When an agency shows a profit, one of the first inclinations of the agency owner is to pay a bonus to the staff. I applaud that instinct. But I don’t think you should do it simply because you have a little extra money. I believe you should have a bonus program that serves your agency every single day, whether you pay out any money or not. I think there are several elements of a successful bonus program: They should not be an end of the year thing. They should influence the employees to behave in ways that serve the agency year-round It needs to be simple and explained over and over (every month/quarter) It should be used to teach employees to think like agency owners (focused on the same metrics you do) It should be based on one or two metrics that accurately measure the financial health of the agency The metrics should be measured/achieved or not every month The metrics should be set in a way that your team hits the goal more often than misses (should be a stretch but a reasonable stretch...ideally they’d hit the metrics at least 7 or 8 months of the year) Bonuses should be paid quarterly (with most of the $ accumulated for an end of the year payout) to keep everyone motivated/focused The owners should hold an all agency meeting every month to report on financials/success on bonus program for the month/YTD At AMI, we have a specific bonus program that we teach in our workshops, owner peer networks etc. It’s based on two metrics. The big number in our opinion in terms of an agency’s health is AGI (Adjusted gross income — Look here for more [...]
One of the best compliments my agency ever received came from a client who said he never felt like we had our hand in his pocket. We were putting his interests ahead of our own. And while that’s a great way to build trust, it’s not sustainable. They always want a little more. Sure, it indicated we were satisfying our client, but if clients are satisfied with your work, you may be in trouble. Clients don’t want to be “satisfied” with their marketing agencies. They want to be wowed. And that means they want to be over-serviced. That’s a very fine line we walk. There’s a danger there. Offer too much, and you could be hurting your agency’s future. I explored that very thin line in an article for Spin Sucks (Gina Dietrich’s excellent site) and identified some ways you can dance on the line without crossing over to the dark side of actually giving away your work. I’d welcome your input into this challenge that every agency faces. Now that we've passed the halfway mark for the year, I know you’ve got a ton of items on your To Do list before year-end. But I also know you can get worn out from grinding it out 24/7. Be sure you take some time for yourself. Replenish your energy by sharing the Fourth of July holidays with those you love. Invest in those relationships that have nothing to do with your shop or the pile of work on your desk. The work will be there when you get back from some R&R.
You know the drill. Client or prospect calls. They have an urgent need and you drop everything to figure out how to help them. About a third of the way in — when you need something (copy, assets, information, etc.) from them, suddenly there’s a grinding halt and you wait. And wait. It’s part of agency life. Unfortunately, so is that sucking sound you hear as the profits get drained from the project because of the delay. The longer you tread water, the more the work costs you and it’s difficult to recoup the expense of trying to cajole your client into giving you what you need. The delays aren’t always on the client. Sometimes an outside force creates the lag time. But either way — your agency ends up holding the bag. You can greatly reduce that drain on your profitability if you anticipate it up front and build a contingency into your scope documents/contracts. In another blog post, I shared some language you can use to protect yourself from these delays. Feel free to use it verbatim or modify it to fit your agency’s voice. But don’t leave yourself more exposed than you need to be. Check it out and let me know what you think. Our September AE Bootcamp is getting pretty full. If you want to send some of your crew — it would be good to get them registered soon.
It’s annoying and expensive when clients pull the plug on a project before you can recoup all of your upfront investment. And yet it happens all the time. So much of our work requires a huge investment on our part on the front end and when a client stalls or does a 360 and cancels the work — we often get left holding the bag. I wrote a blog post about this challenge and offered some language you can include in your contracts and/or scope of work documents that will help protect you from losing money in this situation. Check it out and let me know what you think. Our September AE bootcamp is getting pretty full. If you want to send some of your crew — it would be good to get them registered soon.
In my mind, as you read that sentence, you were thinking “Are you kidding? I just paid THIS year’s taxes. Why are we talking about 2019 taxes already?” Which of course is my point. If you’d like to pay less tax than you did this past year, you can’t wait to until late December to put some strategies in place. I find that most agency owners have very conservative tax preparers. They’re much more concerned about making it easy for them than they are in actually giving you good advice about how to structure your business in the most tax advantageous way. I had a CPA like that and paid through the nose for years. Fortunately, I realized the mistake I was making about a decade ago and have cut my tax liability to a fraction of what I used to pay. There’s no reason why you can’t do that too. We will talk tax strategies in our owner workshop this fall (October) if that’s of interest. Whether you join us or not — it’s time to evaluate your tax prep pro. If he/she isn’t actively meeting with you every quarter to review your financials and look for ways for you to protect yourself from unnecessary taxes, it’s time to go shopping. We all have to pay taxes but it shouldn’t add up to more than we need to pay.
Most agencies use the the accrual basis method of accounting because it aligns more closely with how our businesses actually run and gives the agency owner more realistic numbers and metrics, so their decisions are better informed throughout the year. In the cash method of accounting – the day a business gets a check or cash from the client, it recognizes the revenue. This works well in a retail world. I walk into the grocery store. I pick up milk and bread and give the cashier some money. At that point, they have actually earned that money. Our transaction is complete. But in our world – in many cases, when a client gives us money, we haven’t actually earned that money. If the client asked for the retainer or the media pre-payment back, we have to return the money because it’s not ours yet. We haven’t done the work. But in the accrual model of accounting, transactions are accounted for when the transaction occurs or is earned, regardless of when the cash is paid or received. (Note: most agencies convert to cash for tax purposes.) Let’s play this out. You send a client an invoice for $30,000 which is 50% of a project’s fee, after they sign the scope of work. They send you a check. Your bookkeeper should book that $30,000 as a liability. Again – if they ask for the money back the next day, you owe them the $30,000. If your bookkeeper books that as a sale or revenue (like they would in the cash method) it would tell a lie. It would say that you did $30,000 worth of work in that month and you can spend that money without risk [...]
If you’re operating your agency with the goal of achieving the performance metrics of 55/25/20 recommended by the AMI, it’s easy to see in any given month just how well the agency is performing. Those three numbers should be the basis to guide your decisions on everything from personnel to pencils. Setting goals is great, sharing agency performance goals though, that has the power to change everything. One of the most important questions agency owners should be asking themselves is a simple one: How many of your agency staffers understand or are even aware of those numbers and how they drive a healthy, sustainable enterprise? Is it just a few—perhaps your finance person and your number one key executive? That’s the most common answer, and it’s also a big mistake. As an owner, if you’re hesitant to educate everyone in the agency about the numbers, you’re literally managing with one hand tied behind your back. Here’s how sharing agency performance goals changes everything, empowers your team, and sets an exciting path for the future. Sharing Agency Performance Goals—Financial Transparency Fuels a Growth Mindset In coaching sessions I have with agency owners, one of the first things I want to uncover is the owner’s comfort level with financial transparency. If the owner is new to AMI, I’ll take them though the metric; 55 percent of adjusted gross income (AGI) is the target for the agency’s fully loaded compensation, 25 percent utilized for overhead, and 20 percent profit. For those who already know the formula, I work to understand just how deep this foundational knowledge runs throughout the agency. As an agency owner for 30+ years, I get the hesitancy about “opening the kimono.” A common concern [...]
Is tax season really over? While the filing deadline for individual and corporate taxes has come and gone (unless of course, you’ve extended), from a strategic standpoint, tax season may be over, but the need for tax planning is really an omnipresent one. There’s always a sense of relief once taxes are filed. It’s an annual chore that, dare I say, nobody loves to do. But everyone I know loves when it’s done. They like getting it checked off their list so much that very few clients want to talk or think about taxes or tax planning for the rest of the year. That is, until tax time comes around again. But that is, in my opinion, a mistaken. In fact, paying attention to your tax situation outside of tax season is worth more than you might think. A few people I know even made it their hobby to figure out ways to pay less in taxes. I’m not suggesting you must go that far. But you should have a good understanding of why the traditional “tax season” doesn’t mean anything to you and your agency business and how agencies can benefit from tax planning. The Misnomer of “Tax Season” Other than getting your own taxes filed at the beginning of each year, “tax season” is a misnomer for anyone outside of the tax preparation industry— where the term got coined in the first place. Tax season is really tax FILING season. Which is an important distinction, so you know where your focus should go. Yes, it’s important to get your tax return filed on time. But keep in mind that filing is the end of a year-long cycle where you should be seeing results [...]
Agency owners are, for the most part, some of the bravest people I know. They have put everything on the line to start/own their agency and every day, they face and move past tough decisions. But if there’s an Achilles Heel for most owners, it’s the staffing issue, especially if your agency has hit a rough spot. It’s ironic but in a typical agency, the higher a person’s salary, the less billable client work they do. They’re running a department, doing admin work or chasing after new clients more than serving your clients. I’m not suggesting their work isn’t valuable. It just isn’t billable. What balances that out is that most of your younger, less expensive employees are very billable. Their billable hours cover the non-billable hours of the more senior staff. If you look at all of the hours your agency employees (including the owner) works — you need to be at 60% billable overall. Most agencies struggle to get into the 50-55% range. Which is why you aren’t making the kind of money you’d like to make. Unfortunately, many of you are out of proportion. You’re over-staffed in general and in particular, you’re top heavy. You might have a large leadership team or multiple owners. On top of that — you’ve got an employee or two (or more) who have been with you for a very long time. You’ve given them regular raises and now, if you’re honest with yourself, they’re overpaid. Odds are, their skills sets and energy aren’t really what they used to be. But you feel a loyalty to them and so they stay. You’ve been okay with a net profit that’s nowhere near the ideal range and you’ve stayed [...]
Want more money in your pocket -- measure what matters. Many agency owners want their agency to be more stable, more profitable and more predictable. The truth is -- you can have all of that but it doesn't happen by accident. You've heard the expression "if you want it to matter, measure it" and that's absolutely true. Here are some metrics you should consider tracking on a consistent basis as you grow your agency. Weekly: Timesheets completed (all time, billable and non-billable): Your goal should be 95% or better. This means yours too, agency owner. Monthly: Gross billings: No specific metric but measure it against your annual goals. AGI: No specific metric but measure it against your annual goals. AGI ratios: Your AGI should be spent in this approximate ratio 55-60% People (all expenses tied to your staff. Salaries, benefits, payroll taxes etc.) 20-25% Overhead (Day to day operating expenses like rent, travel, professional fees, etc.) 20% Profit (EBITA) Profitability by client (It’s reasonable to shoot for a 10% minimum) AGI/FTE (your goal is $150K in AGI for every FTE) Write up/offs (are you adding profit to jobs or writing off time. Track both) Billable % (Overall staff billability should be 75% or higher) Utilization – what you actually billed (Overall staff utilization should be 60% or higher) Quarterly: Employee Satisfaction (On a scale of 1-10, how likely are you to recommend working at the agency to a friend?) New revenue ratios (70% of new revenue should come from current clients) New clients/sales: No specific metric but measure it against your annual goals. Average spend per client (you should set a minimum acceptable quarterly spend) Annually: Client retention (Goal should be 80% or higher) Employee [...]