Agencies and accounting can be friends with Chris Hervochon

Speaker 1:

It doesn’t matter what kind of an agency you run. Traditional digital media buying web dev, PR, whatever your focus, you still need to run a profitable business. The Build a Better Agency podcast presented by White Label IQ will show you how to make more money and keep more of what you made. Let us help you build an agency that is sustainable, scalable, and if you want down the road, sellable. Bringing his 25 plus years of experience as both an agency owner and agency consultant, please welcome your host, Drew McLellan.

Drew McLellan:

Hey, everybody Drew McLellan here with another episode of Build a Better Agency. Always happy to be back week after week with great guests to get you thinking a little bit differently about your business and on first blush, I would argue that most of you are not going to be excited about this topic this week. But I think if you stick with me, even for 10 minutes, you’re going to very quickly see why this is important and why even though it may not be your favorite topic, and it’s certainly one of the most important topics of our agency ownership or agency leadership life, and why am I here to stick through and learn from this week’s guest.

First, couple reminders. So I am sitting here at Walt Disney World getting ready to teach a workshop, and what’s cool about the workshop is that, besides that it’s in Florida in January, I left Iowa and it was 10 inches of snow on the ground when I left. So happy to be here and in my shorts, but what also is cool about this event is that we were able to have two people attend, absolutely for free, and all they did was leave a rating and review for the podcast, and then take a screenshot of that rating, or review and send it my way.

So here’s all you have to do. Go to wherever you download the podcast, leave a rating and review, take a screenshot of that rating and review because oftentimes, your usernames do not tell me who you are, or certainly at the very least even if it’s your whole name, it doesn’t give me your contact information. Then shoot me that screenshot so I have your email address. You will be entered into the pot.

We just keep this pot going and every month we give away one free seat to either our live workshop, or you can get a seat in one of our on demand workshops. Both of those sell for around a little under $2,000. So pretty good ROI for five minutes of your time to leave the rating and review and then shoot me an email about it. So I’m happy to welcome two freebie guests to Orlando, and our workshops because they left reviews and we’re doing two different workshops.

So anyway, don’t dilly or dally. Go and do that so that you can get in the drawing. If you’ve already done it, you are in the drawing forever. So sooner or later, odds are you’re going to win a free workshop. So just hang in there. If we haven’t picked your name yet, odds are getting better and better every day for you that it’s going to be your turn. Let me tell you a little bit about our guests.

So Chris Hervochon is a CPA and his firm, Better Way Accounting only works with agencies and creative shops of a variety of definitions. Chris’ whole sort of philosophy around accounting stems from the fact that he acknowledges that accounting’s job is to give us data and that data allows us to make better decisions. So his whole thing is, yes, you need to do your accounting basics, pay your bills, get paid, send out invoices, pay your taxes, all that sort of stuff, but his whole point is, why not set yourself up for a greater level of success by having your accounting set up in a way that you get the reports and the data you need in as real time as possible, so that you can make better game day decisions.

I have to tell you that I have some agency owners and I will admit that I’m way over it now, but when I started my agency 25 years ago, I had no idea about what I today call agency math. I learned it from AMI and then as you all know, I was a member early on in one of the peer groups and now, gosh, 15 years ago or so, I bought it and now I’ve been running it. So I’ve been teaching what I’ve learned in the first 10 years of my agency career.

Now I get to teach it and I get to help other people with it. So I, like most of you, was not super excited about learning how to read a P&L or all of the data points, the best practices and the metrics that help me today run my business more profitably, and that I get to teach other people how to do so they can run their businesses more profitably. This is not calculus kind of math. So for those of you that are math averse, this is pretty easy math and with technology and software today, even easier math, but it’s important math.

It answers questions like, can I really afford to hire someone? Are we making money on this client or this type of project? All those sorts of things, those questions that you wonder about, but maybe you don’t have proof. You have a gut instinct, but you don’t have proof. There are certain metrics and best practices that will help you get all those data points, and I want you to have all of that. So that’s why I invited Chris on the show, because what I want to talk to him about is how do you turn the money activity of an agency and the staff activity of an agency, all the production activity, how do you turn that into data that helps us run our business better? So let’s just jump into the conversation. All right, Chris, welcome to the podcast. Thanks for joining us.

Chris Hervochon:

Thank you so much for having me, I really appreciate it.

Drew McLellan:

So there’s a little bit of pressure here, because agency owners as you know, not super excited to talk to accountants. It’s like a lawyer. So it’s your job to be fascinating during this hour, so that they listen all the way to the end. So no pressure, but I’m just telling you, that’s on you.

Chris Hervochon:

Well, I hope I can live up to that. For sure.

Drew McLellan:

I’m sure you can. So let’s talk a little bit about your experience with agencies. So your business caters to agencies and you serve as an outsourced CFO, for agencies all across the country, right?

Chris Hervochon:

Correct. Actually, the world.

Drew McLellan:

The world. All across the world. How do you do taxes for people in other countries?

Chris Hervochon:

Great question. Generally, if it’s going to be somebody who’s in a foreign country, they will have a local accountant that will deal with the taxes, but the international clients we have, they’re all American. So the bookkeeping and the accounting and stuff like that, and the business advisory role, we can fill that but the local taxes and getting into that stuff, that’s not our area of expertise. So they’ll have a local account in a foreign country that they’ll utilize.

Drew McLellan:

Yeah. Makes sense. So I know that one of the things that differentiates you is your philosophy about the purpose of accounting. So give us your definition of what is the purpose of accounting for an agency, or probably any business, but specifically in our world.

Chris Hervochon:

Sure. Anybody really. So the whole entire purpose of accounting is so that you can ask questions about your business, about your agency, and get accurate, timely, reliable answers back and the better your accounting, the better the questions that you can ask, the more detailed questions that you can ask and therefore the better answers you can get back. Then that informs strategic decision making in the actions that you’re going to take in your agency and all of those other things.

Drew McLellan:

So when you get hired to either assess someone’s books, or maybe they’re considering bringing you on as an accountant, so you’re looking at how they’ve been doing accounting prior to you, what are some of the mistakes you see?

Chris Hervochon:

Great question. The books will be a mess, generally.

Drew McLellan:

When you say they’re a mess, which I don’t disagree with, what do you mean by that?

Chris Hervochon:

Sure. They’re not being kept up with, the chart of accounts is a mess. What I mean by the chart of accounts being a mess, as the chart of accounts is basically you’re listing of all of the buckets where you’re going to classify transactions. So revenue, expenses, and then you get more detail from there. But generally, that’ll be a mess and that won’t be organized in a way that suits the way that an agency operates, and or the chart of accounts will be detailed enough, or it’ll be too big.

Drew McLellan:

Ridiculously detailed.

Chris Hervochon:

Ridiculously detailed. So what you don’t want is every time you go to classify a transaction for it to be like performing a brain surgery. It shouldn’t be, is this miscellaneous other? Is it other? Is this entertainment meals? Is this internal meals? It’s way too detailed. That lends itself to zero automation, it lends itself to a headache, stress, and then at the end of the day, the information that you’re going to have is not at a level of detail that’s going to help you inform decisions on your agency.

Drew McLellan:

When I find when I look at an agency’s books, and that chart of accounts is too detailed, it leaves too much room for interpretation.

Chris Hervochon:

Sure.

Drew McLellan:

So if two people are looking at the same expense, there are three or four possible places they could put it, and they don’t put it in the same place as opposed to sort of being a de facto place where, yep, that’s where this goes.

Chris Hervochon:

Exactly. One of the things that often gets overlooked there, too, is being able to benchmark. So what does the industry data look like? What does your data look like based on your chart of accounts and are you even able to compare your business to other businesses? That’s one of the things that gets overlooked.

Drew McLellan:

One of the things I also find, and one of the things that we teach in our Money Matters workshop is organizing your chart of accounts. So at a glance, you can look at, here’s my gross Billings, here’s my cost of goods, and then breaking up your operating expenses into what we think of as the three buckets, which are all your people expense. So loaded salaries with benefits and all of that, your overhead expense, and then profit and what you do with that profit. So, one of the first things we do is tell people to rearrange them so at a glance, they can sort of see in these organized ways, how they’re spending their money and in metrics that we use every day to measure an agency’s success.

Chris Hervochon:

Sure, absolutely.

Drew McLellan:

So what other mistakes do you see?

Chris Hervochon:

Not purposely gathering data. That’s a big one. So how do you operate the business? How do you want to operate the business, and do you have the data to support how you want to get from where you are now to where you want to go? A really great example that that I see a lot is time tracking. We work with small to midsize agencies, and a lot of the smaller agencies in particular don’t track time.

Drew McLellan:

Which drives me insane.

Chris Hervochon:

Drives me insane, too. Time informs a lot of decisions. What’s your average billable rate? Can we take the R&D tax credit? Where does your time go? Who are the most profitable clients, most profitable project services on and on and on down the line. It’s just such a huge benefit to be able to track time and it’s just one of those things that I think it falls by the wayside, especially for smaller agencies, but definitely something to look into.

Not understanding how data is connected, or how it can be connected. What I see a lot of is, hey, we’re going to go implement this project tracking software, but the next question is, are you going to be able to take the data that you’re going to get out of there and merge it with your time tracking data, with your financial data? Does it play nicely with all of the other apps that you’re using in your business to deliver the services that you deliver?

Thinking through that in a comprehensive way, and understanding the questions that you’re going to be able to ask if you do, getting back to that whole point of accounting. Managing cash flow, that’s another big one.

Drew McLellan:

Yeah. Tough one for a lot of agencies.

Chris Hervochon:

Really, really hard, because it’s an involved process. Then when to hire, that’s the other big one that we see.

Drew McLellan:

Well, and for most agencies, the de facto is when my people tell me they can’t take on another thing, that tells me I have to hire and oftentimes, the math would suggest that you are not ready to hire.

Chris Hervochon:

Absolutely. You should ask probably three or four questions before that’s the only factor that you’re looking at.

Drew McLellan:

Yeah, absolutely. So you mentioned the R&D credit. Can you tell us a little bit about that? I have a couple agencies that take advantage of that. But I’m not sure that … I don’t know that we’ve talked about it on the podcast yet. So I know that listeners probably would find value in hearing more about that.

Chris Hervochon:

Sure. So the R&D credit is a federal tax credit, not to be confused with the state tax credit, but you can take it against research and experimentation expenses. You need to be a startup agency, relatively. First five years in business. You can take up to 1.25 million in expenses over those five years and basically, where we would see that mostly in agencies is internally developed processes and software and things like that.

When I’m thinking about that, I’m thinking about SEO and automation around analytics and things of that nature. What it is not, is probably the most important piece of that. It’s not you taking commercially available software and applying your processes to it in some way that’s not really meaningful. It’s got to be something that you’ve developed in-house that’s not commercially available, that you’re not going to sell and it’s for the benefit of being able to operate your agency more efficiently.

It is a very complicated credit. There’s a lot to it but that gets into the time tracking, because one of the things that you have to do in order to claim that credit is put together a package for the IRS to support that credit. If you don’t have time for your people and for your contractors, it’s going to be hard to segment out their costs. Actually, it’s going to be impossible to segment out their costs.

One of the big things to be aware of there is there are prepackaged R&D tax credit packages out there that you can basically user support. That’s not a good route to go. Those have been stricken down by the IRS numerous times and so you want to be careful about the package that you’re putting together. You want to make sure that you can substantiate internally with internal documentation exactly what it is you’re doing and how you’re doing it.

Drew McLellan:

I’ve got some agencies that, especially digital agencies that are developing new methodologies or their own tools for both their own agency use, but also that they use on behalf of clients that have been able to really rack up some serious tax credit.

Chris Hervochon:

Absolutely. It’s a big credit. It’s a very good credit.

Drew McLellan:

So I know that one of the hallmarks of your practice is thinking about money and numbers from a data perspective, and part of that for you is trying to automate as much of the accounting process as possible, A. to have more real time data, but B, also just because it’s effective. So can you talk to us a little bit about some of the ways that you do that, because I think for most agencies, most agencies, especially if they have an internal person doing the bookkeeping, it’s a pretty labor intensive position and it’s also sort of a siloed, isolated position.

One of the things I always worry about when you’ve got one person doing all of your accounting in-house is, and I’m sure you’ve seen this, too, agencies are at great risk for internal fraud and most agencies don’t have the checks and balances in place to protect the owner from that fraud. So I’m curious about the automation that you guys implement, and some of the tricks and tools around that, but also some of the efficiencies that agencies may be able to think about inside their own shop.

Chris Hervochon:

Sure. So it’s funny that you mentioned fraud. In a prior life, I was certified in financial forensics, and then also a certified fraud examiner from my days in forensic accounting, but you’re right. Internal controls are huge for any business, agencies in particular, and having internal controls is super important, because it does help to prevent that fraud, but it also helps to ensure the quality of your financials.

So when we’re talking about the purpose of accounting, and being able to inform decision making, you’ve got to have high quality. One of the ways that you have high quality is through automation, because it standardizes everything. It standardizes the way that transactions are coded, it standardizes the way that you’re handling things like accruals, it standardizes the way that you’re handling time tracking and the way that all the time activity is getting put into your books.

Automation is so freely available now. That’s the most fascinating thing. A few years ago, it had to be that you’d go hire a developer, they’d have to be skilled in using API’s, you’d have to have a clear understanding of the automation that you wanted to build and how they wanted to build it and then you’d have to instruct them on how to do it. 10 times out of 10, that developers got absolutely no experience in accounting.

So if you think about it, you’re an agency owner trying to tell the developer how to automate your accounting, that doesn’t really work. Most accountants really didn’t really have that skill 10 years ago, either. So the fascinating thing now is, automation is freely available. It can be as simple as having bank rules in QBO or bank rules in Xero, where you’ve got standard transactions that are coming through the bank feed.

You connect your checking account or your savings account, or whatever it is to your accounting software and it’ll deal with those transactions in an automated way. Simple as that. Other ways to do that are through tools like Zapier or some of the other automation tools that are out there. One of the things that we do is we build automation based on data warehouses, where we take all the data that are in the financials, move it to a data warehouse, and then we look at financials across periods, but also across companies.

We want to make sure that transactions that are going to common vendors across companies are going to a consistent place. You can do that in your agency by running reports that say, what are all the expenses for this vendor for the last, I don’t know, 12 months and then what are all the different accounts that they’re being classified to? In most cases, it should be one account.

HubSpot is going to go to some sort of a software account, for instance, or your CRM is going to go to some sort of software account. Make sure that that’s consistent. Make sure it’s not going to marketing one month, and then it’s going to software another month, things like that. Doing all of those checks and having automated checks, and there’s a ton of them that you can do. Like I said, we use a data warehouse to do a lot of them, but that’s a good place to start and it’s free. It’s easy to implement.

Drew McLellan:

So help me understand the data warehouse thing. So I’m plugging my accounting software, whatever it is, into … Is data warehouse a tool?

Chris Hervochon:

It can be looked at as a tool, but it’s a database. It’s a collection of all of the data for the various apps that you’re utilizing. For instance, I’ll use my firm as an example. We have a data warehouse, we’ve got data for our financial software, which we use QBO from our workflow tool. So we use a ticketing system just like HelpDesk would. We’ve got data there, we’ve got data from our CRM, we’ve got data from our email management system and by extension, we’ve got data from our emails that go out.

Then we’re working on data from phone systems, or from the phone system that we utilize. All of that data gets aggregated in one place, and then once you can combine those different data sources, then you can leverage them but then also from just a pure financial accounting perspective, it makes it very easy to do analytics. A lot of the agencies out there are using analytic tools, dashboard tools, things like that. Once it’s in a data warehouse, it makes it really easy to connect to. You don’t have to figure out how to use the API for QuickBooks or whatever it is. It makes it much easier to access and easier to update. So that’s what we found anyway.

Drew McLellan:

So then all of your information, so if I’m then entering things into the accounting software or the email software, I’m still using the native tool. It’s just then pulling up whatever I did up into the cloud, into the data warehouse.

Chris Hervochon:

Then we can start to look for data consistency across those different tools. Is your customer name the same in your accounting software as it is in your CRM as it is in your email software? Those are the kind of automated checks that you can put in place and it’s super easy with tools that are now automated, drag and drop, that you can subscribe to for a nominal fee, or have somebody else do. It’s super easy.

It doesn’t require a developer anymore, which is the fascinating thing about data now is that it’s so accessible, and it’s been democratized. Same thing with analytics. So it’s not just the data, it’s everything that you can do on the back end with that data.

Drew McLellan:

So once you have a client in that kind of a setup, then what are you able to do for them that you can’t do if all of the systems just stayed disparate?

Chris Hervochon:

Great question. So how do you calculate average billable rate, if your time data is in one system, and then your financial data is in another system? The way that you do that is if you have access to both of those systems, and then you can combine them in some sort of a BI tool, and that’s what we’ve been able to do. Whereas, before, you’d have to go and download something into Excel from your accounting software, and then you’d have to go into your time tracking platform and download something else in Excel.

Then you got to combine the two, and you got to do all of VLOOKUPs, and all that stuff and then you can either have it in Excel format, with all these calculations, with all these formulas and there’s problems with formulas, right?

Drew McLellan:

Right.

Chris Hervochon:

What you’ve now got is this unauditable spreadsheet, and it’s just numbers on a page. It’s difficult to look at, it’s not graphical, probably things like that, whereas

Drew McLellan:

And it’s a snapshot, right? You’d have to keep redoing it.

Chris Hervochon:

So every time you want that data, you’ve got to go through this process that’s going to take you an hour, two hours, however long, it’s going to take your team, and what are you getting for it? If you’re using these automated tools and the data warehouse processes, and you’re throwing everything into a data warehouse, and you’re just linking it to a BI tool, everything’s up to date as people are entering their information.

So as the time is coming in, then the time is being tracked in real time. You can log in and see the dashboard, and it’s right there. Same thing with bank rules in an accounting software. If you know that invoices are getting paid, they’re going out in an automated way that’s going to feed that data warehouse, it’s going to feed your BI tool, and now you’ve got almost real time access to information and then you can make those decisions. One of those key concepts of accounting is timely. That’s one of the ways you get around it.

Drew McLellan:

You keep using the acronym BI. Define that for everybody.

Chris Hervochon:

Business intelligence.

Drew McLellan:

So what would be an example of a tool you would use that you would classify as a BI tool?

Chris Hervochon:

Sure. Well, the example that we use in our firm is Power BI, Microsoft tool. Another good example would be Tableau. Those are probably the two, I would say industry leaders, but there’s a ton of them out there. It seems like there’s a new one every single week, and I know that there’s some that are coming out for agencies that are agency specific. We’ve just found that with the amount of resources that Microsoft is putting into their products and the number of connections that are native to it, it’s just been pretty easy for us to use.

Drew McLellan:

I think Microsoft is the devil, but I have to say, I am pretty impressed that they’ve sort of re invested in developing and improving their software.

Chris Hervochon:

Sure, and Google’s actually in that same boat right now with if we look at Google Sheets, and then Data Studio, I was actually at the Internet summit in Raleigh a couple months back and did a whole workshop on Data Studio and it was really interesting to see how far that product has come. To my point, it’s like every other day, there’s a new BI tool out there and they’re all getting easier to use. So it’s becoming more democratized. Same thing with data tools.

Drew McLellan:

Let’s take a quick break, and then I’m going to ask you about how you walk through the setup of all of this and then also, I want to talk to you a little bit about where you think accounting is going but first, let’s take a quick break.

Hey, sorry to interrupt, but I want to just remind you about the Build a Better Agency Summit. So as many of you have heard me talk about before, I am sticking my neck out and I am saying it’s ridiculous that there is no conference built specifically for truly small to mid-sized agencies across the globe and it is time for someone to do it and then I looked in the mirror, and I said, “Actually, Drew, it’s time for us to do it.”

So we are May 19 and 20th of 2020 in Chicago, some amazing presenters and speakers and some of the topics are things like building your agency’s value. So whether you want to sell the agency or you just want to use it as an ATM machine, how do you get more value out of your agency one way or the other and how do you decide which way you want to go? Do you want to build an agency to sell or do you want to just run it, use it as the ATM machine and some day, just close the door?

What does that look like? How do you earn a profit every single year and we’re going to show you exactly how to do that, and around the idea of agency thought leadership, what does that actually mean and what does it look like, and how can you, as busy as you are, as busy as the agency is, how can you go down that path and how can it serve you with an incredible ROI? We’re going to talk about some of the agencies that are knocking it out of the park, and you’ll meet some of them there, because they’ll be there as attendees as well.

So the content is going to be awesome. If you’re struggling with imposter syndrome, if you are struggling with how to concisely tell a story in a way that is so compelling, people can’t help but be drawn to it. If you are worried about how to build up wealth outside of the agency, and you want to talk to some experts who are doing that in real estate and other places, the Build a Better Agency Summit is the place for you.

So please grab your ticket. Just head over to agencymanagementinstitute.com and the very first choice on the nav-bar is BABA Summit. So Build a Better Agency Summit. Click on that and that’ll take you right to all the information you need, including how to register. So I hope to see you in Chicago in May, but now let’s get back to the content. All right, I am back with Chris and we are talking accounting, and we’re talking about the automation of accounting.

Well, let me ask you this. So if they’re working in a tool like eSilentPARTNER, or Workamajig, or one of those kind of tools, where in essence, it is all sort of self contained. It is the time tracking and is the project management, it is the accounting. Do they still need to automate even further than that? Do you still think that they should pull it up into a data warehouse and do all of that?

Chris Hervochon:

If it’s all consolidated, and you have the real time access to the information that you need to make the decisions that you want to make, then no, then it’s sufficient. But when it’s insufficient, when you have different tools that you want to use for whatever reason it’s going to be. Whether somebody on the team is familiar with it from a previous position, or whether you just totally enamored with the tool, doesn’t matter. One of the ways that you get around with using disparate tools is through that data warehouse technique and through the different connection techniques.

Drew McLellan:

So once you build that infrastructure, you’re in theory, “done.” It’s like a one time build, to get everything all connected, talking to each other, but all of those softwares change. So are you spending a lot of time reconnecting, or is that not an issue for you?

Chris Hervochon:

In version 1.0 of how we operated, yeah, that was definitely the case where we were using different data sources, depending on where the data was coming from and where we could get it to. With a data warehouse, it makes it so much easier, because now it’s all in one source and there’s really only one connection to break. At that point, you know what you’re doing is fine tuning the transformations. A good example of a transformation is when you’re replacing text in a column of data for whatever reason.

Maybe it’s just reformatting a date differently, or maybe it’s formatting a number differently or something like that. So at that point, it’s all in the transformations and how you’re going to connect the data and model the data and make the different tables talk to each other. It’s not about the broken connections. The broken connections really happens when you’re using different disparate sources with cobbled [inaudible 00:28:13] processes.

Drew McLellan:

So let’s talk about where do you think with all of that … In some ways, accounting is exactly the same as it always has been and in other ways, how we do accounting, and what accounting is able to do for us, has changed pretty dramatically. So given that you’re on the forefront of all of this, where do you think it’s going?

Chris Hervochon:

Great question. So when we think about accounting, or the way that I really define accounting is it combines everything up the value chain from bookkeeping, which is just data entry, to accounting, which is being able to classify things accurately, being able to do accruals, being able to check the quality of financial statements and things of that nature, and then finance and then finance is everything that’s forward looking, really.

So that’s kind of what I lump accounting under. Everything, in my opinion, or most things on the front end of that value chain. So your bookkeeping type stuff, your data entry type stuff, that’s going to be automated. A large chunk of things in the middle, your accounting is going to be automated as well. So when we think about being able to do accruals, that’s fairly easy to automate in a material way.

You can’t get all the way there for most businesses, but you can get materially pretty close, or pretty far down the line. The thing about accruals is that it’s labor intensive. You got to go bug the various people inside of the agency, inside of the business and say, “Hey, what are the things that we don’t know about that we need to include in the financials this month?”

A lot of that can be automated. So where you’re going to those people and saying, “This is specifically what we think it is,” and just confirm, as opposed to, you go dig it up. A lot of that’s going to be automated. Then there’s going to be a chunk on the … The finance side is going to be automated as well. So when we think about cash flow forecasting, there are tools out there now that can do it fairly accurately.

Being able to connect all of this data is going to allow for a lot of cash flow forecasting automation, a lot of forecasting automation in general, not just cash flow. So that’s where I see it going. What’s going to drive that is data connectivity. So the availability of APIs, the move to the cloud, which is going to open up the availability of APIs. AI, which is the intelligence that gets built on the back of that data connectivity, and then one of the other things that’s kind of hanging out there that everybody’s talking about is blockchain.

Now, what blockchain is going to do, how that’s going to be applied to accounting processes and business processes in general, I think that still waits to be seen. I’ve asked a lot of people who are a lot smarter than I am about it, a lot of questions about it and basically, what I’ve been told is that it’s like API version 2.0. So it’s going to allow for a lot more and a lot more secure data connectivity.

I don’t know that it’s going to be this magic bullet where now just because we have blockchain implemented in various ways, that it’s going to allow for everything to be automated all over the world but it’s certainly going to be, at least a better way to connect data. So that’s still hanging out there. What we’re going to see from the accounting profession as far as how that’s utilized, I think it’s still early days for that but I think the broader conversation is around data connectivity, which will allow for automation, and more analytics.

So what you’ll see is accountants that move further up the value chain, necessarily so, but also because that’s how we provide value to clients and how clients get value from us.

Drew McLellan:

So as your in the head of everybody who’s listening, and so I know one of the questions they’re wondering is, you’re talking about all of this automation and you’re talking about that you serve as sort of the CFO for your clients. Does your firm build out the infrastructure if somebody has someone on staff and doesn’t need you to be there, your outsourced CFO? Or do you only do this for your own clients if they’re going to sign on with you, in an ongoing way?

Chris Hervochon:

We’ve been approached about building it. We have not had any engagements yet where we build that automation. So generally, it’s been for clients that we on board that we’re going to have a continuing relationship with but we would be open to that for sure. Just because I think that there is a need, and I think that agencies could get value from it.

Drew McLellan:

Yeah, I think so too. So back to my other question. So you’ve onboard a client, you’ve automated their processes, you have aggregated their data in a way that you can analyze it and forecast, I’m assuming, ways that you couldn’t before. So what kind of decisions can your clients make, or what kind of insights do they have, that they didn’t have before?

Chris Hervochon:

So that is going to inform pricing, for one. It’s going to inform what kind of clients you should be taking on, what questions you should be asking about the clients that you’re thinking about taking on.

Drew McLellan:

So give me some examples around those things.

Chris Hervochon:

Sure. So I know that this particular project for this particular client was, shall we say, not profitable. So that’s client A. When client B approaches you about doing a service for them, maybe it’s a website or something else, you know what questions to ask now. Well, how many pages is it going to be? What different apps do I need to connect to? Because you’ve already had that experience and now you have that data that you can apply to that situation.

What sort of industry should I be niching in? That’s another good one. What I see, especially with a lot of smaller agencies, as you’re moving from a smaller agency to a midsize agency, and this is a problem with every business, is you take whatever work comes in the door, that’s not necessarily niched, but you’re taking it because you want to keep the lights on.

Well, you can figure out exactly what projects have been profitable, what projects inside of those industries have been profitable and then you can start to tailor your own marketing going forward to bring in those types of clients. Another thing that is important is benchmarking. So that’s one of the things that we do. how do you stack up against other agencies of a similar size and similar geographic region?

How does it compare and why are you different? You can start to answer those questions, too, because now you’ve got a good chart of accounts, which will allow you to do that benchmarking. Where does your time go? What’s your utilization rate? What does your cash reserve look like? What does the forecast going to look like to fund that cash reserve, which gets into, how are you going to scale and whether or not you can hire and all those sorts of questions, but the first place to start as always with a good accounting system.

Drew McLellan:

So I’m curious when you were talking about benchmarking against other agencies. So you’ve got your client’s data in this sort of aggregate data warehouse, but how are you then benchmarking them against other agencies? How do you get the data for the other agencies?

Chris Hervochon:

That’s a great question. Because there’s what? I think 12,000 agencies in the US, something like that.

Drew McLellan:

If not more. Yeah.

Chris Hervochon:

Yeah. If not more. Exactly. So no matter what size we grow to, we’re always going to be a rounding error. Whatever we have that we’re comparing internally is going to be anecdotal. So what we do is we use different data sources to benchmark that data. The best one is ProfitCents, which is the largest private company data resource, and they pull those they pull financial information directly from financial software and aggregate it. That’s a good one.

I’ve got a valuation background. So I’ve got access to RMA data, which is used in a lot of business valuations. We use that. We use First Research reports, we use IBIS reports. So those are specific to industries, and we pull those for agencies quarterly basis. So we have a pretty good idea and you’re going to see differences in the data, depending on the source that you look at.

I think what’s important is to pick one source, and to go with it and to understand exactly the size of the data source that you’re looking at, to make sure that it’s big enough, because some of the data sources that you’re pulling out, you’re only going to have three agencies that make up that number and really, that’s no better than what I’ve got internally. So you got to make sure that the sample size is big enough as well.

Drew McLellan:

Then, as you continue to work with clients, what are some of the monthly or quarterly reports that you think are critical? So most agency owners, as you know, did not get an accounting degree when they were in school, and most of them really do not enjoy … They enjoy making money side of the business, but they do not enjoy the money side of the business, right?

Chris Hervochon:

100% true.

Drew McLellan:

So getting them to look at reports and understanding reports, it’s not that they’re not bright people, because they are. It’s just A, they don’t like it and B, they’re running like chickens with their heads cut off. So that it has to be super simple. So what are the key reports that you think an agency owner should be looking at and at what cadence should they be looking at them?

Chris Hervochon:

Such a good question. It’s totally true. If agency owners wanted to be accountants, they would have gone to school for accounting.

Drew McLellan:

Well, most agency owners went to school for agency work to avoid mass classes.

Chris Hervochon:

Exactly.

Drew McLellan:

Then they got into the 21st century and were like, “Crap, we have to do math now.”

Chris Hervochon:

Yeah, I have my own business and I’ve got to file a tax return. How do I do that? For sure. It’s hard to nail down agency owners, I found in general, and to have that conversation. That’s why we put-

Drew McLellan:

Welcome to my daily world.

Chris Hervochon:

That’s why we put them on the calendar and we are sometimes somewhat annoying about keeping those appointments, but that’s neither here nor there. I recommend at the very least quarterly, reviewing your financials. If nothing else, that that’s going to go on the cadence of when you’ve got to file quarterly estimated tax payments, or make quarterly estimated tax payments. At the very least, monthly is better. Biweekly is even better than that, weekly is better than that. So the more frequently you’re looking at it.

Drew McLellan:

When you’re saying review your financials, are there specific reports that you’re asking them to look at and understand?

Chris Hervochon:

Sure. So when we do monthly meetings, we’re going to look at the P&L. We’re going to look at a trended P&L, we’re going to look at a common sized P&L. So trended P&L, basically what that means is that you’re going to look at the months in columns, and we’ll look at 12 months. So we’ll have a 12 month snapshot of historical data that we’re going to look at. Each column has its own month.

When I talk about common size financial statements, that’s where you take every line on that P&L as a percentage of gross revenue. So marketing expense is 3% of gross revenue, or 10%, or whatever it is, or accounting expense is 10%, or 50%, or whatever. That gives you that ability to then go and compare it to the industry, because that’s how a lot of the industry data is presented.

It’s presented on a percentage basis, it’s not presented on dollar terms. So that’s why we look at it that way. That helps to put context around where your money is going, or where it’s coming from. So we’ll look at that. We’ll look at a cash flow statement as well. Cash is king. Everybody knows that. It doesn’t matter, really the gross revenue of your agency. It doesn’t matter even what the net income is. It doesn’t matter. What really matters is cash. You can’t pay your people in Doritos. You got to pay them in cash.

Drew McLellan:

Yeah, they’re pesky that way.

Chris Hervochon:

Isn’t it ridiculous?

Drew McLellan:

Yeah. Right.

Chris Hervochon:

You got to pay your own mortgage with cash. Cash is king.

Drew McLellan:

Everyone is so needy.

Chris Hervochon:

Yeah, it’s unbelievable. You could try Bitcoin, but that’s a different animal.

Drew McLellan:

That’s a whole different podcast.

Chris Hervochon:

For sure. So the cash flow statement, we want to understand where cash is coming from and where it’s going and then we’re also going to look at a dashboard. Then the dashboard is going to be the visual representation of the different KPIs that we find to be important that we have decided, so you and I, the agency owner and I, what we have decided are important for you to run your agency at that particular period of time. Dashboard is going to change over time, but we’re going to look at that and that’s a little bit more easy to digest and that kind of brings everything full circle as far as what we talked about with the financials.

The financials are difficult to ingest, really. It’s just numbers on a page. That’s why it’s our job to tell the story of what that actually means and then to wrap that in a pretty bow with the KPI dashboard.

Drew McLellan:

Speaking as an agency owner and somebody who likes other aspects of the business more than the math side of the business, certainly, I think pictures help. [inaudible 00:40:22] charts, that sort of thing. So are there some KPIs that you think are often overlooked or misunderstood by agency owners, that they should really be paying attention to that maybe they have the wrong metrics around or they just don’t pay attention to it?

Chris Hervochon:

I think average billable rate both by client and by the industry that you’re serving and in total, those three are important. Utilization rate of your people, and you can get that through your time tracking process, and a lot of the agencies that we see, especially on the small to midsize end, they’re still in the whole revenue generation process. So we want to be looking at marketing metrics that are inte