How agency profits can lead to revolutionary work

The goal of small agency owners is to turn their clients' brands into household names. These same agency owners should look at running their business like a household. Small agency owners brew creativity and are big idea people with great vision. They dream up original concepts, express themselves in unique ways, and bring to life many amazing ideas. However, small agency owners are often not prepared or interested in dealing with agency finances but they should not underestimate its value.

Dollars and sense

If small agencies exercised a little financial prudence, it would be easier to meet business demands, have the financial backing to take occasional risks, and pursue the accounts or projects wanted. In addition, hiring valued creative talent would produce ease knowing the company is financially solid.

Financial diligence might be boring or intimidating, but implementing some basic guidelines could go a long way to ensure an agency's future health so that owners can focus on their passion in the business: make award-winning ad campaigns, craft break through strategies, and develop a vision for clients' brands. These lessons easily apply to shops that have 10 or fewer employees but they can translate to bigger shops too.

Take stock of your house

If you don't know your means then you won't know what you can afford. Try this: Think of your shop as a household. You have several costs in running a household: rent, utilities, water, transportation, tuition, housekeeping, etc. The incoming has to be greater than the outgoing or you will eventually deplete your savings. Your business is precisely the same model. Big companies can sell stock or draw on one of many credit lines, but you as a small agency owner have one stream of funding to pay bills and invest in future endeavors: operating income.

It's simple Finance 101. If cash is continually going one way -- in the "out" direction -- you'll eventually go broke. It isn't rocket science but many agency owners light up when the household analogy is presented to them. Thinking of your shop as a household will help you make sound judgments when it comes to financial decision making.

Get financial leadership

Small shops often do not carry a large amount of overhead, including an experienced CFO. However, a super senior financial person isn't always necessary. Most agencies would be well served with a mid-level finance or business manager who can provide basic insight and a few key ratios to to build a foundation of stability.

Building a foundation of financial responsibility will enable small agencies to conduct themselves in prudent ways. Find someone who can keep the books clean, give a projection of future income streams and make suggestions to cut unnecessary expenses. It's worth the extra headcount to get at least one person on the team who can balance a checkbook and manage profitability. It can certainly help you when it comes to pricing out your services and how many people to employ. Perhaps the biggest benefit is that it will allow you as the principal to focus on the things you're most talented at rather than scratching at accounting or administrative tasks.

How many hours have you spent trying to run the business rather than drive your client work? That said, you should always be cognizant of business issues and lead important business decisions. Open and direct communication between the owners and a trusted finance colleague is vital.

The price is right

A lot of times, agency folks get a puzzled look on their faces when I ask them about pricing. Often times "What do you charge?" is met with random responses not built from anything specific. They don't always understand the why behind prices and rates.

Agency work is about pleasing clients -- sometimes at all costs -- which is noble, but the downside of giving your work away is that you will set a dangerous precedent. Either you will struggle to be profitable or you will be known as the low cost provider. You need to charge for your work -- at every level of service. Good agencies get paid for work and the great ones get it handsomely. Financially healthy agencies' profits can fund innovation, employee incentives, or some other activity that can drive your business. It won't benefit your client if you deliver great creative or client service but are shuttering your doors a few months later. Find someone who can help you determine the appropriate pricing given your costs and income targets and be sure to charge that rate.

Basic concepts can change the fate of small agencies and build a sustaining profitable environment. I have great respect for small agency owners that work too hard and risk too much personally not to take a little time and investment to seek out financial wisdom. Great ideas and great relationships alone may be good enough to survive, but add to that a few savvy finance ABCs and these agencies could persist and thrive to be robust employers.

Ed Lu is the Finance Director at Questus.

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