Recently on the Growth Code® podcast, I interviewed agency CFO Simon Collard an agency-only fractional CFO. With over 30 years of experience in the industry, Simon has dedicated the last 12 years to helping independent SME agencies thrive and prosper. You can listen to the full episode but I wanted to delve into a few of the many key insights on the importance of numbers, simplifying finances, and mastering the art of profitability. Equally important for agencies and service-based businesses.
The Numbers Game
Numbers and finances might not be everyone's cup of tea, especially for creative minds, but they are the language of business. Simon emphasises the significance of keeping things simple when dealing with financial data. Avoiding complex spreadsheets and reports is crucial to gaining valuable insights into your agency's performance.
Simon's approach revolves around a few key figures that can provide a clear picture of your agency's financial health:
1. Revenue: The lifeblood of any agency or business, knowing your revenue for different periods allows you to track growth and performance.
It’s important to know your revenue figure of course but also what are your sources of revenue. A particular marketing strategy, a group of clients, your service offerings.
2. Staff Costs: Often the most significant expense in an agency or service-based business, understanding the ratio between revenue and staff costs is a vital key performance indicator (KPI).
3. Freelancer Costs: Keeping freelancers as a separate line item helps gauge variable costs and their impact on profitability.
4. Overheads: Though generally consistent, overheads play a role in the overall picture. And it’s vitally important to know what your breakeven hourly rate is.
Net Margins: The Ultimate Indicator
Simon highlights that a profit and loss (P&L) statement reveals how efficiently your agency turns revenue into profit. Since net margins for agencies are typically thin, it's essential to pay close attention to this aspect. With a straightforward set of numbers and visually impactful representations, you can easily identify how much of your revenue goes into people costs and where your profit vampires are lurking.
The Golden Ratio for Staff Costs to Revenue
In the past, the ideal ratio for staff costs to revenue used to be around 50-30-20 (50% people costs, 30% overheads, and 20% profit margin). However, the industry has evolved, and today, the recommended ratio stands at approximately 60-20-20. Investing in people remains a significant expense, and agencies need to adapt their commercial models accordingly. Achieving a 60% staff cost-to-revenue ratio is a good target, though some agencies still opt for lower or higher ratios based on their unique circumstances.
The Pricing Puzzle
Agencies often face challenges with pricing their services profitably due to intense competition and pricing pressures. To be sustainable and profitable, agencies must focus on showcasing their value, proven processes, and efficient pricing strategies. By analysing the P&L statement, agency owners can pinpoint areas of improvement and address revenue leaks, such as undercharging for project management or thinking time.
If pricing for profit has been a conundrum, here’s the “Pricing for Profit” book to help guide you through charging more with confidence.
The Path to Profitability
Simon concludes by emphasising that the simple P&L serves as an entry point into understanding an agency's financial standing. If the net margin is satisfactory, it indicates that most things are working well. On the other hand, a low margin signals room for improvement. To achieve profitability, agency owners need to delve deeper and identify the factors hindering their ability to convert time and talent into expected margins.
Understanding the language of business is essential for any agency or service business looking to succeed. Simplifying finances and focusing on key numbers can provide valuable insights and help master the art of profitability. By embracing straightforward financial strategies and leveraging the data, you can make informed decisions to drive growth and prosperity.
In this podcast interview, Simon Collard shared his expert insights on agency finances, paving the way for agencies to navigate the financial landscape and achieve sustainable profitability.
The content of this blog post is based on a podcast interview with Simon Collard on the Growth Code® podcast, dated July 31, 2023. The interview has been transcribed and repurposed into a written blog post for educational purposes.