Episode 226

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Most of us didn’t major in math or accounting. In fact, many of us were drawn to our industry because it wasn’t math centric! Unfortunately, agency leaders are not math exempt. Without proper financial data, it’s impossible to successfully run a profitable agency. This means your accounting partner, in-house or not, should be your constant companion.

Many agencies are exploring an outsourced accounting solution, just like most of us outsource our tax prep. But there is more to accounting than what meets the eye. Chris Hervochon is the founder of Better Way CPA that was built to serve agencies. Chris and his team approach accounting as a vital source of data that can help us make better decisions in real-time.

Chris joined us to discuss the metrics and best practices we can use to run our agencies better. We also talk about how to automate some of your accounting to really take full advantage of the information you have.

A big thank you to our podcast’s presenting sponsor, White Label IQ. They’re an amazing resource for agencies who want to outsource their design, dev or PPC work at wholesale prices. Check out their special offer (10 free hours!) for podcast listeners here: https://www.whitelabeliq.com/ami/

What You Will Learn in this Episode:

  • How to maximize the value of an outsourced CFO
  • Chris’ view on the purpose of accounting
  • Common mistakes that agency owners make with their books
  • The automation of accounting and the value it can bring to your agency
  • How accounting has changed and what it is able to do for us as agencies owners

The Golden Nugget:

“Accounting enables you to ask questions about your agency and get accurate, timely, reliable answers back.” @ChrisHervochon Click To Tweet “The availability of APIs, the move to the cloud, AI, and blockchain are driving the automation of accounting.” @ChrisHervochon Click To Tweet “Data-driven accounting allows you to make informed decisions about pricing, what kind of clients you should be taking on, and what questions you should be asking the clients you’re thinking of taking on.” @ChrisHervochon Click To Tweet “A lot of smaller agencies, in particular, don’t track time—and time informs a lot of decisions.” @ChrisHervochon Click To Tweet “Accounting’s job is to give us data, and that data allows us to make better decisions.” @DrewMcLellan Click To Tweet

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Ways to Contact 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 w