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5 financial tips that lead to creative success

5 financial tips that lead to creative success Ed Lu

As an executive at an agency, your day might consist of:

  • Meetings with other members of the agency management team.

  • Numerous phone calls from several clients who want ideas, solutions, changes, and improvements to their campaigns.

  • Emails from the internal team about how the timelines are unrealistic and in jeopardy.

  • Sessions to onboard resources and freelancers so everyone understands the request and is on the same page.

  • Sparring with the creative team over the assignment's vision while trying not to disrupt the creative process. 

  • Learning new project scopes.  

Among all of the responsibilities, meetings, project delivery, and keeping clients happy, it turns out the agency isn't minting cash like everyone thought. This trend is permeating the industry and the profits that once were are now disappearing. 

This occurs more frequently in our industry than is necessary. It is a fate that agencies sometimes accept entering into client relationships rather than mismanaging what was supposed to be a profitable relationship. An abundance of agencies have commoditized their own talents, while the proliferation of client procurement departments questioning agency rates have contributed to battling for accounts that offer razor-thin margins -- and that's if the account is run mega-efficiently.

In a Kingston Smith Agency Model Survey completed by agency CEOs/CFOs, 89.5 percent reported margins are declining due to reduced fees. Presumably most agencies have their share of accounts that are financially healthy, but there are still less profits and cash than before. Here are some suggestions to stay ahead.

Invest in talent, not ego

It's not uncommon to hire hot young creatives or a new biz hotshot who has had some recent big profile wins. To get these players, agencies woo them with big paychecks, bonuses, and other perks. Sometimes this level of investment is justified, but paid client work still has to mostly cover the pay for these folks. Sometimes this talent is hired into "newly created positions." This is great -- if there is a "newly created stream of revenue," too.

Get paid for hard work

Check what a client pays for and the utilization rate of those members assigned to that client or project. One pitfall is giving employees more time than what the client is paying. Imagine if the nanny, car mechanic, or painter didn't charge for all the hours he or she worked. What luck! There are few feelings as gratifying as not being charged the full price. This is very plausible for an agency. Checking timesheets and hours can be uninspiring and time consuming, especially while working through a big client deadline, but it is important. Account team staff are judged on how happy the client is, not whether the client is somewhat happy but stayed within the hours of the retainer. 

Invest in your team, not client entertainment

Who in the advertising business doesn't enjoy flying first class, dining at hip restaurants, or sitting front row at sporting events? Many client/agency relationships are built or fostered in a social environment which fuels agency spending on entertaining clients with expensive meals and experiences. Outside of standard billable expenses, these costs add up quickly, especially if the account is under pressure. Instead invest in great resources which will push breakthrough work. Making your client contact look like a genius is a better way to endear yourself to the client than excessive spending. It's important to remember that as much as one likes their clients and vice-versa, client budgets are shrinking, and procurement's larger role is reducing spend and margin on the account. I like my landscaper, and I think he likes me too, but he hasn't taken me to any upscale restaurants or any World Series games.

Stick to budgets

This might seem like basic common sense, but protecting margins should be critical. Every dollar made in today's ad world is hard-earned and labor intensive, so no spending beyond means. It is critical to adhere to budgets and remember that once a dollar is spent, it can't be spent on something else. Collecting client payments is taking longer these days, whereas paying agency bills has not extended. For small privately held agencies, the primary or only solution is to be profitable. Publicly held agencies can rely on their parent company for cash infusions. Earlier this year, a well-known, long-standing NYC fashion agency shut its doors, and the apparent demise was out-of-control spending. The agency had several prized client brands, but mismanagement of spending abruptly and ultimately caused the agency to shut down. 

Build a stable of awesome resources

The recent movement of clients switching from retainers to projects has put pressure on how an agency staffs itself. In the same Kingston Smith Agency Model Survey, 61 percent of agencies acknowledged they are trending towards hiring more freelance than full-time employees. Given the sporadic nature of when projects start and finish, along with the unpredictable infrequency of ad hoc requests, having full-time employees may be diluting profitability. Freelancers allow an agency to ramp up staffing when needed, unlike an employee who is a sunk cost and possibly not just underutilized, but not utilized at all. The result is a recurring cost every month, but with little to no revenue. Referring to the aforementioned landscaper, imagine if he was paid a fixed amount every two weeks, whether or not he mowed the lawn or trimmed any hedges.

Earning profits in an advertising agency is becoming more challenging. Every dollar an agency earns should be coveted. Agency cash can evaporate quickly without a big event or much fanfare. The above silent killers can easily sneak up and consume an agency's cash. Agency life has its highs and lows, and many of the highs come from the cash that an agency earns. How much cash an agency has or invests in its team can correlate with the happiness of the team. The happier the team, the more likely they'll produce better work for their clients. In other words, more agency savings results in a well-adjusted team doing great client work.

Ed Lu is VP, finance at Questus

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"Man putting coin in piggy bank" image via iStock.

Ed Lu is the VP of Finance at Questus, a revolutionary advertising agency with offices in New York City and San Francisco. You can contact Ed at [email protected]  Questus is leading the advertising revolution. Technology and connectivity...

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