Do you ever wonder how profitable your clients are?
Are you confused with your cash flow? Does it fluctuate a lot, or do you have to use a line of credit regularly?
Would you like to have a marketing agency that you could sell one day?
Do you struggle with understanding your current financials?
Do you have inconsistent or unclear accounting procedures that cause concern with the information you get?
Would you like to one day be in a position to sell your agency?
I have worked for at least 15 years with marketing agencies, and I understand the challenges. There are many ways that a fractional CFO can help a marketing agency – let’s discuss five of them here.
1.Consistent Financial Reporting
Do your revenue and profit fluctuate significantly from month-to-month? This fluctuation could mean that you are not matching the revenue and expenses accordingly. If you are not matching, then you cannot see your gross margin (Revenue – Cost of Service) or Operating Margin (Revenue less Cost of Service and Operating Expenses). Seeing these metrics will help you to understand your true profitability, and to make good decisions in hiring and other business investments.
Many agencies have passthrough billings, which is billing a client for media and paying this out to the vendor. It is especially important to match the billings and costs, because it will make you understand your actual net revenue.
2. Financial Forecasting
Once you have consistent revenue and expenses, it is much easier to create a forecasting model. You want to start with revenue forecasting by each client and then staffing expenses by each employee. Then, forecast other operating expenses such as marketing, travel, insurance, and rent.
Once you have a handle of all your revenue and expenses, you can review a forecasted P&L Statement and even more accurately start to forecast cash flow. I suggest reviewing your actual financials monthly, as well as an updated financial forecast, and then compare your forecasted revenue and expenses to actuals. Do you have anyone doing this for you and providing commentary and insights? If not, you should consider an outside perspective that understands how to review your financials and forecast productivity.
3. Cash Flow Management
Do you have a consistent Accounts Receivable (AR) collection process? You don’t want AR to get out of hand because it gets harder to collect as time goes on. Do you prebill clients for a large media spend? Do you have a “sequential liability” arrangement with key vendors, in which you don’t have to pay or are a liability for media spend until the client has paid?
All of this is part of cash management, which probably seems overwhelming. I even suggest doing a weekly cash flow forecast to understand the ebbs and flows of cash better. Many agencies have seasonal and timing challenges that affect cash flow. I have worked with agencies in which Accounts Receivable increase significantly in Q4, which can put a strain on cash flow. So, if you don’t have a line of credit, I recommend getting one.
4. Client Profitability
You might feel that you are working extremely hard but aren’t seeing any benefit to the bottom line. This is because it is common for some clients to be highly profitable, while others drain all the profit from the business. By not reviewing your clients’ profitability regularly, your business will be more prone to the latter type of client.
Therefore, by performing routine client profitability analysis, you can better staff your teams and set pricing more accurately. Check out more in an article I wrote, “The Importance of Client Profitability and How You Can Improve Yours.”
5. Selling Your Agency
Doesn’t every agency owner want to build an agency worth something? Maybe you don’t want to sell now, but you still want to do the things that increase value. However, if you wait until you want to sell to get your agency ready to sell, it will be too late.
So, how does a fractional CFO help? A CFO will help you to invest in areas that give you a high return on your investment. Then to better understand the profitability of services and clients, you need to structure the accounting reports properly to get this information; which a CFO can help with.
Do you understand or review your Balance Sheet? Understanding critical metrics like Working Capital, Liquidity, and the average time to collect invoices are essential. Also, agencies that are highly productive and streamlined are much more appealing to a buyer. Even your billing, payables, and accounting processes can be improved to save time and enhance accuracy and communication.
Consistent financial reporting, forecasting, cash flow management, and client profitability will help your agency be more “Sellable.” But I don’t recommend trying to do this on your own.
If you don’t have a fractional CFO, hire one – it will be worth your investment, and you will be able to trust that you have someone who is well versed in what your business needs to do to continue improving.