Presentation - Financial Benchmarks in Digital Agencies
PRESENTATION: 51:06 mins
AUTHOR: Paul Barnes, MAP
In this GYDA Expert Seminar, Paul Barnes of MAP shares his insight into the key financial metrics that he believes agencies should focus on.
Whilst every agency is unique and should develop their own tailored business plan that meets it's own vision and ambition, there are some key metrics that every agency should pay attention to. Paul explains not just what good performance looks like, but how to track and improve in these key areas.
Take the MAP Financial Maturity Scorecard here.
Transcription:
Paul Barnes 00:01
In this guide, a master class for bonds with Paul shares his insights into the key financial metrics that he believes agencies should focus on. Whilst every agency is unique, and should develop their own tailored business plan that meets some vision and ambition, there are some key metrics that every agency should pay attention to. Paul will explain not just what good looks like, but how to track and improve in these key areas.
Paul Barnes 00:29
Hello, and welcome to GYDA Talks. And today, I am absolutely delighted to have with me Mr. Paul Barnes from a MAP and Paul is going to talk about a subject that he and I have argued and debated about many, many times, which is about financial benchmarks for digital agencies, what are they? Are they good? Are they bad? How do you use and how do you make them happen? How do you actually make this thing happen? And the way we're going to run this is we're going to have about 25-30 minutes of presentation from Paul, if you've got any questions, you can pop them into the chat. And Paul will either take them as we go along, or we will take them at the end depending on whether they're relevant. And then we'll have like 20 minutes of q&a after that. So we will, the whole thing start to finish will be about 30 plus 20, about 15 minutes. So without further ado, if you're watching if you could be and and you're watching live, it'd be so kinda make sure you are on mute. We'd love to see your faces. And let me hand over to the wonderful Paul from Map. Hello to you, Paul.
Paul Barnes 01:36
Hello, Robert. Thank you for having me.
Paul Barnes 01:37
It's an absolute pleasure. We're really looking forward to this.
Paul Barnes 01:40
Hi, everyone. Thanks for joining us today. So for those you don't know me, I'm Paul in the managing director of Map. I've spent 14 years in the accounting and finance industry, and the last eight years of which as being fully focused on digital agencies. So we run an accountancy firm based in Manchester, but we actually provide a full outsourced finance function specifically for digital agencies. So we've worked with about 250 agencies over the last eight years UK best the UK based have predominantly been UK based. And we do what we call finance partnering. So we actually work closely with our clients on the internal operational finance elements of their agency, not just the compliance stuff that you'd expect from an accountancy firm. So delighted that Roberts brought me on today. This is an area that I'm really passionate about. It is my firm belief that the more financially intelligent businesses, the more chance it's got, I've been successful. Obviously, success is not guaranteed. But the more that you know your numbers and measure the things that matter, the more you have a clear plan in place to work towards and the better chance you've got of being successful. So without further ado, I'm just going to share my screen, if you've got all give me a thumbs up now you can see. Super. So measuring the numbers that matter. Data, as you all know from your own industry can be very overwhelming, so many things that we could be tracking. But the reality is that we're all small, small businesses, or smallish businesses, and even large businesses, to some degree, are still limited by resources. And so we must be careful about choosing the things that we want to focus on. What gets measured, gets managed, and all of that. So we need to resort put our resources into the areas that matter and the areas that are actually going to drive our business forward. So the way that I see this, and Robert is the absolute expert in this area, we must have a vision as a business and a business owner, we must know what it is that we're trying to achieve and where we're trying to go so that we're not just constantly spinning the wheels. So what is that vision? What does that future version of our business look like? It's hard enough, if you have a plan, if you haven't got a plan, it's almost impossible to understand what it is that you're trying to achieve. And then secondly, how you're going to get there. What is your strategy? How are you going to differentiate from the market? How are you actually going to use your resources to help you move towards that vision, there are 1000s of things that we could be doing in any particular day. And the very best businesses focus on the few things that matter to them. And they've worked out what it is that they're going to work on. And most importantly, I think what it is that they're going to ignore, because there are far more ideas that we can actually execute within a business.
Paul Barnes 04:32
So where are we going? How are we going to get there? And then the KPIs fall out of that we don't want to be driven by other people's KPIs. Because make down the pub told me I should be focused on this KPI. We want to have our own clear vision, our own goals, our own strategy, and then falling out from that we put the hard work into deciding what are the drivers of success and what are the things that we're going to measure to tell us what's working and what's not. So as I say, it's my Then belief that the more financially mature businesses, the better its chances of success. Finance, for me sits right at the heart of the business. Because without that, all the other stuff around that circle is irrelevant, because it's not getting the business is not going to last if it's not financially performing. So fundamentally, we must be resourceful and must be sustainable. And the more financially mature that we are, the better chance that we've got of achieving that success. So all this other stuff that Robert and his team work on with you a guide is absolutely fundamental. And there's so many different aspects of business that we need to get right. But fundamentally, we need to know what our financial goals are. And we need to know that we're running a financially healthy company. Whilst we are deploying our resources in all these other areas. As I said, before, you know, most accounting firms are only focused on the first part of this graph, they're there to keep you out of jail, they're there to keep you compliant and file your statutory obligations. With the taxman.
Paul Barnes 04:32
When you start to actually use finance as a driver in your business, rather than a chore and a reporting requirements, you use it to help you make more effective decisions and to be more efficient by doing the things that are actually going to drive your business forward. So we move from year end accounting to get a monthly management accounts. And then when we start to understand the business and where it is today in how that's broken down, we can start to compare that to a budget, we put a budget together a financial model that shows that the business broken down. And then we compare the actual results against the budget that we put together and understand any variances, we can then start to use once we've got the right data, we can start to use it to project forward and see what's coming around the corner. And then the best finance leaders and the best business leaders are able to actually narrate what's going on in the finances and provide some useful executive analysis of what's showing up. Ideally, then, you want to start thinking about how can the founder of the business remove themselves from a lot of this? So how can we start to get different members of the team involved in producing reports for board providing the information that board needs to be able to look at the report that it wants so that you as a founder can start to think at more of an executive level more of a strategic level, you spend less time crunching the numbers and preparing the information, and more time analysing and asking questions of the numbers. And then ultimately, we want this to be linked to the business strategy. So financial statements can only tell you so much. What the again, the best finance people best business leaders do is to actually dig deeper and ask better questions, and produce meaningful information that's linked to the business's strategy and its KPIs. And this is also about looking at the risks within the numbers. You know, if you're performing badly, then that's going to show up. And that's a problem. But even if you're performing well on the face of it, where are the risks within those numbers. So we're going to talk about what some of those risks might be later. But where are the risks that things might be about to fall off. So again, very passionate about this, although I'm here, I appreciate to talk about benchmarks, we just need to be careful that we are driven by our own plan. There's no shortcuts. If we find ourselves, reporting on things without really knowing why following others that can be very dangerous. What matters most is that you put in the time and you put in the hard work, you craft that time for yourself to work on your own business and your own plan. And you're not just trying to hit a benchmark for the sake of following others. And then the other thing, or this sort of tip, if you like is about particularly in this industry. And in the modern day, we've become more and more obsessed with automating. I saw a posting in the Gartner Group recently about the beauty of manually keying in your own information keying in your own reports. Why that's so important is because if it's automated and it's too easy, it can be one of those, it's just like, flick on and leave it and you're not actually taking ownership or doing anything about those numbers. So be careful not to be jumping onto the net new shiny technology to say this is going to solve all my KPI reporting. You don't need to LD to do it. You need to do the hard graft of sitting down, working out your own vision, your own strategy and what your KPIs are. And then if you need to manually go and get that data for a few months, it is not the end of the world.
Paul Barnes 04:32
What's more important is that you get on with it you start getting the numbers down and that you Start recognising the trends in the business, if you can automate it later, there's perhaps a part for that, but don't automate what you're not already measuring. So, in terms of KPIs, I've given this a lot of thought, and this is how we work with our clients is that there are some things that need to be monitored on a daily basis. There are some things that should be reviewed on a monthly basis. And there are others that should be left to quarterly. And the reason for that is particularly in a service business, like an agency, and particularly if you've got a lot of projects coming through the business, you could look at any one month in isolation. So it was a blip. Project didn't come off in time it came in the next month, next month looks great. But over a three month period, you'd expect there to be sort of less excuses and more, more sense to be made of the numbers. But on a monthly basis, really passionate about knowing your financials, knowing your top level financials, what did we add to the bottom line in this month, and what does that mean to our profit and loss and our balance sheet. So we track fee revenue per client. So the reason I use the word fee revenue, rather than turnover or revenue, is to make sure that you're actually netting any costs that might be borne on behalf of the client. So in plain English, if you think of a paid advertising agency, they've got all this spend coming in from the clients that they then used to pay for the Google AdWords pay for Facebook ads, pay for the social media ads. And some agencies use that to inflate their turnover. Because it helps them to feel better, helps them to win awards, it helps them to appear like a bigger company. But it's all very dangerous in terms of getting proper insights on your business. And if you're going to do anything in terms of any ratios in terms of staff costs as a percentage of revenue or anything like that, it has to be on your fee revenue. Otherwise, it could be very distorted. So if you've got Commission's that are coming in kickbacks, referral fees. And if you've got procurement spend on behalf of your client coming through the business, all of that needs to be separated and netted off in order to get your fee revenue. Because that ultimately is that the earned revenue that exists within your business. The other part to that, and I always try to speak plain English, not in accounting jargon, but is what accountants would refer to as revenue recognition. And what Xero and QuickBooks and sage and all the cloud accounting platforms are great at is helping you to quickly raise invoices, get them out to clients, bank feeds, automated and run reports. The danger is that if you're just running your finances based on what's been billed, and what's been billed to you, that is not telling you that the full pitch, the full operational picture of your business, and finance should be the the monetary translation of what's happening operationally in your business.
Paul Barnes 04:32
So for example, if you've raised a 50 grand project bill on the 30th of September, and that's now sat in your p&l, actually, you're not going to start that work until October. And you're going to finish it until December. You've not earned 50,000 pounds in September, you've build 50,000 pound in September. But the resources required to deliver on that 50,000 pound are going to be deployed in October, November and December. So if you don't make the right adjustments in your accounts, you're going to get a very distorted picture. It basically says great, we got a billion at the end of the month, we've had an amazing month. We haven't delivered that yet. And we can't understand the profitability of that work until it gets delivered. Operating profit. So, again, you'll hear lots of terms EBIT, EBITDA, net profit, profit before tax profit after tax operating profit tells you the true trading profit of the business. So it ignores things like depreciation, tax interest. And anything that might be cream on top of the trading performance if you like. So our recommendation is that if you do have all the Commission's referral fees, things that come in and not relevant to your trade that sits outside of the operating profit. So this is basically telling us how well have we converted the earned revenue into operating profit? How efficient are we been at delivering that work? And then operating margin is obviously that expressed as a percentage. That today's make sure that we're getting that money in quickly. Whew. And there's another reason why I struggle with benchmarks and KPIs for agencies is because a digital marketing agency that works on a retainer on a direct debit every month is very different from a project business that and delivers those retainers within the month rather A project business that delivers over a number of months with invoicing milestones, payment terms on credit, they're going to have much different working capital requirements because they don't get their money in as quickly. So, you know, for some digital marketing agencies, seven days would be a bad better day. Whereas for some web development agencies, 30 days will be a really good data day statistic. So really important to work out what's acceptable for you, based on your financial model. And based on your financial plan. How quick, are we expecting and planning to get paid for our invoices, and don't get drawn in too much by a benchmark on that one in particular? And then free cash again, another brilliant discussion in the Garda community recently, which was about how much cash should I be retaining in my business? How much should it be trying to build up different views on this? My view is the as well as the overhead cover that a lot of people talk about three months, six months worth of my usual overheads in the bank. That's basically to say, if all of our revenue disappeared overnight, for whatever reason, how long can we continue to fund the operating costs of the business. So if you can do three to six months of that six months will be brilliant, that certainly helped me sleep very well at night having six months of cash in the bank, but also, and this is why financial reporting and information is so important, exist in current liabilities. So what other liabilities do you have for overheads from previous months? For your rent, for your freelancers? For HMRC? What are those liabilities look like today, and we need to have enough money in the bank to cover that as well. Certainly the short term liabilities, and then finally retained earnings. So I actually have a view, we have a tool called a goal setting tool, which helps you to think about what I personally want to be getting from this business. At the end of the day, as emotionally attached, as we all get to our own small businesses and passionate as we get gets there is an asset to serve you. So what financial reward вo you want to be getting from this business? And that can be quite complex in a small business, because you have salary, you have benefits, potentially you have dividends, or going through the business. What retained earnings says how much after all that has been accounted for? Am I adding to the bottom line? So after all, the shareholders have been paid, the tax man has been paid. What this month, did we add to this bank account, if you like, you know, the accounting version of the bank account is the balance sheet. What did we add to our retained earnings, this period, and we want that to be growing and building over time, particularly if your business is getting bigger, because bigger businesses should have a bigger pot of retained earnings to store. So that is what we would provide to our clients on a monthly basis, we provide that as a snapshot as to the financial performance of the month. And then we provide the detail to go alongside it. But you can actually tell a lot just from that snapshot dashboard. If you've then got a financial budget in place, which is what I'm advocating, you've got a budget with targets to say, these are the costs that we're going to invest in the next 12 months. These are the resources that we're going to deploy.
Paul Barnes 04:32
First and foremost, this is the profit that we want to kick out and out what I want to get out of this business. Ultimately, then your day to day decisions are about converting and the revenue that you've decided you need to generate in order to pay for those overheads and pay for the profit of the business. So we create a live view of what was the revenue required that we agreed in the budget? How much of that have we actually converted today that we know about today? And then we've got a gap between what we've converted and what's required potentially. But we've got some in the quote, banks are how much is quoted, and how much of that quoted revenue do we need to convert? And this helps you to make really laser focus decisions on which opportunities are we going to go and focus on and try and convert to help us to hit our own revenue numbers. And this is different from sales pipeline, your sales pipeline, your CRM, your portable should sit in a separate CRM, but this is talking about the actual revenue that falls off of that to going back to my example before, it might be a 50,000 pound deal. But that might only be 1/3 of that in the current month. So if we're only recognising 1/3, we can't be high five and that we're that we've just won 50 grand because we've not won 17,000 pounds this month and we need to go and be more because we Got a target that's higher than that. So we set up that these revenue tracker models to say, what's the revenue required? What's all of the revenue converted, as in named by project or by client? What else is quoted, and therefore, what do we need to do to fill the gap. And then finally, quarter ended KPIs. So this is when we start to get into more of the operational financials, if you like. So people talk about revenue per head, which I'll come on to shortly, staff costs as a percentage of revenue. But all of those are sort of what I would call lagging indicators. And they're the sorts of things that a business coach can sit down with you and say, What's your revenue per head and sound clever. And you can use it to benchmark it against other agencies. But it's not really telling you much about what's going in up going on inside your business. So ideally, you want to get to a point where you can see information on a per unit basis. I call it theory, you might call it chargeable person, billable person. But for each billable person, if you're tracking your time correctly, you should be able to see what does that person cost me? And what revenue have they delivered in the period, the sum of all of that will give you the profit, the profit per billable team, it'll give you the revenue per head. But we can do better than that, because that they're just fat, sort of folk packet, KPIs, this is actually going to help you to drive action in your business and understand who's performing who's not. And then the same thing on profit per client. So it's good to see things like client illustration, which I'm going to come on to, but actually, what are all each of those clients contributing to our business, because there might be a big fee, but we they're actually draining money out of our business, because we're over servicing them. They might be a small client, but they're really profitable coming through the door, they're low maintenance, and they're kicking out profit regularly. And then per service or department. So you can break in most cloud accounting applications as well. You can break your revenue and your costs per cost centre. So that might be we do digital marketing, we do creative, we do branding, we do web development. Or it might be we have Part A, Part B, Part C and Part D. So what are the departments or services? What are the cost centres in your business and work out the profit of each of those. And that, again, this is about finance, not necessarily not just reporting against the strategy of the business, but driving the strategy of the business. Like three years in a row, our web development business has made 1% profit or is losing us money, yet these two other areas kicking out high profit margins regularly. Yeah, but web development is still important for us, as an agency clients come to us for that and do other things. Okay. Is this still the way that we want to do web development, though? Do we want to offshore? Do we want to partner? Are we accepting it as a loss leader? Or are we going to find other ways of making it more profitable. And then client concentration, ideally, none of your clients contributing to more than 10% of your revenue. There are many agencies that are far higher than that. But there are lots that are much lower as well and able to manage that. But you need to plot this over time. We can't if we've got a client, that's 40% of our revenue today, we can't make them 10%, next month, or even next quarter, what we want and what we're not asking that client to do is stop spending so much money for with us, we're going to just put a strategy in place to build all the clients around it. And do we see that coming down all the time.
Paul Barnes 04:32
So this is about benchmarks, some stats on the screen there for you to take a screenshot. Sure, Robert will share the slides anyway. But I wanted to make sure that I delivered to the brief of sharing benchmarks generally. But again, just to caveat this with you know, follow your own ponder your own numbers. But typically, we see something between 11 to 20%, a retainer based digital marketing agency should be should be aiming for 20% upwards in my mind, whereas a web development agency will probably really happy if they're getting into double figures, profit margin. Lots of agencies do struggle to consistently deliver profitable work. And this could be as a result of the pricing strategies. So if you are pricing based on fixed fees, fixed projects, then obviously all the risk is on you to then deliver that efficiently. If you've got an agile approach, then hopefully you'll get paid for most of the hours that you put in, but you might struggle to sell that with your business. And legacy is important. You know, we have to be risk For as to where you are today, and the baggage that you're carrying in the way that you've worked with your clients in the past, we can't just change the pricing strategies and suddenly become efficient overnight. But again, concentrate inwardly on your own strategy. Average utilisation for billable staff then somewhere between 65 to 75% of their time, which should be spent on chargeable billable work. Staff cost ratio as a percentage of although it says revenue, their fee income, as we talked about earlier. So I see this as sort of 50% billable people, and 10% non billable people, there might be a bit more complexity, if somebody's partly billable and partly non billable, then they'll sit in both of those camps, a bit of salary in each of those camps. But about 50% of your revenue should be spent on your billable team. The other way of looking at that is each billable team member should be delivering double their cost, their fully loaded salary in revenue. And then you're going to need to invest about another 10% in the non billable team. So that gives you 60%. And then obviously, you've got about another 20%, to spend on other overhead if you're going to deliver a 20% margin. So that's a decent benchmark to start with. And I would just use this to first of all, start tracking your own business. If you're not tracking this stuff, yet, don't set targets just yet, get the baseline information, right, find out what your stats are today, and how that's looked over the last, you know, so many months, so many years. And then you can start to set targets to improve that. Revenue per head, everybody talks about the magic 100,000 pound revenue per head, have seen it done. There are not many that do it. From experience, I think if you do an 80,000 pound revenue per head, I'd be very surprised if you're not kicking out like close to at least close to a 20% profit margin. But again, I know I'm banging this drum hard but doing your own numbers, because revenue per head doesn't take account of the cost of people that you've got. So if you've got you know, a lot of young apprentices lot of young people on 20 - 25,000 per year, you don't need as higher revenue per head. And if you've got a lot of expensive experienced 70 - 80,000 pound a year heavy hitters, your revenue pad needs to be higher. So you can model this and work out what your own review pad needs to be. Gross margin. So this is revenue minus any costs, direct costs required to deliver on the project. So this is different from your rent, and your rates and your advertising and marketing your IT costs your HR. This is if we went to 50 grand project today, what percentage of that it's going to be spent on our direct costs. And this is just a mess in the industry, because some people put clients spend through there as a cost of sale. Some don't some put staff through some don't some put billable staff, but not non billable staff. So I don't think I'd be being credible to try and say this is a gross margin to aim for. It's different from one type of sector to another. So you know, digital marketer versus web development. And depending on how the agency reports, and this is why I really struggle with a lot of the the benchmarking that's out there, and a lot of the top 50 lists and all that kind of stuff, because they're relying on the fact that they've actually done their accounting, right. And in reality, I've seen a lot of inconsistency in that. Then this is when it gets more into project financials. So I'm not going to go through all these because there's quite a lot on there. But this is about when the rubber hits the road and those projects go live. How do we track the performance of those projects from a financial perspective? One thing that I will touch on is that second to last one ageing of deferred income, because if you take these slides away, and you read in through this one, that will be the one where you might be thinking, What's he talking about here? When we talked about revenue recognition earlier, that the 50,000 pound invoice on the 30th of September, that the work was going to be delivered over October, November, December. That's what we call deferred income. So the bill has been received on it that has been sent out there to September, but we need to defer that revenue. So we see 17,000 pound a month for the next three months. What sometimes happens in agencies is that they'll defer the revenue. And then when you speak to the agency at the end of the following month that oh, we've not done any work on that project this month. We need to keep it deferred. So the it's still sat there and it's not been earned. That rings alarm bells for us because you've invoiced that client for And you've still not started working on the project. And what we've seen in the past is this is a symptom of a forceful sales team trying to get invoices out the door quickly to hit their own targets. But actually, that project isn't being delivered, and that client is not paying that invoice. And that starts to raise questions about what's going on within the business. So you know, this is about being all over your numbers and looking for risks within it as well. So just summing up three key points from today, don't get led, I think I've said it enough times, don't get led by what everyone else is doing. Focus on your own vision in your own strategy. Targets come from your plan, not from somebody presentation telling you what you need to be doing. Track different metrics monthly, daily, and quarterly. So all of those metrics that I've shared today, in terms of what you should track has been thought through very carefully in terms of how frequently you need to be looking at them. As I say, we're really passionate about building financial intelligence, not just in our clients, but in our teams and in the wider community as much as we can, this is our passion and what I map and the team are committed to doing. So just as a result of everyone being here, today, we will be making a contribution through B one G one. So for every person that's attended, you've enabled a female business owner to successfully operate a business background. And of course, to learn bookkeeping skills. So we will actually fund that as a result of all the attendees that are here today. As I say, the more financially intelligent we can help the world to be, the better chance we've all got of making smart decisions and running great businesses. Their contact details, so website, Twitter, and my email, feel free to get in touch. And then if you wanted to understand your own financial maturity score we have a scorecard. It's about 32 questions, it goes into quite a bit of depth. But if you're serious about going on this journey, and developing your own financial intelligence, then work through that scorecard. And I'll give you some key tips in terms of how you can develop your financial maturity. And I will stop talking and pop that in that link to that scorecard into the chat.
Paul Barnes 32:21
Brilliant, thank you very much, Paul. That's absolutely awesome. We've got questions in the chat. I've got some questions that have been sent direct to me. So keep putting the questions in the chat. And Paul's just put the finance scorecard, scorecard up into the chat. So you can pick that up. So just making sure I haven't missed any. Here we go, yeah. Vortec says, Can you recommend any good simple Excel Google Sheet templates to keep track of those KPIs? And I guess there's another question behind that. So I'll add to that, which is should you be using some clever KPI piece of software? Or is XML good enough?
Paul Barnes 33:06
No, I think that's a really good question that is posed there. He she sorry, I'm not sure is, as I said before, just work on getting the data. If you go and set up a data box, or Fathom or you know, million others, you will just spend so much time setting up the application getting the data to pull through only to realise it wrong. So start that process. Now, when you start reporting on this data, you'll find loads of issues, because you're not actually collecting the right data in the first place to get it loaded spreadsheet. So the answer is yes. If you drop me an email, we have what we call our agency toolkit. So there's a load a little templates in there. And perhaps, Robert, I can just hand those over to you because there's no email address or anything like that. They're just tools and templates that we have that you can use.
Paul Barnes 33:59
Perfect. And then Serena, the wonderful Serena, who I've interviewed and she's interviewed me, when you say profit margins, do you mean net retained after tax and dividend?
Paul Barnes 34:12
So this is another reason why I have an issue of benchmarks is because everyone finds it differently. And understandably, you've probably heard this before, but you might not have done but in small businesses, one of the challenges that we have is the challenge of the owner operator. So the owner operator is actually wearing two hats, the shareholder, and the operator Managing Director, Operation director, CEO, whatever they might be, and they will be delivering for that business. Even if you're not client facing and you're not providing a service, you are delivering a role to this business that is expensive. So another way of looking at it to mean if you were to work, walk away from your company today, you would have to hire somebody on a hefty salary to take your role. So often what we do in our clients management accounts We put in, we provide a and when you go to sell your business, you'll hear this terminology adjusted EBITDA. So this is what the statutory accounts tell us. But come on, what else in reality is required within this business, there are other costs, the managing director can't be on nine grand a year. So we'll make a provision for the costs of replacing you as a managing director. So I actually taught screen about operating profit if you remember. So operating profit is before you take account of tax and real shareholder dividends. But to get to that figure, you would normally put a provision in for the people that are delivering a service to the business, like the directors that are not on a proper salary. And only then we be able to see actually how profitable is our business, really, because if it's 20%, and you're doing all the work, you know, if you stepped away, that sort of things gone. So have a look at what it looks like after your salary taken account off. I hope tha answers your question.
36:05
So for my clients, I always bring corporations up to Dividends into the p&l Anyway. So we've got a true net cash flow, net cash profit.
Paul Barnes 36:13
Yes, we do as well. I will show both all of them. So you have operating profit, and then you have the corporation tax the dividends, you can actually you can look at both. There's not one right answers there. Sometimes you want to talk about what's our operating profit, sometimes profit after tax profit.
36:31
What I aim for my clients is to make 20% net after tax and dibs. So your 20% benchmark also relates to?
Paul Barnes 36:38
No, that's 20% of operating profit. But remember, that's after I've accounted for a proper salary as well, the managing director that it's come to 20%, I would never look at anything after tax because one agency could have a very different tax bill to another dependent on things like r&d, and things like that. So it's too distorted.
37:05
As a benchmark, yeah. But as an individual measure to know what you've attained was really useful.
Paul Barnes 37:14
Cool. Other questions we've got is revenue per head, and this is something went through my mind saying it is that revenue per head when we look at all the heads in the business, or is that just a billable heads?
Paul Barnes 37:29
Yeah. So when I did the like, the would love to be 100. But actually, 70 Twice isn't normally profitable. That's all heads. But then when I talked about the profit per year now, that would just be the available people.
Paul Barnes 37:40
Cool. And the questions come up again. So I think we need maybe we don't need to answer it again, is we've got all the data, what are the most common recommended KPI tools recommended for agencies? And before you answer it, I think you're absolutely spot on. Paul, I've played with a couple of the KPI things, and you'd spend hours and hours trying to get Zapier to push everything across. And my two problems are one one Zapier moves numbers across you lose, it ceases to be tactile, because you don't actually literally, with your own pen, write down a loss of 100,000 pounds. So you're not aware of it. But also a decent Excel spreadsheet gives you what you want.
Paul Barnes 38:25
Yeah, and you also have it you find self validating Zapier, push that across a map, just go and check where it got that information from and just check it's picked up the right number at the right time. So you end up doing a lot of manual work to sort of validate it and undo it anyway. But to answer the question, yes. So we have a suite of templates in Google sheets that we can share. But the reporting framework that map used to present those KPIs that I showed as part of the management accounts pack that's built in software called fathom, so far and pulls data from zero, but it doesn't pull it from your CRM, your HR system, Operation workflow system, it's just for the financials, but it's great with graphs and charts and really bringing the numbers to life. So that's what we use within map because it integrates with Xero.
Paul Barnes 39:19
Keep on bringing in questions or just unmute yourself and ask us a question or as a couple of others I've got here, which is how do you decide which numbers to look at? Presumably it's an 80/20 thing, but which are the 20% I should be looking at?
Paul Barnes 39:43
So first of all, we talked about having a strategy on working out what KPIs fall out of that, but I wouldn't be trying to track 20 KPIs, I'd be trying to track one. So pick one, and go and do the work and Make sure you know where to find the data, who's going to be responsible to get that data, how frequently it's going to be reported, you're having a discussion about that data point. And whether it's where you want it to be in how you want it to improve, then add a second one and go through the same cycle again, if you were to add 10, or 20, what would happen is you'd spend all your time try and get the data first 20, and have no time doing anything about it. And that's really inefficient way to run your business. Because you don't end up doing anything data you spend all that time gathering. So just start small and build it up over time. I can share with the metrics, but you know, Robert, probably, you know, have shared all this before in terms of sales and marketing metrics, operations metrics, employee metrics. Today, I wanted to just focus on the financials and the operational financial metrics as well.
Robert Craven 40:54
Jack asks, What was the 31-90 rule from your side all about?
Paul Barnes 41:00
What's out? And what's most paying attention? Yeah, I don't want you call it, Robert. But it's basically a three year target, a one year plan, and then 90 Day objectives. So it's how you start at the end and work that forward. Though, have you got that as a routine in your business? Do you know where you are? Where you are in three years, you know, and I'm getting a year, and you know, what you're doing in the next course, from what your objectives are for the next quarter? So that's what that was.
Robert Craven 41:31
Another question about automation, when should you be starting to automate the finances and the KPIs?
Paul Barnes 41:42
When you are successfully tracking them manually. So don't automate what you're not already tracking, automate something because you've been tracking it, you've got confidence in the data and really good discussions about it, it's worthwhile, and therefore, now you're going to invest in trying to automate it. And then you'll know what you're looking out for, and you'll know sort of any red herrings that pop up. And if there's any issues with that data, because you've been doing it, don't try and automate what doesn't already exist.
Paul Barnes 42:11
Cool. Another one here, which is when you go into a new business how do you assess how good the business is?
Paul Barnes 42:26
So that, as I said before, the sort of fog packet stuff that we're referring to in terms of revenue per head, profit margin, will give you a feel, as to the general health of that business without you really knowing too much about what they do, or what good should look like for them. So you could ask you, I would ask things like, so, you know, what's your turnover? How many people have you got, and then you'll get a bit of a gauge if they understand profitability. Okay, but there's a million different answers to what your net profit is, as a serine has been talking about today. I would want to also do like a bit of a if they didn't want to share their financial accounts, or they were a mess. And I can ask questions to understand the financial position of the business. So how much is in the bank today? How much is owed to you? How much is owed out? That effectively is getting somewhere close to your retained earnings, or what we call net book value of the business on the balance sheet. So yeah, hopefully that helps from a p&l perspective, revenue, number of people profit margin. And from a balance sheet perspective. The retained earnings of the business are just what's in the bank. what's owed to you? What fixed assets have you got? And what do you owe out to creditors? And you can get a general feel from that. Unfortunately, as many of you probably know, Companies House is not very helpful because all small businesses, small businesses been up to 10 million pounds worth of turnover, by the way. File abbreviated accounts, so you can't decipher it.
Robert Craven 44:01
Okay, love it. Love it. Keep popping in the questions. Another one I've got here. Robert goes on about I love my accountant. And what should my accountant be doing for me?
Paul Barnes 44:11
Good question. Your accountant should be asking you questions that make you think differently. So when you get on a call with them, you spend time with them than that there's a lot of talk sort of within the accounting industry about advisory as if we're here to give groundbreaking advice. It's going to transform your business overnight. That's not how it works. You know your business better than your accountant does, and you always will. But what a good finance professional will do not just an accounting, there's a big difference between an accountant and a proper finance professional, and accountants there to sort of make sure that stay out of jail. Get the data right You know, get the basics filed and that they earn their money because they're gifted opportunities by the government because the government made small businesses. a finance professional would say. Okay, Robert, you know, what are the concerns on your mind this month? Where are you seeing where we've seen opportunities is in your business? I've noticed that you've got a lot more coming in from your hub over the last few months. How do you see that going? If you actually modelled what you want the hub to achieve? You know what that looks like? What's your average price point? Why do three more customers joined last month? What was the thing that you did before that to drive that? What the different price points? Could we have an additional price point for different level of membership? So they just asked good questions that made you think if they were there just to give you if they were just giving you answers, it sort of it was that easy to just come up with answers, you'd have already come out and answer. So your accountant should be there to partner with you. And to work things out together. And to say, Robert, let's ask each other some questions and go away and do some work and try and drive your business forward. It's not just trying to be clever, and give short sharp answers, because if it did that, you'd have already done it yourself.
Paul Barnes 46:18
Okay, another one. Okay. Another question, which seems to be feeding directly to you. Someone's setting you up. Does an agency need a specialist? Agency focused accountant.
Paul Barnes 46:32
Obviously not now, there are actually more and more accountants that are popping up that proclaim to specialise in agencies, but they don't actually partner with the clients. So they use it as a marketing ploy to say we really understand agencies, but really, they just have a more modernised way of using cloud accounting to get your books done quicker. There are other finance professionals who understand business well, and understand how to ask good questions and how to partner with their clients that are not necessarily agency specific. They understand your industry, they understand your language, they understand how to convey to other businesses like you, they might, you know, they might help you get there quicker. But a really good finance professional should be able to cross between sectors as well. So it's more about their approach to finance, you know, are they just an order taker? They act on instruction from you. Please, can you farm a VAT return? Yes. Okay. Or are they partnering with you asking the questions and properly guarding and supporting you?
Paul Barnes 47:35
As one more question which is on exactly the same? The same thing Put them in the full chat? They don't have to come to me, which is what questions should I be asking my accountant to close in lights, getting the lights down?
Paul Barnes 47:49
Song is gradually moving around and take it off.
Robert Craven 47:52
So last question, I got in my chat, add anything to the chat or unmute yourself and ask questions. Last question I got here is What questions should I be asking my accountant?
Paul Barnes 48:03
Yeah. I would be asking questions like What can we look at together? You know, as I say, you know, you're not looking for instant answers. What, Mr. Accountant, could we start to spend more time looking into on our business? What trends should we be looking at? Where would you recommend, I focus my time in helping my business to grow more profitably. And they will give you a bit of a framework, and they'll sort of give some questions and some ideas back to you. As I say, you know, business isn't easy. It's not solved overnight. It's how can we go on a journey? How can we partner together? There's obvious things like, how can I get more money out of a business tax efficiently? That is advisory, they should be able to answer that better than you. That doesn't require loads of partnering, that they should be able to get on with. So we've written an article on like 30 ways to get value out of your business tax efficiently. So things like this, things like that. But in terms of like, how do I grow revenue, how to go profitability, how to grow cash flow, they're big questions, and they require you to partner together. So asking your accountant, how can we work more closely together to grow my business? What does that look like?
Paul Barnes 49:26
Lovely group anymore for anymore. Any comments? just unmute yourself and ask you a question. We don't bite anymore for anymore. Chuck it in the chat. Cool well, so I'm a great fan of accountants. Although I have written several poison pen blogs about the bad accountants. I'm a huge fan of great accounting because I think if you've got a decent accountant with you, you're sailing because they can make you and your business so much more successful than you are otherwise. And my issue is with For those accountants that just do the bare minimum, and take the money without adding the awesome value that a great accountant can add to. So, Paul, thank you very, very much for that. Because this has been a bugbear of mine for a long time the discussion about benchmarks and how they work and what we use and how we choose. And so thank you very much. There are links there. We will send you some more links after today. But all it is left is a very, very big thank you, Paul for being very honest, open, transparent, and sharing with us what we need to know. Thank you very much indeed. That's very kind of you. Finally clap.
Paul Barnes 50:41
Thank you all for comments. Such really lovely genuinely, it's so hard to know what the other side of the screen whether this stuff's going down well or not, especially when you're staring at a set of slides. So thank you for your feedback. Really appreciate it.
