Looking to improve agency margins and profitability? Which key metrics are important to track? Are you paying yourself a salary? How much cash should you have in reserve? If you’re hoping to sell soon, you shouldn’t underestimate the importance of starting to pay yourself a salary. Potential buyers will pay attention to this and many other details you could start to work on right now. Today’s guest owns a CPA firm focused on helping agency owners scale by getting their finances in order and avoiding the biggest mistakes in agency finances.
Chris Hervochon runs Better Way CPA, a CPA firm that specializes in virtual CFO services for agencies. Over the past eight years, his company has provided services to marketing agencies and nonprofits all over the US. He provides some insight into the key metrics you should be measuring, why you should pay attention to your gross margin, and more.
In this interview, we’ll discuss:
Avoid the biggest mistake in agency finances. How to increase your margins. Why you should pay yourself a salary. Key metrics to manage agency cash flow. Subscribe Apple | Spotify | iHeart Radio | Stitcher | Radio FM
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The Biggest Mistake in Agency Finances The biggest and most common mistake Chris sees agency owners make with their finances has to do with cash management. Usually, they fail to understand how cash moves in and out of the agency. Also, how it’ll move into and out of the agency in the future. This is critical because it’s how you can really understand how to grow in the future.
As an owner, you must understand the way cash moves within the agency impacts clients, the work you do for them, and how you collect payments. This impact the people you pay to work for the agency. All of this helps you get a clearer vision of how you’re going to scale and bring in the next client.
Pay Attention to These Key Metrics Profitability. When it comes to profitability, you need to be over 15% or 20% to be good. 15% or less is when the alarm starts ringing and you need to pull some levers to figure out what’s going on. Net income. If you’re using some sort of accounting software and looking at P&L, net income is your bottom line. Gross margin. This varies wildly across agencies because every agency operates so differently. In this particular case, measure yourself against yourself and track that over time. Make sure you’re maintaining or increasing margins over time. Cash reserves. Every business should set aside cash reserves to fund growth. They help pay for unexpected costs that occur throughout the year, and they're often kept in your business account. Pipeline. Make sure to have a process to measure your pipeline. This bleeds into your forecast and indicates what roles you need to hire, when, as well as who you need to fire and when. Why You Need to Pay Attention to Gross Margin Gross margin is your revenue minus variable expenses (cost of sales). This is the percentage of revenue you can keep in order to pay fixed expenses and then pay yourself. In short, the costs you’re going to incur every time you generate a dollar.
If your margins are very low, it's hard to pay for fixed expenses needed to operate the agency and deliver your services. If you don’t have enough money to pay your team, for example, you might start making bad decisions, like cutting staff, expenses, and software. At that point, you don’t even have enough to pay yourself as agency owner, which is definitely a problem.
This is why you need to pay attention to margins and make sure you have enough money every time you generate a dollar of revenue to pay those expenses. In the end, having revenue is