A start-up client asked me the other day: “As a fellow SME operator, what do you look for in your agency figures?”
The first response of those in the creative industry, famous for promoting people into positions of senior management who have no financial training or grounding, would be: “Ask my Financial Director!”
Particularly as creative agencies operate in a slightly unusual way, versus your average business, as they are so reliant on a mixture of both retained client and project clients. But, on reflection, there are certain things you learn to look for when you have the agency profit and loss spreadsheet in front of you, so here’s a bluffer’s guide on how to keep an eye on your agency finances.
Think across years
Don’t just look at this year’s P&L, keep flicking back to compare it to last year’s. There is no point looking at your agency’s profitability in isolation a year at a time, especially as a priority is to check on the volatility of the profits. This will reveal if you are growing a business on sure footings, by showing if sales figures are rising over the years, and if the profit margin is getting better or worse.
Factor in the tax man
You also need to take a quick glance at what effect tax or your company’s borrowings may have on your pre-tax profit, to avoid a shock if your bottom line ends up being a lot lower than expected. What you really want to sense is whether the business is making steady progress, and even hopefully flourishing, and that nothing unexpected (within your control) will affect profits or your own shareholder dividends.
Look at service areas
The P&L also allows you to look at how many sales have been achieved and how profitable you are, per each of your services (everything from creative department, to planning, to digital build). This isn’t just interesting to the curious MD, but actually allows you to get a hint about where you may want to put the emphasis of your investment or focus for the year ahead.
Look at the competition
You have to keep an eye on your competitors; for example, when their topline figures are shown in industry publications’ ranking tables. Look carefully, for if their P&L figures are wildly different to your own, even though they are a similar size agency, it may be an indicator that you should be performing more profitably or spreading your risk across a wider client base.
Watch the flow
Any company owner should be making sure that they are not looking at nicely accelerating P&L figures whilst cashflow goes in the opposite direction. Sometimes cashflow may be going south due to sensibly extending credit to certain clients, but nine times out of 10, a net cash outflow is the sign of trouble. This may only be mitigated if you are at least seeing a trend of the net cash outflow decelerating, rather than getting worse, as you come to the end of the financial year.
The feel at the coalface
However, even if you never intend to examine your agency’s P&L closely, factors indicating the health and growth of your business can be noticeable on the shop floor. Every agency employee can notice if the agency seems to be gaining more clients year-on-year (good), or just swapping one client for another and staying the same size (probably not so good).
Also, it could be a matter for concern if the company is not visibly innovating, or offering new or refreshed services at regular intervals. Something as simple as a raft of top talent choosing to leave the business in a short period can indicate something about the underlying financial health of the agency.
So while many agency side marketeers are not from a “figures” orientated background, they should not be put off. It is not that tricky, it is just about bringing the figures to life, as we are so used to doing with briefs for client campaigns. Of course, it is important to remember that the P&L only gives a part of the picture, and is best looked at in tandem with the balance sheet and cash-flow… and with a healthy dose of gut instinct, which us more creative types are great at.
(As published on The Drum on 14 August, 2014)