Episode 67

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Jason Blumer is the Chief Innovative Officer of his firm, Blumer & Associates, CPAs. The firm was one of the first to move from a traditional office to a virtual environment, where they serve digital, marketing, and design agencies. He focuses heavily on business coaching and consulting, while his team meets the technical and compliance needs of the customer.

Jason also founded the Thriveal CPA Network in 2010 as a way to help CPA firm owners connect. Since that time, Thriveal has helped many firms grow by providing an online community, coaching services, webinars, and live events.

Jason is the host of two podcasts, the Thrivecast for the CPA community and The Businessology Show for the creative community. He speaks and writes frequently for CPAs and design agencies, his firm’s chosen niche. He has been honored as one of the 40 under 40 in the profession (CPA Practice Advisor) as well as one of the Top 100 Most Influential People in Accounting (Accounting Today). Jason loves to watch documentaries on just about anything and is working on his personal bests in Crossfit several times a week. He lives in Greenville, SC with his wife and their three daughters.

 

 

What you’ll learn about in this episode:

  • How Jason and his team got into the agency niche
  • Mistakes agencies and agency owners make regularly
  • Why going virtual doesn’t automatically save your agency money
  • How to legally save your agency money in taxes in ways that make sense for your agency
  • Employment benefit plans which benefit agency owners
  • P&L and AGI numbers to know
  • Why you shouldn’t be struggling to make payroll if you have a strong value proposition
  • Why being a successful creative director doesn’t mean you should open your own agency
  • Why you need to be willing to sacrifice services, clients, and your team
  • How to know whether the metrics that you’re tracking are worth tracking
  • Things most if not all agencies should track
  • Why you should outsource your accounting
  • Jason’s recommended resources

 

The Golden Nugget:

“If you’re struggling to make payroll, your value proposition is broken.” – @JasonMBlumer Click To Tweet

 

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Speaker 1:

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, invested 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 McLellan:

Hey everybody, Drew McLellan here with another episode of Build a Better Agency. One of the things that I talk to agency owners all the time about all things financial tied to running their business better, and so that’s why I think you’re really going to enjoy today’s guests. So, Jason Blumer is the chief innovative officer of his firm, Blumer & Associates, and they are CPAs. The firm is one of the first to move from a traditional office to a virtual environment, which many agencies are doing as well. Jason’s firm serves digital marketing and design agencies. So they specialize in that kind of clientele.

So we’re going to dig deep into the finances of agency life. He focuses heavily on business coaching and consulting where his team also meets the technical and compliance needs of their customers. He’s also formed a group called Thriveal CPA Network. He did that in 2010 to bring CPA firm owners together to connect and to build their businesses. So, not unlike what AMI does for agencies, he’s doing that in the CPA world. So he helps those firms grow and providing community coaching services webinars and all kinds of live events.

So, he’s the host of two podcasts. One, unless you’re really a numbers geek may not be for you, it’s for the CPA community, but you will all love his podcast called The Businessology Show, and you can find that at wwwbusinessology.biz, B-U-S-I-N-E-S-S-O-L-O-G-Y.biz, where he talks about how to manage finances better inside your business and all kinds of other things that relate to you, agency owners. So you’re going to love that.

Jason has gotten a bunch of different awards and honors, as you would might suspect from someone who has already done all of these things. He’s one of 40 under 40 in his profession from the CPA practice advisors. He’s one of the top 100 most influential people in accounting. We’ll have to talk about what that means from the folks in accounting today. He also in his spare time loves to watch documentaries and hang out with his wife and their three daughters, and he’s a CrossFit guy, so we’ll probably get into a little bit of that as well. Jason, welcome to the podcast.

Jason Blumer:

Wow. Drew, man, that was an awesome intro. Thanks for having me, man. I’m pretty pumped. Excited to be here.

Drew McLellan:

You sound pretty good. Don’t you?

Jason Blumer:

Yeah. I mean, I didn’t know I was that awesome.

Drew McLellan:

So now we just have to deliver on it, my friend.

Jason Blumer:

I know. Well, I’m going to try my best. So I’m going to give the best content I can.

Drew McLellan:

I have no doubt. So, when you were thinking about specializing your firm and focusing on a niche, what made you decide on the agency community?

Jason Blumer:

I think a lot of times niches find people and I think that’s what happened to me. I didn’t know it at the time, but we were a generalist type firm serving anybody, and then we started getting some agencies, and this is when we had an office, so we went virtual over four and a half years ago. So we had an office, but we were getting some agencies that were on the other side of the country. So we’re in South Carolina and we were getting agencies on the other side of the country. Then they started referring other people that were in other parts of the country, and I thought, “Well, apparently they don’t care that I’m going to drive up and give them their tax return.”

So, I wonder if I can do this in a virtual way, and I decided that I would just give it a try. So I picked a date, two years out that I would close my lease on my office, shut it down and start moving towards the niche, which took me about two or three years to fully commit to and get invested in and be found in that community, and we’ve just been doing it ever since. That’s kind of how we did it.

Drew McLellan:

When you start working with an agency, what are some of the common mistakes you see agencies making when it comes to their finances?

Jason Blumer:

Oh my gosh. I think, well, a lot of these probably apply to any small business owners. So we may work with agencies between two and 5 million in revenue. So we’re working with small people, typically, not the big guys. I think a lot of times they do what a lot of small business owners do, the owners fail to move themselves out of the details. Sometimes that creative and technical service that they start at the agency doing. They don’t realize they need to move away from that over time.

They don’t invest funds in a strategic financial partner like us. We try to convince them that, though there is a dollar amount that you have to invest to have us as your partner, it’s probably also, there’s some savings related to what you’re spending because with any small business, you’re thinking, “What do you not have to go through?” Because you have a partner watching out for you. So a lot of times they fail to make investments early on in a coach, a consultant and keeping their financial platforms steady and stable.

Then just generally, since we consult and coach with agencies, we find them being fearful, really. I don’t know I think the creative industries are fearful of actually making very strong definitive decisions about growth, moving in very specific directions, they’re just fearful of, will it work? And so they just have what I call accidental growth strategies, where they grow into some model and they don’t realize how they even got there. So those are just a few of the many common things we see them doing as they’re running businesses.

Drew McLellan:

And as you are, I would assume that most people come to you because something’s on fire, either they have a tax situation or something has happened. So what is typically the impetus to an agency coming to you and saying, “Okay, I’m waving the white flag, I give up, I need some help.”

Jason Blumer:

Actually we’ve tried to structure our value proposition in a way that says, if stuff’s on fire, we don’t want to serve you. So it’s kind of the opposite. The reason we found that to be true is because people who have businesses that are on fire, typically don’t have the funds to invest in that kind of putting out fire issues. So the people we really love to work with are people who have a growing business that really go, “You know what? My CPA’s just not there. They’re not at the level that I need a partner to be at.” So we find a lot of agencies find us and they’re like, “You’re my next step up, you’re one of the investments I know I’ve needed to make, and we’re growing. We have some money in the bank and I’m overwhelmed as an owner and it’s time for us to step up.”

And we want them to see that, we want them to see us as a strategic financial step up to challenge them and grow. In fact, on our website, Blumercpas.com, if you go to the new client button, this is the form we have them fill out before they become a new client. We say, “This is the persona of customers that we’re best for, please click all boxes that apply to you.” There’s about five or six boxes. One of them says, “I have no prior messes that you need to clean up.” They have to attest to the fact that they are not a mess, because we’re not good at fixing messes, we’re not structured that way. So we have to weed them out.

Drew McLellan:

So how does an agency assess whether or not they’re ready for … Most agencies, as you know, they might have somebody in house who’s doing their books day in and day out, doing their billing and accounts payable and accounts receivable, and odds are they’re doing it in QuickBooks or if they’re a little bigger, they might be doing it in a Workamajig or Advantage or FunctionFox or one of those sort of things. Then they have a CPA who does their taxes. So, how does an agency know when they’re ready for a more sophisticated relationship than that?

Jason Blumer:

I think typically when an agency’s grown to a certain size, the owner may have made some strategic decisions to move themselves out of some of the service to the client. So, they’re able to commit to growth and selling, which is a part of what the owner has to do. I think what’s happening is the bookkeeper’s not feeding them reporting and metrics that gives them any kind of intelligence in running their business, and maybe they’re at a level that they’re in groups like an AMI or something like that, or Owner Summit or something like that. And they’re like, “Hey, other people, they have some kind of intelligence I don’t have access to.”

They find that a bookkeeper internally is really somebody, they still have to manage the bookkeeper. Bookkeepers are okay, but an internal bookkeeper is just going to really keep transactions cleared up. They’re not going to be proactive and start feeding them in a kind of strategy or going over the financials with them in any kind of strategic way. So, I think they just don’t have reporting or metrics that are driving any kind of behavior, and they start to see that as very important.

Drew McLellan:

Yeah. What kind of reports should an agency owner be looking at on a regular basis?

Jason Blumer:

Part of our philosophy as a firm is we really try to keep owners out of immense amounts of detail. We really believe that strategic decisions to grow companies are made at higher levels. And so when they’re diving deep into the financials, we know sometimes that can get them out of balance. So, we want to give them financials that are summarized in some way. So we want some big summaries of occupancy and rent, labor line items, pay to the owner line items, of course, cost to good sections like contractors and costs of service to their clients and things like that.

So, a profit and loss statement is a key, you need to be looking at that on a monthly basis if you can, but I like it to be in some kind of summarized format where it’s scaled down. So the owner’s not getting distracted by a lot of details. We don’t typically tell them to look at a balance sheet, but that also looking at their of cash flow is a key. So what we see a lot of our smaller agencies, we serve the smaller ones between two and 5 million in revenue, is they typically have some kind of project tracking spreadsheet.

We see a lot of them do off accounting system tracking through some kind of spread sheet, and that’s related to, especially those project related clients where they’re getting projects of money down 20% later, 30% at the end or whatever they’re trying to track when that cash is going to be hitting their books. And they also align it somehow with project milestones and things like that.

So, that kind of reporting is helpful. We do have tools that we can hook into an accounting system that do a little bit of prediction forward. So, I would say probably the two keys are going to be some historical profit based reflection of how they’ve done, and then some kind of looking forward some strategic aspect of what do I think my cash is going to be doing in the near future are both really important.

Drew McLellan:

So you mentioned occupancy and rent, talk a little bit about that.

Jason Blumer:

So, occupancy and rent. Obviously, I think that has a lot to do with the strategy and culture of a company you’re building. I think it’s possible that a lot of small businesses just default to a lot of different strategies, they’ll default to going and getting a bigger office, because that’s what somebody else has done or I’m going to close my office because somebody else did that, and that sounds really cool, and I like working from home. But those are really big cultural decisions you’re making.

Drew McLellan:

Absolutely.

Jason Blumer:

Occupancy and rent thing is, there’s really no strategy to whether it’s there or not, it’s really is the leader able to lead a virtual team? Because that’s really hard to do. Is a leader best able to lead a team in person life? So maybe you need an office. So, I don’t know. I think often it’s true that people might want to go virtual to save money on the occupancy and rent, but then they find themselves incurring other costs in other ways, like they figure out their team that was good in person is actually a poor team in a virtual setting. And so now they have a lot of costs in rehiring, retraining.

So they blow all that occupancy and rent money that they save by going virtual because they screwed up hiring. I don’t know that there’s a lot of strategy in that line item. It has a lot to do with what kind of leader are you and who do you want to become in three years and why?

Drew McLellan:

Well, I think the other thing too, when I think of occupancy and rent on the flip side is, do you buy your building in a separate LLC and do you become your own landlord? And is that part of your financial strategy?

Jason Blumer:

Okay. Yeah. So I see what you’re saying. Yeah, that definitely can become a good tax strategy. We just got a client in Boston and they have that strategy too where they said, “Okay, we’re spending money on rent.” They’re not a virtual agency, so they’re going to pay rent to somebody. They had a condo. So they just upfitted it to be their office. That is a good strategy. If you’re going to pay rent anyway and you can pay that rent to yourself, yeah, you can actually lower your salary a little bit, pay yourself more rent and you just save some self-employment tax by playing around with that balance a little bit. Yeah, that’s a great tax strategy.

Drew McLellan:

And you’re building up an asset.

Jason Blumer:

That’s right, yeah. And you’re building up an asset, just know that you have an asset that’s not liquid, it’s not anything that’s going to be of quick cash to you. So just know whatever you buy it with, you can support that debt or you have the cash for a down payment, you got to be willing to get rid of that money and pour it into an asset. That’s going to be a long term commitment.

Drew McLellan:

Yeah. So, we just touched on the whole idea of tax strategy, and I would guess that a lot of clients come to you looking for … A lot of agency owners really feel like, for every dollar they make, it seems like they spend $3 in taxes, and so they feel like they’re kind of on a hamster wheel. The more they earn, the more they pay, and it doesn’t really feel like at the end of the day, they end up with much in their pocket. So, what are some of the tax strategies that you talk to your clients about?

Jason Blumer:

Yeah. Again, that has a lot to do with some just philosophies that we believe. Well, just some basics. Let me say that service based businesses, Drew, you know all this, service based businesses, it’s just harder to really come up with some really robust big tax strategies because it’s just labor. There’s not a lot of things you can buy or purchase up front that are really things that’ll save you a lot of money, but some basics are … sometimes we find there are some very profitable partnerships that should become S corporations and you should do that at strategic times, and depending on the size of your company and your profitability, you can save a lot of money, and we do that a lot.

We’re actually doing that with an agency right now, that’s come to us and they are very profitable and they’re just paying through the nos in taxes because they’re this partnership structure when they really should have been an S Corp structure. Now that applies a little bit of technicality and some complexity to managing your business. So, you kind of need the CPA more involved managing distribution to salary balances and what’s a reasonable wage the CPA firms should be helping you know what that is.

But if you pay somebody to do that, oftentimes in the first year and all subsequent years, the money they can save in taxes is more than what our fee is in a year. So just an S Corp, just electing the S Corp is a good strategy. Now, if people are listening now, they’re like, “Cool, well, I’ll go do that by myself.” That’s not a good idea. Obviously I would want them to hire a firm like ours, but hire some firm because there’s a lot of management that you have to do and keep it up throughout the year and keep checking that distribution to wage strategy.

We do a little educational class to teach them how they’re saving money, how to calculate a strategic wage and how it’s reasonable, but also it’s not high enough so that you’re making the right amount of money. Then some other big things that you can do that service based companies do is employment benefit plans. Those can save, if you want to give somebody to the employees that can help them, but you can also structure employee benefit plans that only really help the owner, and you do have to put some cash in investments, but it can save-

Drew McLellan:

Tell us a little bit more about that. Define for people what an employment benefit plan is and what that would look like.

Jason Blumer:

So basically if you’re a company that’s grown and you have some excess cash and you would rather spend some money on your retirement instead of giving it to the IRS, we like to tell people, “You’ve got this excess money, that’s because you have profit. So you’re going to give it to somebody, you’re going to give it to the IRS or you could give it to somebody else.” And so sometimes we can say, “Why not go ahead and give it to a retirement plan like a 401k plan?” That’s really just structured to benefit the owners maybe.

And so, maybe you can write a 20 or even $30,000 check at the end of the year, that goes into the owner’s retirement for the future, but it also becomes an expense on the books of the company, and so it lowers your profit significantly and can save you whatever your tax rate is, 20, 30% in taxes just by writing that check. It is cash that left your books, but it went to your retirement account. And so, starting a 401k is something you can do.

Drew McLellan:

Yeah, I think most agencies listening, I suspect IRA or 401k is something inside their shop.

Jason Blumer:

And then some do health insurance. Again, the thing about tax strategies, which you have to balance is they’re often cash strategies too. So, you might have this tax strategy, is going to save you a lot of money, but you also have to get rid of 30 grand in cash. I don’t know, some people don’t want to do that. You need to have a good three months worth of savings probably to just remain healthy. There’s just this balance of saving money, and sometimes they might say, “Well, I’ll just buy a rent Range Rover and maybe that’ll save you some tax money, but you’ve also bought a depreciating asset. You just have to know if that’s what you want to do with your cash to save the tax.

So, saving taxes we say is not often the only goal, sometimes rich people pay a lot in taxes. So I would rather you focus on building wealth. Sometimes we see agencies who are paying more and more tax are actually very healthy, because they’re making more and more money. I kind of like that strategy better than just spending money to save taxes.

Drew McLellan:

Yeah, at a certain point in time, you can’t, a lot of agencies try to spend down their cash at the end of the year, but if you don’t need this stuff, then what’s point?

Jason Blumer:

Exactly. So it’s not often the best strategy just to spend money to save taxes.

Drew McLellan:

Yeah. Okay. So an owner should be looking at their P&L every month and they should be looking at cash flow, and they should be looking at projections. What does a healthy cashflow look like? Are there ratios that owners should be watching for or keeping an eye on?

Jason Blumer:

Yeah. Drew, this is stuff I know you guys know at Agency Management Institute too, depending on the types of agencies we serve, if we tell them, “Listen, if you’re doing a 15% bottom line profit margin, we consider that healthy.” Then this is not a gross margin, which is revenue minus your cost of good sold. I’m talking about the bottom line number. If you’re in a 15, 20% margin, we consider you really, really healthy. We think a minimum goal should at least be a 10% margin. Then the owner should be taking 20, 25 out percent of that. Then labor sometimes just totally depends, could be in the 40% range because that’s really your only cost in a service based business. Those are some basic metrics we look at to assess the health of an agency. Are those about line with what you guys teach in AMI or any different?

Drew McLellan:

Yeah. We talk about that. The only number that really matters in an agency is a adjusted gross income. Your gross billings and your cost of goods are what they earn. Yes, you want to manage your cost of goods as best you can, but the money that matters is the money you get to keep and spend. So you’ve got your adjusted gross income, and then our ideal ratios are that 55% of your adjusted gross income is spent on people, so loaded salaries, 25% is overhead and 20% is profit.

Jason Blumer:

Nice, I like it. Good stuff.

Drew McLellan:

Yeah. How does somebody know, if they’re looking at their cash flow report, what would be a danger signer? What would be a red flag that there’s a problem?

Jason Blumer:

Yeah, that’s a good question. A lot of times we look at the receivables strategy a lot of times, because we can actually see that on the books, a cash flow strategy might show that they’re making a good healthy margin when really what’s happening is receivables coming in currently are covering for losses and jobs they’re incurring. So, if we see somebody with some really long or big AR invoices outstanding, that’s an issue because it’s not helping us rightly judge whether they’re profitable on a month to month basis.

So, if I just look at December’s profit and loss statement, but the AR maybe 60, 90 days out, whatever cash is on that December profit and loss statement might be cash that really was spent on projects a couple of months ago. So I want to see a pretty healthy AR collection or even a more strategic healthier way to get money down and the way you bring in percentages on the projects, those are some really important things. But of course, just some basic things. If you’re struggling to make payroll, something’s broken, it means there’s not enough value recognition in the marketplace to pay you a wage that leaves money leftover, that leaves 20% leftover, that’s an issue. So, you need to take a hard look at that if you’re not able to make profit on a cash basis scenario.

Drew McLellan:

So as you work with your agency owners as clients, what are some of the things that you find from an educational point of view, because you and I talked about this, I think, when I was on your podcast, not too long ago, that I think a lot of agency owners are accidental business owners that they either were downsized or they left to shop or they hung up a shingle, they were freelancing, and next thing they knew they’ve got 10 employees or 20 employees and 30 employees, and all of a sudden they’re going, “Oh shoot, now I have to run a business.”

Jason Blumer:

That’s right.

Drew McLellan:

So what are some of the educational holes that you find when you start to work with a