Do you know the current health of your creative agency? Do you know who are your most profitable clients? Can you accurately predict how much cash you’ll have on hand in 10 weeks?
Most agency owners would struggle to answer all these questions. But there is one person who can give you the answers: your accountant.
Whether you have an in-house or outsourced accountant, they can provide you with detailed financial reports that can give you more clarity on the financial health of your agency. Here are my recommendations for reports that your accountant should be able to give you each month:
5 Crucial Questions You Need to Ask About Your Agency
1. How much money did I make this month?
At first glance, this can seem like an easy question to answer; after all, isn’t that what a P&L report is for? But the answer is more complicated for creative agencies, depending on the accounting system you use.
Many creative agencies rely on accrual-based accounting, which recognizes revenue when the work is performed, regardless of when the cash is paid by the client. This works really well for project-based creative agencies, when the work is spread out over a few months but is paid upfront.
For creative agencies with accrual accounting, the bottom-line number of how much money you made is a number your accountant can and should provide to you each month. By following this number over the course of a few months, you can see the trends in your agency’s financial health and know if your business is actually profitable.
2. What are the trends?
A trend is nothing more than looking at something over a period of time. Watching financial trends in your business can be good markers of underlying or unseen changes occurring and can help you make better financial decisions for your agency.
There are several financial trends that you will want to be following: change in revenue month-over-month and change in expenses month-over-month. To make trends even more valuable, you can look at the ratios between trends: how is my percentage of profit compared to revenue changing over time?
For example, say a creative agency sees 20% of revenue become profit one month, and then that number is 15% the next month. This would indicate a change in your business that is worth looking at.
3. Who are my most and least profitable clients?
Knowing the most and least profitable clients is powerful information for any creative agency owner to know, yet most don’t have it figured out. The reason: figuring this out involves implementing several systems throughout your agency:
- Accrual-based Revenue Tracking – You need to recognize revenue over the length of the project.
- Time Tracking – You employees need to measure how much time they spent working on a client’s project, so you can measure team costs.
- Expenses – If any expenses are coming through your business – like hiring subcontractors/freelancers, software, or buying media – you need to have these encoded in your accounting system, so they get tagged to a specific client.
Once you have these systems in place, your accountant can use this information and show you who are the most and least profitable clients. As an agency owner, you can use this information to know where your money is coming from, what types of clients to keep and find more of, and what clients you may want to send to the agency down the street. Essentially, this info helps you make more detailed decisions about your business.
4. How much cash will I have in 10 weeks?
It is rare for an agency owner to have a good handle on their cash flow how much cash their business will have in 10 weeks. That’s because it is tough to predict and requires the proper system in place to project cash flow in your agency. Once you have this report in place, it is extremely valuable in making decisions for today.
The key to cash flow is that it’s not the same as profit. Your monthly profit report may not indicate the cash in your business at that moment. As your business grows, figuring out your cash flow gets exponentially more complicated.
The reason we recommend knowing cash flow 10 weeks from now is so you can prepare for a cash crunch. Knowing that your business is going to be short on cash is a stressful situation, but if you get a 10-week advanced warning, it can give you more time to plan and prepare for it.
If you are in the enviable situation of having excess cash, having advanced knowledge can help you manage it well. You can pull it out of the business and invest it or invest it within the business.
Accurately predicting cash flow in your agency can give you clarity in the financial health of your business and allow you to make better, more informed business decisions.
5. How much is my business worth?
This is a less obvious question to be asking your accountant, especially if you are not ready to sell your business. However, your accountant can give you a general idea of how much your business is worth, which can help you better understand your agency’s overall financial health and profitability.
A full valuation of your business is expensive, takes a lot of time, and will not be worth it for you if you are not prepared to sell your agency yet. But there are general rules that can approximate a company’s valuation. A good ballpark for many creative agencies is 1x or .75x annual revenue.
By establishing a consistent way of measuring that value and tracking it month over month, you will gain a clearer picture of your business and if it is becoming more valuable or not. This can help you track whether the steps you are taking today are making your business more valuable.
Gain Financial Clarity of Your Agency
As a creative agency owner, you can always use more clarity on your company’s financial health. If your agency accountant can answer these questions for you on a monthly basis, you will gain greater financial clarity and make more informed business decisions.