What To Do Today, This Week, This Month and This Quarter
It’s not easy running an inbound marketing agency. It's even harder running a more profitable agency. You have to build your own inbound marketing machine to generate leads, you have to close those leads, you have to work with clients, you have to hire, train your team and of course handle all the admin stuff that goes along with running a business. On any given week, you have to wear five of six different hats.
What typically gets lost in the mix is—profit. At the end of the month you sit down and go over the numbers. If you made any money, it’s not because you were proactive, it’s usually just the way it worked out. You got lucky. If you made money this month, it doesn’t mean you’ll make money next month. And don’t forget to pay yourselves. If you’re making money, but not taking a pay check, you’re not profitable.
This story is typical of most small businesses. It’s typical of most agencies. It’s typical of the owners I work with, but it doesn’t have to be like this. With a little planning and strategy, you can make sure your agency does between 10% and 20% net profit every single month. You can collect enough cash to weather a sales dip, economic downturn, or even give yourself a bonus after a few months. It just takes some planning.
Here are a handful of net profit improvements you can use to make inbound agency profitability a top priority at your agency today, later this week and at the end of the month.
Build A Budget
Depending on what article you read, between 20% and 50% of businesses under $5 million don’t have a budget. Even less manage their businesses based on that budget. But if you want to improve profitability this is the first step. This is something that’s going to take time. This isn’t a today tip, but it’s a this month tip and it’s the most important tip in the list.
To do this right, you’re going to have to get a list of everything you spent money on over the past few months. The big costs will be easy like payroll, your salary, rent, electric, etc. The smaller costs like subscriptions, office expenses (if you have them), UPS, might be a little tougher, but you need ALL your costs. Next plan those costs out over the rest of the year, or at least for the next few months. Some will be fixed month over month, others might change. Be as detailed oriented as possible, try not to miss anything. It’s better to overestimate than under estimate.
Sometimes it’s easier to start with this month or last month and work from there. Just make sure you don’t miss expenses that don’t come monthly, like some insurance expenses that come quarterly. Make sure you don’t miss those and make sure you’re including your own compensation. I’ve had agency owners tell me how profitable their agencies are only to find out they’re not getting paid. That’s not profitability.
Another area people forget to include is contractors, freelancers and 1099s. While these people are not your employees, they are people you must pay. The projected expenses for all your contractors should be budgeted for and projected. When agency owners tell me they have a 30% net profit margin, it’s usually because they’re not counting all the expenses properly.
Project Revenue
Once you have the expenses, now you need the revenue. This is usually easier in some ways but harder in others. Start with current customers. If you’re on retainers and your clients are happy this is easy, take what you’re getting paid this month and project it out into the future based on what you know about the client. Now add in any new revenue you’re projecting, either from new clients or from new projects at current clients.
If you’re not working with retainers and everything is project based, this gets more difficult. But the exercise is the same. Month by month, what do you expect from clients and prospects? Now that you know all your expenses and all your incomes, you can start looking at what’s left over and proactively managing the business to make sure it makes money month over month.
Set A Profit Goal
There are usually three scenarios that appear after you get both revenue and costs down on paper. First you realize the business has never been profitable, or you realize it’s been profitable but it’s not consistently profitable, it makes money one month but loses money the next, or its profitable but not at the level you expected.
Each of these three scenarios is fixable with a profit goal or target. If the business has been historically unprofitable, my suggestion would be to start with a very low goal of 2%. If the business is inconsistently profitable, I’d suggest working toward a 5% net profit, but making sure it comes in every single month. If the business is profitable but below expectations then I’d recommend setting a goal in the middle of industry averages for agencies, somewhere between 10% and 20%.
For a little more insight into this goal, some bigger and more traditional advertising agencies can be in the 20% to 25% net profit range. While most inbound agencies (which are typically more labor intensive) are more in the 5% to 10% range. I think a good goal would be 15%. If you could deliver 15% net profit consistently month over month for a year or two, you’d be considered top 10% of all agency owners, in the inbound space.
Eliminate Hidden Costs
Ok, so we’ve got a pretty good budget set up let’s start working it. First, go back through all those costs, one by one and see which ones are accurate, which ones can be eliminated or which ones can be trimmed. In a lot of cases, there might be items you’re paying for that you are paying for automatically, its hitting your credit card each month and has been for months, but you were unaware. If you don't need this anymore, cancel it. Make sure the subscription is at the right level. Don't overpay for services you don't need or use.
You might be overpaying for services that can be found for less money. Identify those, renegotiate or switch service providers. Insurance is a great place to start. Did you know you can actually attempt to renegotiate with your landlord? There might be six or seven areas in the expense side of your budget where you could save money. This simple exercise alone, could help you go from unprofitable to profitable.
Optimize Efficiencies On Your Team
This is going to take a little longer, but have bigger payoff. Your payroll and contractor expenses are going to be your biggest line items. It makes sense to start here if you’re trying to be more profitable. Look at all your people. Who is highly efficient? Who is working hard? Who is doing what? When you look closely, you might find two people in the same role, neither is working hard and neither is working efficiently. You might be able to have one amazing person in that role instead of two mediocre people. This type of insight is going to save you big money and have a major impact on profitability. I’m not even suggestion you fire someone, but perhaps move them to another area of the company that could use additional resources.
Manage The Business To Your Budget
One of the biggest improvements toward sustaining profitability is managing to your budget. Once you get a budget set up, you have to use it -- like a tool, to keep you on track. Want to hire a new graphic designer? Is it in the budget? Yes, great! No, sorry, I’d wait. Want to start offering more benefits or lunch on Friday for your crew? Is it in the budget?
The "is it in the budget" question is more about—do we have the revenue to support this additional expense? The conversation and the control is critical. If you’ve planned for it and if you can afford it—then the budget lets you know. It takes some of the emotion out of the equation and makes it easier to sustain profitability.
Work With An Expert
Finally, if you’re like me, then financial stuff is not at the top of your list of fun stuff to work on. If this sounds like you, then you need an expert. This could be your accountant, a part time CFO, or an in-house controller. It doesn’t matter what the role, it just matters that one of their responsibilities is to help you set up a budget, maintain that budget and manage to that budget.
They should also be helping you get to your goals and if one of your goals is 15% net profit then this person needs to play an important part in this process. They could be recommending places to cut or trim. They should be consulted before you make any major purchase or hiring decisions. They might also be able to help you look at efficiencies within your operation and resolve those as well.
Here's where they won’t be able to help you and where I see most agency owners go off the rails. They won’t be able to help you with revenue projections, they won’t be able to help you with lead generation, lead qualification or the quality of your leads. That’s where you come in and that’s why for years I’ve encouraged you to focus on your own marketing, your own sales and your own revenue generation models.
Because what I’ve learned about budgets over the past 14 years is that while they’re valuable, if you’re closing new clients, charging more for your services, and adding new revenue streams to your agency—managing the costs becomes quite easy. It’s only when the top line isn’t growing that controlling costs and managing your budget becomes your control mechanism to ensure profitability. You chose—grow the top line or manage the bottom line.
Start Today Tip – This isn’t going to be what you want to work on. But it’s one of those tasks you have to work on. If you don’t have a budget get one. Work with someone who can help if you feel completely overwhelmed by the idea of building it. It might cost you money to invest in the help, but it will pay off two or three times once it’s done. Then work with that same person to create the net profit model that fits your agency’s life cycle. You need a business that sustains profit month over month. Businesses that are not habitually profitable are called hobbies and they rarely last. Be proactive instead of reactive about this and you’ll be a much happier inbound agency owner.
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