Current Assets v Current Liabilities, how well you’re doing at generating cash, and any upcoming risks there may be. The bottom line is the Equity or Net Assets in the business – the overall result of Total Assets less Total Liabilities. If you’re profitable, this figure will be gradually increasing month on month.
Management accounts by nature are a backwards looking view of what has already happened in the business. With the right financial forecasts in place alongside them, nothing that is ever shared in the monthly accounts should come as a surprise.
Live financial forecasts give a view of the confirmed revenue and the expected costs of the agency for the coming months. The key word in the previous sentence is ‘confirmed’, as the starting point should be for the forecast to include confirmed revenue only. Due to the project nature of many agencies that will often give a difficult view of the coming months, particularly when you get 3+ months out, however that view is essential to understand the shortfalls and what action can be taken to bridge the gap.
The costs of the agency do tend to be more predictable with the biggest spend coming from your employed team and supporting freelancers. With an updated view of expected costs, the projected profit figure can be understood early in the day. The forecasted revenue, costs and profit can then be compared to your budget. If the numbers are lower, then also comparing to your breakeven point can be useful so you know specifically what needs to happen as a minimum.
Once you know the shortfall of confirmed revenue against your targets, a forecast of new business requirements comes in, allowing you and the team to discuss what opportunities you have to make up any gap. As you continue to collate this data you’ll start to have a better understanding of what the numbers mean and what you need to see in the pipeline to be reassured that you’re on track. What varies agency to agency is the conversion rate and the conversion time, so make sure to spend time working out what applies to you.
Live forecasting is all about making effective decisions early and minimising any surprises. Revenue forecasting works particularly well as part of a weekly routine, giving the team who can influence those numbers clarity, accountability and momentum.
With the above trio of reporting in place and the principles being stuck to, you’re giving your agency the best chance of success – whatever that success looks like for you.