Whether you like it or not, there are several financial mistakes being made in your agency today that are costing you money. You’re in business to make money, so every step you can take to prevent these mistakes is worth it’s weight in gold, literally. Most of these mistakes happen slowly over time and just eat away at your profits little by little.
This solocast is all about these money draining mistakes and what you can do to plug any holes you may have. In this solocast I will cover:
- Gross Billings vs. Adjusted Gross Income
- How agencies lose money when pricing
- Why scope creep leads to little or no profit
- Why your agency needs to issue change orders and how to turn this into a process
- Why you need to use the one page business plan
- How to know if you need a better new business plan (hint: you probably do)
- Why you need a tax advisor not a tax preparer
Drew McLellan is the Top Dog at Agency Management Institute. He has also owned and operated his own agency over the last 20-years. And all through the year, he straddles the fence of working in his agency and working with 250+ small- to mid-size agencies in a variety of ways. He works with agency owners in peer network groups, teaches workshops for owners and their leadership teams, teaches AE bootcamps, and does a lot of consulting. Because he works with a lot of agencies every year — he has the unique opportunity to see the patterns and the habits (both good and bad) that happen over and over again. He has also written two books and been featured in The New York Times, Entrepreneur Magazine, and Fortune Small Business. The Wall Street Journal called his blog “One of 10 blogs every entrepreneur should read.”
To listen – you can visit the Build A Better Agency site (http://buildabetteragency.com/drew-mclellan-solocast-episode-8/) and grab either the iTunes or Stitcher files or just listen to it from the web.
If you’d rather just read the conversation, the transcript is below:
Table of Contents (Jump Straight to It!)
IV. Financial Mistake #4: Get a Tax Advisor, Not a Tax Preparer
If you’re going to take the risk of running an agency, shouldn’t you get the benefits, too? Welcome to Build a Better Agency, where we show you how to build an agency that can scale and grow with better clients, invest in employees, and best of all, more money to the bottom line. Bringing his 25-plus years of expertise as both an agency owner and agency consultant to you, please welcome your host, Drew McLellan.
Drew: Welcome to another episode of Build a Better Agency. Today’s episode is one of my solocasts. That’s where it’s just you and me. We’re talking about a topic that I think needs to be on your radar screen. No guest, just you and me talking about something that I believe is pivotal to agency ownership and being successful in a way that makes you want to go to work every day.
Today, I want to talk about common financial mistakes that agency owners make that cost them money. So, at the end of the day, the reason why you have an agency is because you are trying to make a living. You’re trying to take care of yourself and your family, take care of your employees. No matter how hard you work and no matter how well you serve clients, when you don’t make money, it’s pretty tough to sustain the business and the enthusiasm for working so hard in the business. It’s a tough business, whether you’re making money or not, so the least you could do is make a little money. I want to talk about some mistakes that get made around that, and specifically some money mistakes.
First thing I’m gonna do, is I want to sort of set the table. At AMI, when we talk about agency billings or money, we always talk about adjusted gross income. I know you probably know what this is, but just so I know that we are all talking about the same thing, I just want to sort of define that. When you read Ad Age or Adweek and you are hearing about how much an agency bills or the size of an agency, remember that those numbers are always reported in gross billing. That is everything an agency bills a client. So, it might be for media. It might be for out-of-pocket expenses like printing or photography, and it’s also for the agency’s services and time. Gross billings is the big number.
It’s also an absolutely meaningless number. The reason it’s meaningless is because depending on the kind of agency you are, a lot of that money, a lot of that money that shows up in gross billings, is really just a pass-through that you are in essence serving as the bank for your client. You’re buying media for them, or trash and trinkets, or you’re paying for trade show booths, whatever it may be, and you are just basically a pass-through entity. They’re giving you money and you are turning around and giving it to someone else.
The number that matters to us is the adjusted gross income. You take your gross billings, everything that you bill a client, you subtract all of the cost of goods sold. So any vendors or outside expenses that you incur on behalf of the client. By the way, one of the costs of goods sold needs to be any freelancers that you use, any contract labor that you use. Whether it’s someone you’re using just for a specific project or let’s say you outsource your web dev. All of that fits into the cost of goods.
What’s left after you take all the cost of goods away from the gross billings is the adjusted gross income. That’s the money that you get to spend on your agency. You spend that money in three different ways. You spend that money on salaries for your people and for yourself. When I say salaries, I mean loaded salary, so salaries, benefits, all that sort of thing, payroll taxes, you name it. Some of that money gets spent on overhead – rent, supplies, professional development, lawyers, accountants, that sort of thing. Then hopefully, there’s something left over, which is the profit.
As I talk today in this podcast, I’m gonna refer to AGI, I’m sure, many times. I just want to make sure that we’re talking about the same thing. Again, gross billings, big, big number, meaningless number. Because if you’re a media shop, you may have 80% or more of your gross billings go right back out the door through media expense. And so, your AGI is 10% or 15% or 20% of your gross billings. If you’re a PR shop and you do most of the work in-house, you may keep 85% to 90% of your gross billings, and that all drops down to AGI. But, to compare apples to apples, when I work with agencies across the land, what we care about is AGI because that is the money that agencies have to spend on salaries, people, owner salaries, overhead and profit.
Financial Mistake #1: Your Pricing Strategy
All right, with that level set, let’s talk about the first financial mistake. The first mistake that agency owners make is your pricing strategy. Way too many agencies present a client with a single price or an option. And about 90% of the time, I’m just gonna give you an example. Let’s say that you are presenting a client with a proposal or a scope of work for helping them with a trade show, and you’re gonna give them a single price and option. What happens about 90% of the time… This is all based on human psychology. This is not, by the way, specific to agencies. It’s true in any sort of buying and selling situation. When you present a client or a prospect with a single price and option, about 90% of the time, they will push back on that price and say that it’s too high. So they’re gonna negotiate that price down.
If you give a client or a prospect two prices or two options – so think of it as a silver and a gold option – 95% of the time, human nature drives them to choose the lower priced option. The good news is, they’re probably not gonna try and negotiate that price down. The bad news is, you’ve left money on the table because they didn’t even consider the gold option. But there’s this magical thing that happens when you present a prospect or a client with three prices or three options. Over 96% of the time, they will choose the middle option. So what I want you to do, is I want you to start building your proposals in a different way than you have been. I want you to always… When I say always, I’m not talking about piddly little projects. I’m talking about anything that’s, let’s call it five or ten grand or bigger. I want you to always give them three options.
What I want you to do to fix these kinds of financial mistakes is, I want you to build the middle option first. Remember, this is the option that 96%-plus of the time, they’re going to choose. I want you to build that option to be your ideal sale and what’s really best for the client. It’s got the right stuff in the mix. It’s got the right frequency reach, whatever it is – quantity, amount of time, whatever it is. Then I want you to strip some of those deliverables away from option two to create option one. So I want you to kind of think of option one as the bare bones option, and price it about 20% to 25% less than option two. Again, you’re gonna build out option two. It’s what you believe is in the best interest of the client and you’re gonna price it appropriately so that it’s profitable for you and good for the client.
Then, to create the down and dirty option, option one, you’re gonna strip away some of the deliverables so that it’s really basic, and you’re gonna reduce the price between 20% and 25%. Then, to create the option three… Again, if we’re doing silver, gold and platinum, if you will. To create the platinum option, I want you to add some bells and whistles and some other things, not things that are meaningless to the client but things that perhaps take things above and beyond where you think they absolutely need to be. If they buy it, great. It’s gonna help them, but they don’t need it to be successful. So you’re gonna add those bells and whistles to option two to create your option three or your platinum option. I want you to price it about 30% to 35% higher than option two.
Now, when you present those three options to the client, 96% of the time the client will talk themselves into option two. What’s beautiful about that is that they feel like they have control over their budget. They feel like they are in control of the work that they’re doing with you. If you don’t get an initial or an initial no or at least some hesitation about 25% of the time when you’re presenting project pricing to your clients, that means you’re underpricing your services. This three-tiered option is also a great way for you to learn whether or not you are underpricing.
If they always choose the platinum option and they don’t even blink an eye, then you know that you’re underpricing your services. But if most of the time, they kind of grimace a little but they choose option two, then you know that you are pricing it kind of at the sweet spot for you and at the right spot for your client mix. I want you to try that because I think you’re leaving money on the table by offering… Most agencies offer a client one or two options. What you’re really doing is you are coaching the client or the prospect to negotiate you down if you only give them one option and to choose the lesser of the two options that you give them. So try the three-tiered option.
Financial Mistake #2: Not Controlling Scope Creep
The second mistake that agencies make, and I know that you’re gonna recognize yourself in this – maybe not you but other agencies you know – you give it away for free. Honest to God, if we could control the scope creep in our shops, you all would be driving nicer cars and going on better vacations and your kids would not have to worry about college tuition. Every agency has a gaping hole in it. Now, okay, I’ll amend that. Ninety-nine percent of the agencies I know have a gaping hole, which is scope creep.
Some of that is uncontrollable. Some of that is just the nature of the beast. You’re always gonna over-service your clients, and there’s nothing wrong with that. I’m not suggesting that you nickel and dime your clients to death. But we’ve got to find a way to sort of put some sort of blockage in the way of that seeping hole that you have in the bottom of your boat, where you are just giving away services to your clients all the time.
The reality is, honestly, while we can look at our clients and be frustrated with them that they keep asking for more and more and more, the blame sits squarely at our feet. It is our problem to control. Oftentimes, it’s your scope documents or your proposal documents. The odds are they are too vague. They don’t clearly define the deliverables in a way that there’s no room for interpretation. Or they’re too broad, or they don’t have boundaries or limits. Any or all of those financial mistakes, and most scope documents have a mix of all of them, any or all of those mistakes lead to scope creep. Scope creep leads to over-servicing your clients, which leads to lower or no profits altogether.
So there are a couple ways you can fix this. First of all, if you have account people who are managing client projects and they are in charge of monitoring the budget, one of the problems in many cases is that your account folks do not understand agency math. They don’t understand the thing I opened up this podcast with, which is the cost of goods and all of that and how you spend your AGI. First of all, they need to be taught that … In both the entry level and at the Advanced AE Boot Camp that we have at AMI, we spend a good portion of a morning going over agency math so that these account people understand how you make money and how they can help you make money or how they influence you losing money. The problem is, you expect them to be good stewards of your profitability, but they don’t understand the game that they’re playing, so how in the world can they be?
No one has taught them. In most agencies, the ownership has not taken the time to teach the employees. By the way, I believe you should teach all of your employees. To teach the employees how an agency makes money and how everyone in the agency, every single day either makes the agency money or costs the agency money. That’s in either over-servicing clients or not negotiating better with the vendors. There’s lots of ways that that happens. We talk about a lot of that in the boot camp.
In essence, what I’m saying to you is, make sure your account people understand how your business makes money. When they don’t understand that, then they believe that their job is not about helping you make money, but it is about keeping the clients happy. The easiest, fastest way to make a client happy is to over-service them, which of course is absolutely counterproductive to what you want them to do, which is to help you make money.
Here’s another issue. Many, many agencies do not issue change orders. Again, your scope documents are too vague and when a client seriously exceeds what the scope document says and they’re asking for revision 12 or whatever it is, agencies don’t issue change orders. Because, A, you’re not running profitability reports by clients, so you don’t know that you literally, in some cases, are paying for the privilege of working with those clients. So you absolutely need to be looking at profitability by a client. By the way, your account people need to be looking at profitability based on their clients. They don’t need to see the numbers if you’re weird about that and you don’t want them to see all of that, but they can at least see percentages. They should have a goal from you of how profitable their client should be. And they should be getting reports that say to them “You’re on target or you’re not.”
Number one, you don’t issue change orders because you don’t really understand the profitability of your clients. In some cases, you are literally paying for the privilege of doing that work. Number two, no one wants to stand up to the client, especially if your scope documents are loose. You know that you are standing on really shaky ground, and so it’s much easier just to do what the client wants. But, the biggest reason why change orders are not issued is because by the time it’s far enough along that it’s time to issue a change order, here’s what your AE is thinking in their head. Client wants to make a minor change. By the time I calculate the change order costs, write up a document, send it to the client, get them to sign off on it, we could have just made the change. So I’m gonna waste more time and irritate the client by issuing this change order? Screw it, I’m just gonna make the change. That is a terrible, terrible thought process.
Here’s the easy fix. I think that you should have, in all of your scope documents, language that has a flat fee for changes beyond the number of changes allowed in the scope documents. Number one, you need better scope documents. They need to be very specific. They need to be detailed. They need to really define the deliverables and the time table. And then on top of that, it needs to say… Let’s just say you’re working on a brochure for a client and you’re gonna give them four revisions. There needs to be some language that says, “With this estimate, you are gonna be granted four revisions. Any revisions after the fourth revision will be a flat $250,” or whatever number you want.
But the minute you do that, and again remember the client is gonna sign this scope document, so they’re agreeing to that, now you don’t have to have a big discussion. Does that mean you always want to charge the change order fee? No. There are gonna be times when, depending on the client or the circumstance, you want to waive that fee. But it gives you some teeth in the document to go back to that client and say, “Hey, don’t forget. This is your fourth revision.” So make sure everybody sees it, because after that, I have to charge you that flat fee of $250 for any more revisions.
So, the client says, “Okay, great. Fine.” Gives you back the revision. And sure, as God made little green apples, they’re gonna come back to you with a fifth revision. Now the AE can say, “You know what, that’s outside of scope. I’m gonna go to fill in the blank and see if I can get that waived, but I guarantee you this is gonna be the last one.” So make sure everybody sees it. After the fifth revision…which by the way, go ahead and give them one more for free. It beats giving him another 10 for free, which is what you’re doing now. After the fifth revision, you start dinging them for that change fee.
One of two things is going to happen, either your client is gonna recognize that they cannot get their act together and they’re gonna know that on occasion they’re gonna be paying the change order fee for exceeding the scope document. Or number two, and ideally, you’re gonna train your client to make sure that they get their ducks in a row before they give you changes or revisions or whatever the scope document’s talking about, so that you are not doing change after change after change and watching your profitability literally go down the drain.
It’s a tough love thing, but when delivered inside your agency’s culture and voice, I think you’ll be surprised how receptive clients are. They know that they are being exceptionally demanding, but if you don’t call them on it, they’re gonna keep doing it.
With that, it seems like a really great time to take a brief pause and then we will get right back to the financial mistakes that are costing you money.
I hope you’re finding this content really helpful. I just want to take a quick pause and remind you that on top of the podcast, we also do a lot of live workshops for agency owners, agency leaders and account service staff. If you’re interested in the schedule, check it out at agencymanagementinstitute.com/live. Let’s get back to the show.
Financial Mistake #3: Lack of Future Plans for Your Business
Okay, welcome back. Now, what I’d like to do, is I’d like to dig into mistake number three. The third mistake that many agencies make that cost them money is that you don’t really have a plan for your business. You are so busy running from fire to fire to fire and putting those out and chasing after whatever the drama of the day is, whether it’s a client drama or an HR drama or whatever it is. But you don’t really have a vision for where you want to move your agency forward and how you want it to be different a year from now.
In an earlier solocast, I talked about the AMI one-page business plan. I am gonna highly recommend that you go back and listen to that solocast and that you download that one-page business plan because I promise you, if you use that tool…it’s super simple. It’s really straightforward. If you use that tool, your agency will be more profitable and will look different and will be closer to what you want it to be a year from now.
If you don’t have a plan, I promise you you’re gonna look a lot like you look right now. So, if you really do want to grow your business… Again, I don’t necessarily mean grow in terms of number of bodies. But, if you really want to grow your business and be more profitable and have the business be what you envision and hope it to be, that does not happen without planning. So, go back, check out that solocast and download that one-page business plan. We will also put that one-page business plan in the show notes with this solocast. So, even if you don’t want to go back and listen to the solocast where I sort of explain how to do it, it’s pretty straightforward and you probably can just get it just by looking at it.
All right. The last mistake I want to talk about is that your new business plan sucks. You know this, and I’m gonna do a solo cast specifically on your new business plan down the road. The reality is, you don’t have a plan because, and see if you’ve said any of these things, “Well, we grow based on referrals,” “We’re gonna hire a guy,” “We’re just too busy taking care of clients to chase after clients. And you know what? We’re really lucky the phone is still ringing.” All of that may be true today, but if you’ve been in business for any length of time, you know that all of those things ebb and flow.
The one thing you can do to try to even that out is to have a consistent new business program that is constantly working to try and keep your sales funnel full. It’s getting tougher and tougher to find great client prospects. The time period from meeting them to getting them to sign on the dotted line is stretching out for many agencies, so you’ve got to be constantly working on your business.
Right now, unfortunately, many of you start working your new business plan the day that you get the first sense that your big client, your gorilla client, your most valuable client is unhappy. Or worst case scenario, the day you get the phone call that says that they’re done. That is not the way to conduct new business. New business has to be like exercise. It’s a muscle you must exercise every single day, and you’ve got to have a plan.
I promise I will do a solocast on that specifically around the financial mistakes agencies make around new business planning, but let me just give you a couple little tidbits. Number one, new business is sort of like investing. None of us can time the market. None of us know when a prospect is gonna get ticked off at their current agency or there’s gonna be a sea change inside of a company or someone’s gonna get hired or fired, and all of a sudden, that’s the day the opportunity is there. We have no idea.
Much like dollar cost investing, we need to invest in new business every day. You need to be constantly dripping on your prospects. And you need to be constantly sharing with them good information that helps them get smarter at their job. Again, I’ll get into that a little deeper. But, you’ve got to have a new business program that no matter how busy you are, it is happening every single day. I will tell you this, and you’ve heard me say this before in a solocast, it is your responsibility. If you are the agency owner, new business should be your primary responsibility.
And you should be spending 40% to 60% of your day or week on new business, in some variation. It’s not always that you’re out pitching. It’s not always that you’re calling on prospects. It may be that you’re writing content or you’re working on other things. But a lot of your time should be spent on new business. It’s a huge money sucking mistake that agencies make every day.
Financial Mistake #4: Get a Tax Advisor, Not a Tax Preparer
I always like to deliver a little extra, so one last mistake. I think a lot of you have a tax preparer, not a tax advisor, and there’s a huge difference. A tax preparer looks back and tries to react. A tax advisor looks forward and helps you make a plan so that you keep more of the money that you make. The reality is, for most of you, you make plenty of money. You just don’t get to keep enough of it. That’s the difference between a tax preparer and a tax advisor. A tax advisor will meet with you quarterly. They will make suggestions on tax strategies beyond the simple deductions. They will help you figure out how to schedule annual meetings for your business that are deductible, and all kinds of other things.
They will also have a salary versus dividend strategy to protect you, and also help you figure out tax deferred investments and opportunities. If your tax preparer is not doing any of those things, then the reality is you need a tax advisor. If you don’t have someone, I am happy to make a recommendation. I know several, and I’m happy to make those connections for you if you’d like to at least chat with somebody about how that might look different.
So, again, let’s just wrap this up. Here are the things I want you to do to sort of plug some of those money-breaking, draining mistakes that you are making. Number one, have a three-tiered pricing strategy. Number two, stop giving it all away. Better scoped documents, change orders with flat fees. Make sure you are working real plans so that your agency looks different in a year than it does today. Make sure you are constantly evolving and growing and refining. Even the best agencies, even the most profitable agencies, there is room for growth and improvement.
The reality is, whatever solutions and however you’re running your business today, there’s gonna be different options a year from now and certainly two years from now. Our world is changing too fast for us not to keep growing and evolving. That doesn’t happen without a plan. Make sure you’re working a real plan. Download that one-page business plan and work it.
The fourth mistake I talked about was make sure that you are building a new business machine that is functioning and chugging along every single day, no matter how busy the agency is. That’s very tough to do if you, the agency owner, are super ingrained in day-to-day client work and you are not dedicated to new business. My bonus money mistake is, make sure that you have a tax advisor, not a tax preparer.
That is a lot to pack into one podcast. I hope it was super helpful. I would love to hear back from you of how you’re gonna implement some of these things after you’ve tried them, if they’re working for you. I’m always around [email protected] So again, [email protected] Please feel free to reach out. Happy to answer questions. I will be back next week with a podcast with a guest, someone else who’s out there that has expertise that will help you build a better, stronger, more profitable agency. Until then, have a great work week and I will see you soon.
That’s all for this episode of Build a Better Agency on common financial mistakes that are made in an agency. Be sure to visit agencymanagementinstitute.com to learn more about our workshops and other ways we serve small to mid-sized agencies. While you’re there, sign up for our e-newsletter, grab our free eBook and check out the blog. Growing a bigger, better agency that makes more money, attracts bigger clients and doesn’t consume your life is possible, here on Build a Better Agency.