Having worked with lots of agencies we have seen that there are some challenges that regularly come up when scaling-up. These include managing cashflow, especially when fees are lumpy, building a sustainable sales pipeline, understanding which projects and clients are profitable (and which aren't) and getting clients to pay on time.
As your agency grows so do the complexity of your finance needs. Getting the right systems, processes and people in place is key to scaling successfully. This is where having a dedicated finance team who have experience working with digital agencies like yours can help.
What is Your Finance Team?
Using cloud-based Accounting software like Xero you can have the benefits of partnering with a dedicated finance team without the cost of employing a Finance Director and their supporting staff. This is a great option for those agencies who are still travelling on their scaling up journey.
Your Finance Team should do these three things:
1) keep you compliant with the law (of course),
2) design and run the finance operations of your business, and
3) give you expert insight to underpin the successful growth of your agency.
As your agency grows it becomes more complex. There are more staff, more transactions, more projects, more clients and more issues. Your challenge is to still deliver a consistently great quality service to your clients at a profit. This means you need to become systematic! Systems to manage your workflows, your finances, your team, your costs and your client communications.
A great agency is run on great systems. You may not already know this but Accountants LOVE systems! Implementing systems is a core skill of any credible digital accountant.
You want to run your agency as efficiently as possible so that you can price competitively while maintaining a good profit margin. To do this your accounting processes should be streamlined to increase the speed and minimise the cost of having meaningful and up-to-date financial information (see Xero Accounting for more information on how using Xero can help your agency).
Strategy and Growth - Expert Insight
You will make better decisions and your agency will be more successful if it has these three things:
1) A plan and some clearly defined goals. What do you personally want from your agency and what do you want for your agency? Once you have a plan then you can build a budget (see our blog Why every business needs a budget). With these in place you will have more confidence in your decision-making.
2) Meaningful and timely information about your business so you can make the right decisions at the right time.
3) Expert insight to interpret the financial information and help build a plan for what next.
How we have helped some of our clients
A strong finance function will underpin the successful growth of your agency. Here are some recent real examples from clients we work with.
Reducing profits in a digital agency
Over the last 6 months a digital agency had seen strong growth in sales but a decline in their gross profit margin.
Looking deeper into this, by reviewing the profitability of projects across their client base, we were able to identify that this has been driven by one specific client that they are doing a lot of work with but who are very price sensitive. As the proportion of sales to this client has increased over time, gross profit margin has reduced.
The combined impact is that the client has an increasing dependency on one client that is paying lower margins than other clients.
The result is that our client has re-energised their efforts to expand their client base (and reduce key client dependency) by investing in sales and marketing activities.
Cashflow issues in a marketing agency
A marketing agency with a phenomenal year in terms of new sales had run out of cash and needed to rely on external financing to pay suppliers and staff.
Whilst the agency is profitable and is great at winning new business, its cashflow issues stem from the payment terms it has agreed with its clients. Often clients were given 90 days to pay after an invoice was raised by staff need to be paid monthly so in effect the agency was giving free financing to their clients.
Now the issue has been identified a number of steps have been undertaken including a process of renegotiating payment terms with major clients, the delegation of invoice raising to project managers so the invoices are sent out faster and not bottle-necked with the finance manager, automated invoice chasing for late payments, price review so that any extended payment terms come with an additional price to cover the cost of funding those terms.
How can we help?
We'd love to hear where you are on your scaling up journey and what challenges you are facing.