22 Mar, 2021
We know that running a creative agency is hard work. So keeping a close eye on key financial metrics and KPIs is crucial. Here are some tips on how to keep track.
Mark Probert is the Managing Partner of Agencynomics, a not-for-profit social enterprise for agencies, and Managing Partner for Cactus, an agency specialist consultancy. As a financial director and consultant he provides board-level advice to creative agencies, so who better to tell us some of the challenges agencies face and how to solve them.
Tell us a little bit about Cactus and what you do?
Cactus is the UK’s leading agency specialist consultancy. Our mission is to inspire agencies, globally. We work with the next generation of independent agencies to help them scale; having helped a number of clients achieve triple digit growth and successful exits. Our client base is primarily agencies generating £600k up to about £5m in fees.
We have a health check on our website that we encourage any agency to complete to enable them to get a clear picture of their strengths and weaknesses. It's about 30 questions which they score themselves on.
The majority don’t score themselves well on things like cash flow projection, forecasting and vision.
Read more: Understanding your cash flow
They also comment that they're not doing enough marketing of their own agency. Cobbler's shoes we call it. Once we have a call with an agency, the biggest challenge often is the structure of the agency, though they don't necessarily see it.
And they don't then see how to unpick it and create a different structure, a flat non-hierarchical model that is proven to work. And so a lot of what we end up doing as well as all the finance, marketing and sales support is helping agencies on their business structure.
Can you give us an example of poor agency structure?
The classic is they've got too many account managers that are actually project managers, but they won't say they're project managers. And they've got no account managers selling to clients and bringing in revenue. Or they have no project management, as they see it as non fee earning, and then don’t have the intel to identify and fix the over-servicing and under-charging that many do.
We did a survey 18 months ago, 250 agencies from across Europe, and asked: "Where has your biggest lead source ever come from?". We had 38 different lead sources, with 80% from just 12 of those lead sources.
And, funnily enough, they were mainly relationship building activities, a number of which would come from great account management, things like, "we spoke to a client about their strategic direction or current problems they had," or "our client took us when they left to another brand", or "the client referred us to someone else".
What other challenges do they face?
So they've often got these structural challenges where they haven't got the intel or the data. The lack of utilisation and project profitability reporting (ie. the Project Management role) means it can feel busy with workload and hiring is the default, when perhaps that isn’t necessary.
Many small independent agencies do not have a dashboard of KPIs, especially not aligned to the vision and future direction. Occasionally some have, but most have got some kind of ideas cobbled together in a spreadsheet. I'm not saying that's wrong. I'm just saying that that's what they've got and these often aren’t well thought through and don’t always give you the key insights into how the agency is performing.
Read more: Using dashboards in Fathom
Often agency owners struggle on the finance side. Because they're outwardly entrepreneurial with a lot of passion and interests, they quite often seem confident people and they almost don't want to say they don't understand the numbers. The more introverted types are often wary of questioning too many things.
Is that because they’re more visually inclined?
Potentially. Some are excellent on the commercial side of their business, but that’s not always the case. You're right, they're creatives, often they don't really want to look at the black and white numbers. Then you have to play to what Fathom offers, the visual way of showcasing KPIs and so on.
We wrote a book, Agencynomics, which has exploded. And in it, we have a whole section about finance and operations. I've seen it a lot, people struggle to get a finance resource on board. They see it as a non-fee earner and actually, we all know it should be fee-earning quite quickly because it will alleviate the time of the agency owner.
Recently I was with a £1m+ agency that didn't even have a finance resource. They had the owner doing it and they had multiple invoices. So you have to ask, "what are you doing?!"
How can you start to fix that?
We wrote a post on LinkedIn entitled ‘The £500 Task’. And what I mean by that is if you're a million-pound agency, for the number of days you've got available, you need to charge out four grand a day to hit your £84k monthly revenue target.
And if you're doing anything under £500 an hour, because it tends to be seven or eight hours a day, if you're doing anything that's worth less than that you should sub-contract or freelance it out.
So the finance one is a classic, as a bookkeeper can be around £20 to £25 an hour. But I think there's a lot of resistance often with agency owners on the trust piece. The trust of getting to know the numbers, the trust of handing over my cash flow to somebody.
Watch on Advisable: What can bookkeepers do to help clients?
When’s the right time to get that support?
When you're £300-£400k, you probably should be getting a bookkeeper if you haven't already. As you scale up to maybe £600-£800k you've got to be getting a finance person in-house, probably a sort of financial controller, maybe even finance manager level. It doesn't necessarily have to be full-time.
But I think as you're scaling up towards £1m it needs to be full-time, dependent on volume of transactions. That person can also take on other finance/operational tasks that often the owner is doing, really helping to free them up on new business, marketing and culture.
Tell us about agencies use of technology?
I do think on the finance side, quite a few people are aware of the really useful apps like Receipt Bank, Expensify, Chaser and GoCardless. I still think tech, particularly around dashboards, is an area that more people could focus on to automate their finances, especially as agencies do love their tech products.
Often I’ve heard an agency say, "Oh, we've tried a dashboard. We've dabbled in a dashboard. We've never really got a grip of it." Usually that’s because they tend not to have the underlying finances accurate enough to look at it properly. So the owner's trying to dabble in the free trial of the app and not getting anywhere.
Quite often, unless they've got somebody like a finance person in place or an accountancy firm advocating it and pushing it, they don't really have these dashboards in place. They don't invest the time that it needs to get it set up properly, and that goes back to the resourcing point.
How are agencies working with accountants?
Accountants sometimes get bad press. The amount of times I've heard, "Oh our accountants have never been proactive with us." But actually, that works the other way too. When I was in practice, I always used to say to clients, ‘if you want to talk over a coffee it's fine, I'm not going to charge you for it, it'd be good to catch up, within reason, every so often’. I think some kind of blocker has been created by a lot of creatives who immediately go, "Oh it's going to cost money to engage in my accountant or my lawyer."
But this is changing. They're seeing accountancy adopting tech and apps and it's all in the Cloud, I think accountants are getting a bit more of a personality on social too, which is massively helping. And when I talk to creatives, they're like, "All right, well, you're not going to do our accounts?" and I reply, "No, I'm an FD, consultant and a board level adviser, I'm not going to do your accounts, but I know some people that really understand your industry and are good people."
Believe it or not, accountants have got passions outside of accountancy so they're similar in some ways. I think that the whole sector and knowledge and understanding of each other's roles and skills and how accountants can help a business move forward is improving.
Personally I find it really rewarding to help an agency owner understand in layman's terms the numbers, the impact they have on the business and what simple metrics should be in place to help them.
What KPIs should agencies be tracking?
I got asked the other week about the four or five main KPIs I would have on the dashboard. The obvious one, I say obvious, but everyone has a different interpretation of this, is the Gross Profit per Head.
1. Gross Profit per Head
At Cactus, we work on the idea that all team members' costs are treated as Overheads. Other advisers may say treat your team costs in either Cost of Sales or Overheads depending on whether they are billable or not (i.e. billable goes in Cost of Sales). For most independent agencies this level of added complexity is just not needed and in fact you would need more financial resource to administer it, which as I mentioned before is often lacking. Our motto is keep things simple. All team costs, regular freelancers (akin to an employee) and regular dividends (where owners are paid monthly via payroll and dividends mix) should be totalled up and compared to Gross Profit. So Gross Profit per Head is super important.
2. Team Costs to Gross Profit
Another important people metric is Team Costs to Gross Profit, which can aid you in planning things like team hires. This metric should be between say 55 to 65%, maybe a little bit higher at the moment because no one's got an office and some agencies have had rent deals.
3. Debtor Days
Then it's Debtor Days, i.e the number of days it takes you to collect your money from customers. If you can get that to under 40, you're doing really well in the agency world, given the fact many agencies have a big brand that is slow paying and therefore distorts the metrics.
Read more: 11 Essential KPIs for creative agencies
4. Current Ratio
A key ratio I like for liquidity is the Current Ratio, which is Current Assets divided by Current Liabilities. Current Assets are things like Debtors plus cash in the bank. And Current Liabilities is what am I paying in less than 12 months to my creditors, PAYE, VAT, Loans etc. Anything less than 1 and the signs are you having cash flow issues, 1 to 2 ok, greater than 2 is healthy and anything more than 4 can often be a sign of a lifestyle business as it can reflect a lack of investment in growth, hiring etc.
5. Marketing and Advertising spend versus Gross Profit
Finally, Marketing and Advertising spend versus Gross Profit. This is quite an interesting one because I think often agencies, believe it or not, struggle to invest in their own marketing. They don’t feel they need to bring in an expert to do their marketing when they are experts themselves. Again it’s the Cobbler's Shoes scenario. A robust costed up marketing plan, and resources to carry out the plan, should run at up to 5% external cost to GP, and up to 10% if you hire in resource also.
Other things you might want to track
Utilisation rates are another key area to look at, but that goes back to having more resource to properly monitor this with accuracy, so often the five I mention above are a minimum for a growing small independent agency. Net Profit % is key also! I’d suggest anyone reads our book Agencynomics, as all the KPIs and benchmarks we use with agencies are listed clearly.
Is the UK creative sector as a whole healthy?
I think the sector is reasonably healthy. I say that not just from within my client base but with the insight from our community of 1000+ agencies. Many of my client base are doing at least the level of trading as at the start of 2020, some have seen up to 40% growth.
However, a lot of UK agencies are now much more leveraged up with debt than at any time previously, because they've all taken the funding on offer from the Government. Some are still not clear on when/how they are paying it back. So I think liquidity wise, it could be a tough time for some going forward. Alright, the VAT has been deferred a bit, but it’s going to have to be repaid, the loans also if you don't refinance them, the furlough scheme is going to end.
So some agencies are living in that almost false dawn of thinking they are making lots of money/profit, but they've probably got quite a lot of liabilities building and really need sound cash flow management (as a minimum at least a rolling 3 months in my opinion).
Finally, tell us about Agencynomics?
So as a sector, the thing that's been superb throughout the last year, which I don't think is the case with many other sectors, is the community side. We launched Agencynomics as a free community for agency owners in April of 2020 and it currently has over 1,000 agencies from across the globe (34 countries at the last count).
One thing that agency owners are often good at is talking about themselves, sharing stories and socialising. But also they love hearing about other people's business journeys. So we founded the community to help inspire agencies; peer support, webinars, industry experts giving their time etc and actually, it's also created a lot of co-working and co-marketing in this COVID period for many agencies.
We continue to be massively grateful to all the members for their contributions and activity levels in the community and look forward to seeing its global reach continue to expand to get diversity of opinions from other cultures.
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Our thanks to Mark for giving up his time and providing such great insight into the creative agency industry.
And remember, you can track the five KPIs he recommends in Fathom as well as build dashboards that show you exactly what's happening in your agency's financials.
To find out more, book a call with our customer success team and start your free 14-day trial today.
Written by Andrew Webb
Andrew is Fathom’s Content Strategist based in the UK. He has a background in journalism and has worked for companies like the BBC and HuffPost, as well as start ups in education and technology. Andrew has also published 5 food books and makes a great pie.