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Q&A about agency budgets, exits, benchmarks, recession fears, and more

In this solo edition of the Agency Leadership Podcast, Chip Griffin shares answers to a wide range of questions put to him in the latest Ask Chip Anything webinar.

It’s a departure from our usual format, so we’re interested in hearing what you think. Should Chip and Gini do occasional AMA/mailbag style episodes?

Among the topics Chip covers are:

  • How to prepare your agency for a recession
  • How big your agency needs to be in order to be sold
  • How to budget for 2020
  • Which time tracking tool to use
  • How to decide whether to move from freelancer to agency owner
  • Which benchmarks matter to the business

Transcript

Hello, and welcome to another episode of the Agency Leadership Podcast. I’m Chip Griffin. And Gini is not with me this week. As you may recall, if you listened to the last episode, we’re recording a couple of solo episodes. And so Gini did one on the last one. And now it’s my turn.

I’m actually going to do something a little bit different here, and I’m curious to see what you all think about it. So welcome your feedback. Just shoot me an email Chip at agency leadership dot com. And what we’re going to do this week is I’m going to share with you a recording of an Ask Chip Anything session that I did recently that has a whole session series of questions from agency owners and executives for things that are on their mind. And so I gave quick responses to as many of them as I could, it’s going to run longer than a typical episode.

But I’m interested both in the format here as well as the length and if this is something that you’d be interested in seeing more of on at least an occasional basis of the agency leadership podcast in the future.

So with that, let’s dive into the questions.

One of the things that I note is that a lot of the questions, as always seem to be about the coming recession. And this is something that Gini Dietrich and I talked about in the last couple of episodes of the agency leadership podcast, so I’ll include a link to that in the notes for this broadcast when I put it out, but in general, what I’d like to say in response to some of the specific questions because it looks like some of the folks have listened to the episodes of the agency leadership podcast and had some follow ups.

One of them was, how can I take advantage of the recession? And I love that question because it really puts you in the right mindset to think about the possibility of a recession, not simply as a challenge, because it absolutely will be that there’s going to be pressures on your business, when we get a recession, whether that’s in six weeks, six months or six years from now. And so you want to make sure that you’re, you’re well buttress against any of the challenges that can come up, you want to make sure that you’re focused on diversifying your revenue not being too dependent upon particular clients, making sure that you have a rational cost structure, that you’re not in a position where you’re top heavy with staff or you have a lot of long term commitments that you can’t be flexible with as your business adjust. And, frankly, these are all things you need to be thinking about at any point in your agency’s lifecycle and Not just in preparation for a session.

But the but I liked about the question was it looks at it not just as a challenge, but really as an opportunity. And for many of you out there, many of the folks that I talked to who are running, you know, small to mid size agencies, you know, maybe million dollars $5 million $10 million, you are the kind of agencies that can be a lot more nimble, a lot more flexible, and can challenge some of the bigger players pretty effectively. If there’s an economic downturn.

It’s a time when bigger players tend to have a lot more fixed costs, they’ve got a lot more infrastructure, it’s a lot more difficult for them to flex. Whereas if you’re in the seven figure range as an agency, you’re probably relying a lot on contractors, you’ve built a pretty scrappy business in all likelihood, you’re still engaged as the agency owner, and you can sense the pulse of the prospects and the clients much better than some of the leaders in the larger firm.

And that’s not a knock on the larger firms. It’s just reality. The bigger you get, the more challenges that you have to overcome. When you’re small, you can take advantage of these contractions and you can go out there and say, Look, Mr. client, you are right now paying a lot of money to a big agency. We know you’re looking to cut back on budget, but at the same time, you still want results. You still want earned media, you still want to have a social media presence, you still want to do marketing activities. And if you’re going to undertake all of those activities, you still need help.

And in fact, if in challenging economic times, some companies will be more apt to contract work out to an agency than they will be to hire up staff so they may leave openings on their full time, salaried staff longer and fill those gaps by contracting work out to agencies. So if you’re smart, and if you’re thinking about how you can do this creatively, there will be opportunities In a recession, assuming that you’ve taken care of all the basic challenges that you already have in place, so absolutely looked at recession, not just as a challenge, but also as an opportunity.

The other question that I got about recessions that was sort of a follow on to what Gini and I talked about in the podcast was, if there is going to be a recession, you know, should I be thinking differently about how I’m going to staff and we touched on this a little bit in the podcast episode, but I guess my advice to you would be probably, again, this is one where you don’t necessarily want to change because of the coming recession. But if you have opportunities to contract work out and be flexible, you should always take that, but maybe if you’re particularly concerned about a recession, this is a particularly good time to be thinking about it.

Now, of course, there are all the challenges that I’ve talked about, in other places about if you realize that too heavily on contractors, if you’re putting out the effective work of a full time employee out to contractors, your margins are going to be smaller because typically you have to pay more to contractors than you do to a comparably skilled employee. And that’s because contractors have their own overhead have to pay for their benefits and taxes on that sort of stuff. So there’s, you gain flexibility, but you lose some margin. So that’s something you need to weigh.

And so you wouldn’t want to ever be in a position where you’re totally dependent upon contractors. You do want to have the full time staff when it’s appropriate. But if you follow the the general advice that I’m not unique and giving, which is to hire slow and fire fast, you’ll probably be in a pretty good position. So

Alright, enough about recessions. Let’s move on to some other topics that have come up.

Another one that question has come in, how big do I need to be before I can sell and so obviously in my consulting work, I tend to work with a lot of agency owners who are contemplating the possibility of selling at some point whether that’s couple years down the road or a couple of decades down the road. It’s at least on the minds of the agency owner.

And the this question that came in through the Ask Chip page, pretty similar to, you know, what I’ve heard from a lot of my clients, which is, how big do I need to be before I’m a sellable business?

That’s not an easy question. Because there’s, there’s really no magic number. There’s, you know, certainly if you get to a certain size, you become palatable only to much larger businesses. So, you know, if you’re an agency that say 20, or $30 million, your pool of potential buyers is a lot smaller than if you’re an agency of just a couple of million dollars. So, you know, getting larger, certainly makes you more attractive in some ways, but it can also burden you in some ways or at least shrink the pool better. So you need to be mindful of that.

But look, agencies that are just a few hundred thousand dollars a year sell obviously they’re not going to sell for the same kind of price that a multimillion dollar revenue agency will sell for. And there are certain I don’t want to call them penalties. But there are certain obstacles to getting maximum selling price when you’re in that kind of smaller business. Typically, the owner is very engaged not just in business development, but also client service.

So those deals are going to be heavily skewed towards are announcing really, you know, if you’re if you’re a business that’s under, say, a million dollars a year in revenue, really what the acquirer is doing is it’s called an aqui-hire. So that’s a term that’s been very common in the tech space. But I think it’s starting to get used more in the agency space as well.

And that’s effectively saying, if you’re a sub million dollar agency, you probably only have a handful of employees plus the owner. And so really what the larger agency at that point is looking to do is to Come in and scoop up some talent. They’re not really buying the business per se, they’re buying the talent. And maybe the clients as well.

As you start getting into the the seven figure range that one to five to $10 million business. Now at that point, you’re starting to build something that looks like a real business. And you can start to be in a position where an acquire is really looking at the totality of the business, and not just the talent within. So at that point there be more of a look at track record, you know, last three years financials looking at profit margins, looking at the structure.

And so then really what you’re thinking about is not so much have I gotten to the right level of revenue to maximize my price, but if I structured myself correctly, am I is my agency dependent upon me? Or do I have the ability to have a strong middle tier number to other people around me as an agency owner who will help grow the business and who you know will Continue to remain with the business long after I’m gone.

Now, do keep keep in mind, if you’re selling your agency, you’re going to be there for three to five years afterwards. It’s not, you don’t sell your business and just walk away in most cases that is extraordinarily rare in the agency space. So don’t, don’t be looking at it in those terms. But bottom line is, it’s not so much about a magic dollar figure that you need to get to, to be able to be sold for a maximum value. It’s really, it’s all the things that go into it. It’s your revenue, it’s your profit margin. It’s how you’re structured.

It’s you know, what your client concentration is, if you have a giant whale client, that’s 50% of your revenue, well, that’s going to cause a real discount in the purchase price that someone’s willing to invest in acquiring your business. Whereas if you’re, you know, nicely spread out, you know, clients more than say 15% or so. Okay, that starts to look like a more stable business, a more repeatable business.

Similarly, if you’ve got good profit margins that have held steady or improved over the last three years, we’ve got revenue that’s moving up. These are all things that will work to your benefit in maximizing the price. So don’t fixate on saying I need to get to 1 million or 3 million or $5 million in order to sell it’s really the whole package. This involved in that question.

Okay, let’s see, I see one just coming in on email. And this one is from an agency owner who says, should I give equity to my employees? Okay. And actually, this is one I think that’s going to be covered in an episode of the chats with chip podcast that I did with Brad Farris. Come up, probably in a few weeks from now. It’ll be published and it so equity is complicated, and I generally say be very slow to give away equity in your agency. And that’s to that’s whether that’s to employees long term or otherwise, but it’s also to partner

You need to be very, very thoughtful before you give away actual equity or stock or shares or units or whatever it’s called based on how you’re structured. If you’re going to give someone an actual percentage of the business that they own, with all the rights and responsibilities that entails, that’s a big deal. And it’s the kind of thing that can have a real impact on the employees as well, both for good and bad. So it’s certainly not something you’d want to go into without clear conversations with your accountant and lawyers to make sure that you are doing everything properly.

But it’s also the kind of thing where you need to make sure that whoever is receiving the equity is also thinking about what are the ramifications, what liabilities are they now on the hook for what tax consequences are there for them, those sorts of things. So instead of the actual equity, I think that it’s important to be thinking about other ways that you can compensate folks whether those are various bonus plans. You know, maybe you in the past, I’ve structured some of my businesses so that key employees, you know, well in advance that they’re going to receive a meaningful bonus in the event that the company is sold. And that can be a very effective alternative, because you really want to get at why you’re giving away equity in the first place.

What is it that you’re trying to achieve, you’re trying to retain employees. So, you know, maybe you look at a compensation structure where they get a tiered bonus, they get a portion of it today, but then a portion of it vests over time, you may want to look at alternate approaches, like Phantom stock or stock appreciation rights, or things like that. And, and these are all fancy terms for basically saying, I’ve got a piece of paper that says, In the event of some sort of a transaction, you get a designated percentage as if you own that equity, but you don’t actually own it. And so it certainly gives you a lot more flexibility as the agency owner, but it also is a lot less complicated to implement.

The other thing to keep in mind here is That anytime you’re talking about one of these deals, whether it’s I guess I would call it equity light in the form of Phantom stock or something like that, or a bonus plan, or actual equity, you want to make sure that you are thinking about what do you do when something goes wrong? What happens when you terminate an employee? What rights do they have at that point, you know, you obviously, a smart employee is going to want to make sure that in the event that you’re selling the business, that you don’t just go and terminate them the day before, so you don’t owe them a bonus.

Now, obviously, the acquirer is probably not going to like that either. So that it would make a real mess of things in all likelihood, if you were to do that, but you know, you want to be thinking about how it is that you can come up with the best approach to solving that problem. And you want to think about those worst case scenarios because it’s very easy to spend a lot of time thinking about all the good things that can happen and and coming up with plans for all kinds We’re going to sell for $10 million. And it’s going to be, you know, heaven for everybody. That’s great.

But you need to think about what happens when it goes wrong and make sure that all of the paperwork that you’re putting together addresses that. I think that the way Brad put it in the the podcast episode that will be coming out soon. He said, You need to make sure that you have an exit strategy for anytime that you’ve got a partner brought into your business and, and I would just say I also talked with a lot of owners who are talking about not just giving equity to employees, but actually adding a partner.

And this is not necessarily in fact, often it’s not someone who’s currently in play often it’s actually another agency owner and they’re talking about whether it’s a direct merger or perhaps setting up a new firm together, in addition to what they have themselves. There’s there’s a lot of appeal to having a business partner. And I can tell you as someone who has run businesses with and without partners That I have seen good in both of them. Overall, I kind of like it with a business partner, but you’ve got to get the right one.

If you end up with the wrong business partner or business partners, your life is going to be miserable. And so you need to be very, very thoughtful about it. And I would just, I would just also say, be careful about the idea of running two agencies at the same time. It’s any of you who are running agencies already, you know how hard it is. So the the idea that you’re going to have an agency as a solo owner, someone else is going to have an agency as a solo owner, but you guys are going to come together and build something new in addition to that, really, really hard to do. Not impossible. I’ve seen it done, but I can tell you that is much less likely to be successful, and it creates a whole other set of challenges.

So be really careful anytime you’re talking about an actual equity tie up, look at things like stock appreciation rights, Phantom stock, if you’re talking with other agency owner, look at some joint venture ideas, things that are A lot less entangled than building actual businesses together.

All right, I can see things have been coming in through email while I’ve been talking. So let me try to take a look and see. Okay, so here’s a good one. And this is when I get a lot from some of the solo agency owners that I talked to, and that is, should I go from Freelancer to agency owner? And so this is this is a really good question. I really liked the way that they put this because this is this shows a real awareness when you are a solo agency owner line between being what we would typically consider a freelancer and being an actual agency business. It’s a it’s a really thin line, and it’s really easy to straddle it, it’s really difficult sometimes to know which side you’re on.

And I would say in general, you need to be running your business probably for a few years. If you’re solo before. You really say okay, this is absolutely a business because look, bottom line is if you’re solo It’s very easy to wake up one morning and just decide, hey, you know, this is, this is not for me, I’m going to go work in house. Whereas if I’ve managed to build a business of, you know, five or 10 employees, the exit strategy is a lot different. I can’t just get a call from someone else and, and pack my bags and go take the job. Well, I guess I can. And to be honest, I’ve heard of some agency owners who have done that. But it’s, it generally doesn’t end up well when you take that approach.

So how do you decide if you are if you are quote unquote, just a freelancer and I’m in no way denigrating that I, as I always say, an agency owners of businesses of all sizes, you need to have a business that works for you that helps you achieve your goals. It’s why in the framework that I put together the aim get framework for agency successful, the A is for ambition, and I really try to drill down with my clients, what is it that you’re trying to achieve because if you don’t know what your You want out of your business, you’re going to have a very hard time making the right strategic and tactical decisions to guide that business forward.

So, you know, if you’re a freelancer and you want to stay that way, you don’t have any interest in taking on additional employees, you’re not really looking to necessarily even bring on a lot of contractors to help you. That’s fine. And it’s a perfectly legitimate way to generate income. And it’s done by quite a lot of people. If you want to start shifting and thinking of yourself as a business, whether you plan to have employees or not, but you really, you know, the line is sort of that you’re, you’re structuring it more like a business.

So it’s not, it’s not all just about selling your time it is you’re putting together a network of subcontractors, you’re putting together some product ization or processes or things like that, that that you really can sell. At that point. That is a different approach. It requires a little bit of a different mindset and You need to be at that point, spending a lot more of your time thinking about building the business. Then on performing the work as a freelancer, you can probably spend 80% of your time doing client service and 20%. You know, building your network and finding opportunities so that you always keep a full plate in that 80%.

If you’re starting to think about running it as a business, even just as a solo, you need to be thinking about spending, you know, probably not more than 50% or so of your time on client service. So it is a big shift. In approach. It’s a big shift in your day to day that you need to make if you’re looking to turn it into a business, particularly if it’s a business that you think you might be growing by adding actual headcount. So how do you decide if this is right for you? Well, that goes back to the ambition that you need to think about what it is that you’re trying to achieve. What do you want to generate as far as income What do you need to generate as far as income in order to make Your monthly commitments, your annual commitments, whether that’s to family or its to retirement plans or educational savings, or whatever it is.

And then you need to think about okay. Once I know that, what what do I really what am I looking for is I’m measuring my success because I built a good growing business. I’ve added employees, there are plenty of people who do judge themselves in part by that and how they are perceived. And that’s fine. If that’s if that’s what you want, then you need to be certainly thinking about the business route, if you’re simply looking to to implement a lot of great ideas with clients and have the flexibility to to work when and where you want. Okay, well, maybe that skews more towards the freelancer side of the equation.

So there’s no easy answer here. It’s really just being thoughtful about where you want to go start looking out, you know, 1, 3, 5 years as best you can and say okay, Here’s where I’d kind of like to go. And then I’m a big fan of modeling. So if you are looking at a plan, you need to actually start putting numbers behind it and working things out on whether it’s the back of a napkin or an Excel spreadsheet or something more sophisticated.

But you need to certainly work through things like how much time do you want to spend, you know, what does that mean, from a client service perspective, you know, if you only want to work 20 hours a week, what’s reasonable from a client perspective to achieve there? If you’re willing to work 60 hours a week, but you you want to make, you know, six figures, you know, mid six figures who knows what you know, whatever the number is, you then need to do the math and say, okay, you know, let’s say I want to make $250,000 next year, what does that look like? How many clients do I need to have, What size do they need to be when would I need to sign them in order for that to work out and a lot of these projections fall apart.

Because the People like to focus on the big picture, the big numbers. And they don’t think about what does it take to actually achieve that. So, you know, if you’re in a position where you can only work part time, because, you know, you’ve got some family commitment or whatever, maybe you’ve got small kids, you’ve got elderly parents, you’re taking care of her. Who knows what, there’s so many different scenarios these days, you need to think about, okay, if I can only commit those 20 hours a week, can I actually generate the kind of income I need to in that by being a freelancer? Or, you know, is it practical to spend 20 hours a week and build a business? Probably not.

It’s going to be challenging to do that unless you’ve got someone working with you. You’ve got partners, you’ve got key employees, whatever. So be thinking about all those things. And all of that needs to go into the mix as you decide whether you want to remain a freelancer, or you want to go on to the next step and turn it into a business where you can scale it up.

Let’s see How much revenue Do I need per employee? Okay, this is we actually had a podcast episode about this one not too long ago, actually, I guess, models year ago now. So now I think about it. So it’s, it’s, I guess it was a while ago. Look, bottom line is I am not a huge fan of rules of thumb. Say take rules of thumb with a grain of salt, I will still pass along some rules of thumb here in a moment.

But you need to be looking at your business and saying, okay, is it generating the kind of income that I need? Is it profit margins feel healthy to me? Does it feel sustainable? Is it scalable? You know, all of those things that you need to look at. Look, the the, the rules of thumb were built in days when agency businesses were a lot more homogenous across the board. So agencies really were they different in who their clients were and who their talent was, but there wasn’t as much differentiation as there is Today, particularly as the lines between PR marketing, advertising, all blur, everybody’s got their fingers in every everyone else’s pie. You’ve got a lot more of a mix between full time and part time employees and contractors and some contracting agencies and vendors, and there’s so many different permutations.

So if you look at some of the large listings of, of agencies and how much money they generate, whether that’s PR week or O’Dwyers, or those sorts of things, you will see a huge variation in the revenue per employee. And that doesn’t necessarily mean that because someone’s got a higher average revenue per employee, that they are a much better business, it just may mean that they are differently structured, you know, and so, some folks try to fix this, if you will, by saying, okay, you know, instead of doing it by employee will do it by FTP. So we’ll try to estimate of that contracting workforce we have, you know, what does that equate employees. But that’s that’s an inexact science as well for all sorts of reasons. And all of those of you out there who are using contractors, you know that it’s difficult to paint them precisely as you know a certain number of employees because you know, you’re buying expertise you may be in some cases, you may not be contracting with just a freelancer, you may be contracting with a smaller agency or even a comparably sized agency that just helps you with particular things.

So in any event, the it but if you want some rules of thumb, rules of thumb are generally speaking, that you certainly wouldn’t want to see less than $100,000 a year in revenue per employee. Anything around 200 is very strong. If you start getting north of 200. You know, then you’re in a position where you’re probably either really profitable or you’ve got some kind of a unique business model to how you do things. And if you look at some of these ranking lists, You’ll see that there are some agencies that that actually go up three or $400,000 per employee. But that’s typically because they just have a very different business model, very different structure. You know, so you want to take a look at all these things.

You know, there are some geographic dependencies here as well, if I’m running an agency here in New  Hampshire versus one in Manhattan, you know, the salary structures tend to be pretty different in places like that. But overall cost structures. office space is very different. I can get an office here in New Hampshire for far less than I could get it in Manhattan. Trust me, I’ve done it. I’ve leased offices in Manhattan, and I could tell you, it is not cheap. And so you want to you really want to be thoughtful as How about how you’re looking at this and not get too hung up on comparing yourself against a certain benchmark because you’ll wrap yourself around the actual very quickly with very little positive result. So all right.

What are the best time tracking tools, what do I recommend? So I’m actually working on an article for the agency leadership website looking at some of the different options here, I will tell you that the one that I typically recommend is harvest. It’s the one that I use personally, in my own businesses, and have for a number of years now, generally pretty happy with it, it does a nice job of keeping it simple. while still giving me the data that I need. You know, it’s going to depend a bit on what kind of integrations you’re looking for with other software. What are you using for an accounting tool? Do you want to integrate or not? And there’s, there’s pros and cons to integrations integrations, they often sound nice in theory, but then you get down to the practice and it becomes more interesting, if you will.

The other thing to keep in mind with time tracking is whatever tool you use, you want to think about, not just the tool, but how are you structuring it so with harvest, I can set it up so that There is a gazillion different categories per client or project. And, you know, I can get really granular and I know some agency businesses that do this. And they really try to get into how much time is being spent on phone calls for this client, how much time is being spent on emails, how much time is being spent on creative work, or writing or all those kinds of things. And that’s fantastic.

But I will tell you that the more complex you make it, the more categories that you have, the less likely you are to get accurate information. And part of that’s because employees that you know, and, frankly, is an owner, you need to be doing these yourself, in part because you will see where the weaknesses in the system are. If you’re just demanding it of your employees, and you’re not doing it yourself, you will miss things you will assume that it’s easy to do. And in fact, if you’re doing it yourself, you say, Oh gosh, I can’t believe I have to, you know, check off all these boxes or drill down to this many choices in the pull down to get to where I want to go.

So you need to think about it. From a business perspective, what information are you actually going to use? How are you going to consume it? And how can you get that greatest level of accuracy? The accuracy comes from keeping it simple. You know, maybe you don’t break up every client by every individual project, it sort of depends on how you’re structured. And are the projects billed separately or not. You know, generally speaking, you want to tie the client projects to what you’re actually billing. So you know, if you are doing two big projects for one client, even if they’re ongoing, you may want to split those out so that you can track it accurately. And this goes back to the project budgets that you’re putting together. And let’s put a pin in that. And I’ll talk about project budgets here in just a minute, even though it wasn’t specifically asked but I think it’s important to this conversation.

And you need to think about you know what level of accuracy you’re looking for. So, you know, I typically encourage folks to track time in quarter hour increments You know, lawyers will do it in six minute increments. Some agencies pick that up as well. And so they try to get that granular. But the, the more specific you get, you get a greater illusion of accuracy, but not the reality of it. Really, the key is to try to get folks to input their data in as timely fashion as possible. Most of these tools have automatic time, stop watches built in that you click start doing tasks, click stop recording automatically. Almost nobody uses that most people just manually enter their time.

And of course, you also have to keep in mind that it’s part of your job as the agency owner to be educating folks about why it’s important to be tracking time. Generally speaking, people see this is just big brother, you’re just coming into to try to spy on them and see what they’re doing because you’re afraid they’re playing solitaire or I guess probably fortnight or something these days. Probably Solitaire is not nearly as popular as it was when I was a young Possibly. But in any case, I digress. You know, so you need to be explaining that the the benefit of time tracking is really, it’s for the business, but it’s for them too, because you can see, you know, what’s getting them stuck, you know, where can you get them additional training, maybe additional resources? At what point do you need to push back on a client and say, we’re over delivering, we’re over servicing here, we need to right size this project?

How can you take some of that, that burden and pressure off of the individual employee and time tracking is a really good way to give you the information that you need to do that reliably. It also helps you figure out when you need to hire new folks. So you know, explain that to your team and explain that, you know, as you’re looking at utilization and as you’re looking at time tracking. This is all to really benefit not just the big business but also their individual situation so they have an incentive to report their time and report it accurately and That’s where you also get into the challenge of being, you need to be very careful about what you demand of your employees as far as things like saying, okay, you need to spend 80% of your time or 90% of your time on client service. Or, you know, you can’t spend more than 10 hours a week on this client, or I expect you to spend at least three hours per week on this project, or whatever.

And these are all things that look, I’ve done it too, it’s very common. It’s a typical management structure, technique. But if you if you’re doing that, and if you’re, if you’re painting the picture on that way, oftentimes the data will start to fulfill whatever that obligation is, right. So and I think back to my days as a junior account executive at an agency many, many years ago, and we had some of those rules in place. And so we had, we had a very big client and we were told, okay, you can’t spend more than X number of hours of week hours a week on this particular client. And so the the project team, we would sit there, and at the end of the week, we would make sure that we didn’t report more than that number of hours because we knew, if we did, we would get chewed out. So they weren’t going to push back on the client, they’re going to tell us we needed to be more efficient.

At the same time, if we just stopped work, we would have a really ticked off client and we were the ones who heard from the client day to day, so we weren’t going to do that. And so we tried to find a way where we could thread that needle and be as honest as we could on our time sheets while still delivering the client what they wanted so that we could keep them happy. Similarly, you know, if we’re told, okay, you need to spend a certain number hours a week on business development or marketing or something like some internal function, that’s always the kind of thing that tends to fall by the wayside. When, you know, when things are happening on the client side. So, you know, maybe I record some time that I didn’t spend working on those things. You’re or maybe I you know, cross count things. You know, maybe there’s Something that I should really count as professional development. But I counted it as business development, because that’s really where the priority is from an agency leadership perspective.

So you really need to think about what messages you’re sending in order to get the most accurate information possible. The bottom line is you need to be doing time tracking, you need to try to get as accurate as possible. Talent costs. Employee costs are the biggest expense for just about every agency. And if it’s not your biggest expense, you’re probably a quasi agency, you’re probably in another line of business in addition to the professional services work that you’re doing. So if you’re not going to be really figuring out how that investment in people is being spent, you’re not going to be able to generate the kind of profit margins that you need to be a growing, thriving business.

And as I said, I wanted to just spend a moment on project budgets because of this question, and you’re your time tracking feeds your project budgets gets used historical information helps you build project budgets for new clients new projects. But it also feeds the evaluation on a monthly basis, and a quarterly basis and an annual basis of the work that you’re doing for your clients. So you can figure out are you over servicing? Are you under servicing? Are you generating the kinds of gross profit margins that you need in order to be successful? What lessons you’re learning for future pricing, future scoping. And so that that time tracking is just is critically important to the project budgeting component.

And project budgeting is really the core of your profitability. So every agency that I know of goes through some sort of an annual budget plan or forecasting or projections or whatever you want to call it. At but if they’re if they’re not building that on the individual building blocks of the clients and project budgets that they have, they’re not really building something that’s reliable. They’re really just, you know, throwing a dart at the wall and coming up with some estimates, those project budgets are the lifeblood of a profitable agency. So you need to do them correctly.

Once you get a format that works for you, and you’ve got a process in place to work with it, you want to make sure that you’re sharing the information with your individual project managers. Don’t hoard all the financial information just in the the owners office, you need to make sure that you’re parceling out the appropriate information to those project managers, the people who are running the client business on a day to day basis so that they know what their targets are can can work against them and use that information to manage resources appropriately.

So, you know, be be really considerate of the project budgeting process. And this is something where I there’s a free download on agency leadership calm of a guide to doing project budgeting, it’s got a lot of things in there you might be overlooking, in your current project budgets. The one that that I see quite often when I’m working with clients is they forget to include travel costs in there and with more and more Agencies not working just with clients that are a cab ride away or a car ride away. And places where you have to take a train or a plane or what have you, you need to make sure that you’re factoring in those meeting costs, because that can make a huge difference, particularly for small to midsize agencies where, you know, if you’ve got a client that’s, you know, providing, you know, 50 or $100,000 a year of business, and you go to visit them two or three times a year and you take a couple of people with you, look, all of a sudden now you’re you’re spending 510 percent, maybe even more of the annual revenue just on those travel costs for maintaining the relationship.

So you need to be tracking that and, and you can put some of that off as a biz dev expense, but be careful about that. Because it’s in my experience in working with agency businesses is a lot of expenses get buried in bizdev because you never feel guilty about spending on growing the business. So it’s a it’s a good place to today. expenses that you’re, you don’t want to talk about. And so you just need to make sure that that anything you put in biz dev is a legitimate legitimate business development expenses really going to lead to new revenue, and not just related to servicing existing business.

So all right, let’s see. Let me try to scan this question. Okay. Alright, so this is, this is from an agency owner who is in the process of redoing their website. So first kudos. There. You know, a lot of agencies don’t spend enough time thinking about their own presence spend all the time thinking about clients, and it is important to spend time on your own as an agency but the, it looks like the real nut of this question is should I post my pricing on the website, so Okay, so this is, this is one of those things that I would say goes into the fairly controversial space. And if you talk to a bunch of different agency consultants, you’ll probably get a bunch of different answers.

On this, I will tell you my perspective on publishing your, your pricing on your website. So I think it is at a minimum helpful to give some idea to prospects on your website, what it is that you cost. And so you know, whether that saying, you know, our engagements start with an investment of $5,000 a month, or 20 $500 a month or whatever, or a typical project like this costs between 10 and $30,000, or whatever, you know, whatever makes sense for the kind of business that you’re doing, and the kind of way that you’re framing your agency’s offering.

But I think it is helpful to have some sort of financial information on the site to give some guidance and there’s two reasons for this. The first one and the one that most people think of is because it’s scary. Way bad prospects at certainly can do that. So you know, if you say, Okay, my minimum monthly engagement is $5,000. If I’ve got someone who’s got a $500 budget, you know, they’re just they’re going to walk away. And so we’re not going to have to spend the time talking about that I could be spending with someone who’s more and more legitimate prospect. And I will say, in general, I’m not a big fan of scaring people off because you never know where a conversation is going to lead. And again, I know this is an area where there, I have a difference of opinion with a lot of other advisors, not just in the agency space, but elsewhere.

I’m a big fan of pick your brain type meetings or opportunities to, to meet with, you know, whether it’s someone who’s maybe there are prospective clients day, but maybe they will be when their business grows down the road in a few years. Or maybe they know somebody, you know, maybe I’ll just learn something new. I very rarely take a meeting with someone who’s a prospect or someone who’s asked to pick my brain and say, oh god, that was just a total waste. My time doesn’t happen, yes, but more often than not, I will tell you, I get something useful out of it. So but, you know, nevertheless, there still is value in posting that pricing so that, you know, someone who is not willing to invest that at least comes into any conversation they might have with a, with a clear understanding.

But the second reason is because in a lot of cases, you’ll find that prospects and clients think you’re a lot more expensive than you are. And, and this is often because, you know, they’ve maybe heard pricing from some of the big holding company agencies or, you know, they’ve, you know, they just they don’t have they’ve seen media coverage, talking about, you know, what, some big business paid an agency, you know, who knows why, but they often have an inflated idea of what the cost is.

So, you have you really have prospects at both ends of the spectrum, those who think, you know, well, I, you know, I’ll pay you $500 a month to get me in the Wall Street Journal. And then you’ve got those who You know, assuming that you must be charging at least $50,000 a month. And this is something we need to be particularly careful about, particularly as small to mid sized agencies try to look bigger. And it’s so much easier to do today, with the technology that’s out there people looking at your website, you know, a lot of you are probably listening folks on your website, who maybe are contractors, those sorts of things, you look very impressive to prospects, but you also look a lot bigger and therefore perhaps more expensive.

So, you know, if you say, you know, hey, my minimum investment is $5,000 a month, well, for some prospects, that’s going to be high, and they’ll take themselves out of contention for your, for hiring you. But you’ll also have people who will look at that and say, oh, wow, you know, I can afford that. So I’m a big fan of at least putting some kind of a guidance, whether that’s minimums or ranges, or typical numbers or things like that. I think that can be very helpful. Now, the other thing I will say to you is that most of you probably have typical engagements. So, a lot of times, I will take a look at client rosters for my clients or for other agencies that I’m talking with. And I will look and most of them fall into, you know, just two or three different bands, there’s usually not a ton of variation within the individual agencies, as far as what’s being charged. So, a lot of of agencies even though, you know, I’ve done this as well, you know, you talk about, you know, we’re creating customized solutions, and we’re putting all together and but at the end of the day, they tend to fall into, you know, just those two or three typical bands.

And so if that’s what you’re doing, there is some benefit to thinking about whether you frame something as a product offering, instead of just a straight negotiated service cost. I’m not as enthusiastic about that. I think it can work. But I think you have to be careful because if you if you are an agent See, and you’re particularly if you’re trying to get premium pricing and which you, by the way ought to be trying to do if you’re in that position. And you’re not running just a business based on on trying to get as much volume as you can turn and burn, if you will, that I think that listings from specific product type pricing on your website, where it looks more like a restaurant menu or a subscription service or something like that, there are potential benefits to it.

But you just need to be careful because that may be off putting to the kinds of clients that you’re looking for. So really, anytime you’re talking about your marketing materials, whether that’s your website content or whether you put pricing on it, you need to put yourselves in the shoes of your prospective clients and say how will they see it? And so this The other thing you want to be thinking about when you’re thinking about redesigning your website is making sure that you are speaking to prospects in the language That they use. And, you know, particularly these days where, you know, a lot of agencies are kind of differentiate themselves to stand out, it’s much more common that you’ll go to their sites and they will be using. I won’t say highbrow, but but but they will be using very sophisticated language that may not match exactly the language that their prospective clients will use. S

o, you know, you may be out on a mission to reframe how we describe some aspect of what we do as public relations and marketing folks. But you also need to be thoughtful about the fact that when someone comes to your website, they want a certain kind of service or certain kind of outcome. And if you’re not speaking to them in those terms, they may get turned off, and they may go elsewhere. So just be you know, be really thinking about that and make sure that you’ve got a good match in all of the the marketing materials that you’re doing, but particularly on your website, which also by the way will have an impact on on SEO. You know, people search for things and in Google shocking, right? But they will make sure that you’re speaking in the terms that they would would put in there if they’re looking for an agency like yours in a place like where you are, if they’re looking for geographically or if they’re looking for it with an industry specialty or that sort of thing. So anyway, just be very mindful of that whenever you’re creating the the marketing content for your own business, and I’m sure you’re probably already doing this when you think about, you know, the press releases that you’re putting together or the blog content or all the different things that you’re creating for your own clients. Just make sure you’re thinking about it for yourself, as well.

Alright, so probably can get in at least one more. question here. I’ve got two or three here. Let me see which ones that are ones that would be most likely Alright, so let’s go. Okay, so this is a good one. So this is, and this actually builds a little bit on what I talked about before. So maybe I can answer this one quickly and then get at least another one on top of this in, I like to try to get as many questions answered during this time as I can.

And this is, how do I set my annual budget? How do I accurately forecast revenue?

And so I already talked about this a little bit when I was talking about time tracking project budgeting earlier. But since you know, since we are in that budget season, and everybody’s thinking about 2020, and Hey, guys, Isn’t it fun that we get to think about 2024 site for change instead of hindsight? Yeah, but I’m not going to be a stand up comic, sorry, as best I can do.

But anyway, as we look ahead to 2020 most of my clients right now are going through budget planning processes, and I’m helping them with it as it as I said before, it’s working with the building blocks. So you should start by putting Together the take a look at your, what you think you’re going to have revenue. Next year you start with your existing clients figure out okay, you know, here’s what I have for retainer business or here’s, you know, the kinds of clients that I have who come back regularly for project work. And so start plugging them in. Pro tip here, please do not put in 100% client retention doesn’t happen for most agencies, chances are, you’re going to lose a client or two along the way next year.

And I be particularly conservative next year since the you know, I think most people would tend to say there’s the likelihood of some sort of economic challenge next year, whether we call it a recession or not, who knows but, you know, so you do be thoughtful about that. And so you start with that band of your your known business, the people that you can name by name, and say these are the folks who are currently being serviced by me there, you know, maybe in the pipeline that I’ve got a good chance of Closing, I’ve got a verbal command, or, you know, maybe they’ve signed up, but they’re just not starting until January one or, you know, so the revenue that you are likely to have booked. Now you need to look at the business development piece. And be be realistic here, you know, it, it does, you know, good to say that you’re going to double your revenue next year, if you can’t figure out, you know, what that means, from a block by block client by client, month by month perspective.

And so, for example, so, you know, I was looking at an agency budget about a year or so ago, and they were, they had a very significant projection for top line increase. And they said, Okay, well, you know, we’re, we can do this because we’re going to add 10 new clients next year, and on the face of it, okay, that, you know, it didn’t sound unreasonable. You know, they walked through why they could get 10 new clients and, you know, what their average client spend was, and so you looked at that, you know, Okay, well, those two numbers do match, except it assumed that they were all signed and billing on January one. And so that’s where it fell apart. So when you’re putting together these budget projections, don’t do it just as an annual budget, really do it month by month.

And you need to look not just at the revenue piece, but you also need to look at what’s the associated cost of that business. And I mean, the cost of acquiring that business. So if you’re projecting a large spike in your revenue, that means you’ve probably you’re probably going to have a significant investment in business development, whether that’s by taking away time from yourself and other members of your team who might be doing client service and redirecting it or by actually hiring additional resources or vendors or those kinds of things in order to acquire those those new clients.

But then you need to look because in the agency business, most of our clients are heavily front loaded from risk. Source perspective, chances are you’re spending more time with your clients in those first few months as you’re building the relationship, as you’re learning about them, that you will in later months, so you’re, you have sort of that, that bubble or that that slug in the line of expense upfront, often with a lag in the revenue. So you also want to be doing with your accounting team doing some cash flow projections to make sure that your rate of growth is is sustainable. You know, from a standpoint of, you know, how many folks do you need to hire and all that, you know, can you realistically bring that number of bodies on and train them and get them up to speed, but also just you have the cash to front to do those things. Assuming that you’re going to have those upfront costs with onboarding which most agencies have.

And so you need to be thinking about that and planning for that to make sure that your your whole plan is realistic, and not just the numbers that you end up with in December. of 2020. So, you know, really, from a budget standpoint, really just build it piece by piece. You want to take a look at your particular your projections on staffing, that’s an area where you can really get into trouble because it’s very difficult as an agency to add a lot of percentage basis, a lot of new client work. It unless you have excess staff capacity, most of us don’t want to have a lot of excess staff capacity, because then you’re paying people in advance of work, you really need to there’s a happy balance to be achieved there.

You never really want to be at 100% utilization because you can’t add clients reasonably at that point. You also don’t want to be at 50% utilization because then you’ve got a real gap and you’re, you’re paying for a lot of unused or underutilized time. So, but if you’re if you’re doing this on a building block perspective, we You really drill in and you look month by month for each of the, the expenses that you have, the picture will start to become a lot more clear. And you’ll be able to test your assumptions. And, and you’ll look and you’ll say, Okay, well, you know, is it really realistic that I get five new clients in q1? Maybe but, you know, unless you’ve got a really fat pipeline right now, and a lot of folks close to closing, the odds that you’re actually putting new revenue on the books in q1, are pretty small.

And certainly, you know, at this point, you know, we’re mid October, as we’re doing this, and so you’re so what, 10 weeks or so out from the end of the year. If you don’t know of somebody right now, that’s likely to close, you’re probably not going to have January one revenue from new business. Is it possible? Yes. But the reality is that most agency businesses take more than 10 weeks from first contact to close. So you need to look at your existing pipeline and figure out how long does it typically take you Move someone through your sales process. You know, when do they typically start? What does the project look like from expense perspective? What does the revenue going to look like? And as you pull all that information together, then you’ll have a pretty accurate budget for the year.

And it’s your need to continue to update it most small to mid sized agency businesses, you know, need to make adjustments to their forecasts over the course of the year. The reality is we are not publicly traded companies, we’re not out there with certain targets that we have to hit by the end of q1, otherwise, the markets are going to implode and, and tarnish our stock price and all that kind of stuff. So, you know, we need to be realistic. And really, as we’re, you know, I think it’s helpful to think of it as a forecast more so than a budget. Budget sort of suggests. You know, this is this is set in stone.

There’s also a habit when you talk about budgets, so think okay, well, I put this From the expense side so I definitely can spend it, you really need to be thinking more in terms of forecasting so that you’re making the necessary adjustments over the course of the year. So certainly on a quarterly basis, you should be reviewing the numbers seeing where they are seeing what adjustments you need to make, maybe you’ve you know, maybe you’re running ahead of schedule on on biz dev and generating more revenue.

So now you need to look at you know, maybe making some of the investments sooner than you had thought particularly in staffing to make sure that you’re meeting the needs just you know, be thoughtful about it and and have a plan because it’s you start to get into trouble when you you get buried in the day to day and you’re drinking out of the fire hose and you’re you know you’re fielding incoming fire from clients on one side prospects on another and employees here and then you got your family commitments to and, and it really can be complicated. If you don’t just say timeout, I need to take a look at things I need to figure out where we’re headed from here.

And as I look at the clock, and Fortunate where we’re headed from here is the end of this Ask Chip Anything session.

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The Hosts

Chip Griffin is the founder of the Small Agency Growth Alliance (SAGA) where he helps PR & marketing agency owners build the businesses that they want to own. He brings more than two decades of experience as an agency executive and entrepreneur to share the wisdom of his success and lessons of his failures. Follow him on Twitter at @ChipGriffin.

 

Gini Dietrich is the founder and CEO of Arment Dietrich, an integrated marketing communications firm. She is the author of Spin Sucks, the lead blogger at Spin Sucks, and the host of Spin Sucks the podcast. She also is co-author of Marketing in the Round and co-host of Inside PR. Follow her on Twitter at @GiniDietrich.

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