Agency Forward

Chris DuBois 0:00
Hey everyone. Today I'm joined by Tony Wilson. Tony is the founder of equip providing fractional CFO services to agencies. He is also the host of the dev launch podcast, which I'd recommend agencies give a listen to. I brought Tony on so we could talk agency financials for a lot of founders, right? It's it's not that it's a mystery. It's just not the most enjoyable place to spend your time. It can be intimidating, especially if you're not fully sure what you're looking at. If that's you, rest assured. Tony helps to make sure that everything is more approachable. And in this episode, we discuss the biggest things agencies get wrong with their numbers, the importance of gross margins, how to make your agency exit ready and more. Today's episode is brought to you by Zen pilot. There are lots of tools out there for agencies to manage projects, but any project issues aren't usually caused by the tool. They're from your own processes. Zen pilot helps agencies implement their project management tools while streamlining operations so your team can move from chaos to clarity. You can see for yourself at zenpilot.com/forward, if you're an agency founder, you do not want to miss the all in agency summit. The event takes place all day on October 2, and has 14 expert presentations to help you better run your agency. The summit is completely free, and I promise will be well worth your time. Visit all in agencysummit.com to register and now. Mr. Tony Wilson, it's easier than ever to start an agency, but it's only getting harder to stand out and keep it alive. Join me as we explore the strategies agencies are using today to secure a better tomorrow. This is agency forward. What's the biggest thing agencies get wrong with their numbers?

Speaker 1 1:53
Great question. I think when I was noodling on this question, my mind immediately goes to gross margins. And there's a reason for it. I think I'm going to say about 80% of agency owners out there actually probably get it somewhat right, but not entirely right. And I want to explain here so the people who are like 80% of the like 80% of the people who get it most of the way there, they understand that to some extent they need to be directing their labor costs to cost of sales, right? That's how you get to gross margins. But I think what a lot of times happens is it's a pretty rudimentary look at their in their financials. And so what they'll do is they'll say, Oh, well, I have people working, so therefore we're going to put it to cost of sales. And what happens is your gross margins end up looking probably a lot worse than they normally. Should, you know? So that would be the case if you have, like, a full time, you know, let's say a software developer, you know, somebody who you have hired full time, and you're going to say 100% of their compensation goes to cost of sales. Well, when push actually comes to shove, you've got some degree of utilization that's thrown in there too. And like many agencies are facing right now, a lot of software dev agencies that I know of are facing right now is a little bit of bench time. And so problem here becomes that you're you look like you have really bad gross margins, and in reality, what you have is you actually have pretty good gross margins, but you have a lot of underutilized time. So what I like to say for agencies who are looking to better understand the fundamentals of their business is to have a true understanding of their gross margins now for the additional group of people, you know, they might take it even another step further, and they might say, Well, I'm using harvest, so I'm going to use the, you know, hourly rate associated cost rate associated with each of these people. It ends up being also a pretty, not super accurate financial metric, because, you know, you know, I both know, like, if you have a salaried employee, they might be doing 120% of what you're expecting, or they might be doing 80% so that hourly rate is should all be fluctuating every single month, but typically you keep it pretty fixed, so it's not the most accurate and doesn't always reflect what your true gross margins should be,

Chris DuBois 4:25
right? There's also the confusing aspect of someone providing, actually, like billable hours, versus someone on the operations team who's enabling everyone else to be able to focus on on those hours. But it doesn't directly relate. Now, how do you how do you factor all these in, right?

Speaker 1 4:41
You think about, like an HR person, or like an admin person, like, where are you going to put their compensation? I was just on a webinar recently, and they were talking about, you know, how they look at financials, when you're going to sell, to sell your agency, and their recommendation was, just put all the compensation in overhead, right? Yeah, and I'm actually not a fan of that. I think that that starts to muddy the waters a little bit because and the point that they were making is, they said you should be able to make decisions based on how you structure your finances. And I'm like, I totally agree with that, yeah. What I disagree with, though, is I don't think it's helpful. I don't think you're able to make better decisions by just lumping all your compensation into one line. Because now I don't know, are we, you know is, is bench time a significant financial factor for you? For example,

Chris DuBois 5:31
yeah, I think the more granular you can get with your your data, the better off you're going to be. So that's right. That's right. So what recommendations do you have then for an agency coming in who's not tracking utilization at all? Because I've talked to a lot of agencies that are not period, and it's, it's dangerous, right?

Speaker 1 5:56
And I, I know I'm gonna get a lot of hate for this, especially for the friends of mine who are more creatives. At heart, you know, these are creative agencies, maybe design agencies, people who, by their nature, are just a little bit more free thinking, if you will. Usually you don't have too much of a hard time getting somebody, like a software developer, to track their time like they might have a little bit of resistance, but for the most part, they're pretty analytical people already, so they appreciate data. Good track data. When you're working with like a design agency, I would say time tracking has got to be the first place you start when it comes to utilization. And I want to get this out of the way, because I think a lot of times people misunderstand what I mean by this is I don't mean that we should use that time data to micromanage people, not at all, because you and I both know like time data is it's a good data point, but it's not the end all be all, and it's not always the most accurate thing in your business.

Chris DuBois 6:54
So actually, I just want to Chris dryer was on an episode, and in his agency. He I asked him, How do you manage people? Calling out, you know, time tracking as micromanagement. He's, like, I say whatever. Like, yes, I'm micromanaging you by telling you to time track. Like, it's something I need, but what? And I thought it's hilarious, and it's spot on, really, like, it doesn't matter. Yeah, you don't want to micromanage, but, like, you need that data to be able to make good decisions. And when I've I like looking at like, what are all the top players doing for something if I want to get better at something, right? Let's look at all the experts and what's the common denominator across all of them. And you will never hear a top agency say time tracking is wasted, right? Like all of them are saying, like, do time dragging, it is important to be able to make decisions, yeah, so, like, but still, like, there are companies who are so, so, like, put off by it, yeah?

Speaker 1 7:50
Why? I think, I mean, because I was, I was thinking about this as well as, like, what, what is the biggest rub? And I think, you know, part of it is we don't want to be intrusive on our people. We want them to have autonomy. We want them to give them a degree of respect. And it feels intrusive to ask them for time tracking. I think so. I think that's like the soft side of things. I think the hard side of things is, a lot of times the vision people have in their minds about what time tracking should look like is it's way too granular. And I'm not a fan of like, let's get every single individual, little, itty bitty task time tracked by a task level. I don't think that that's helpful. I think if you want to start off, you know, you let's say you're not tracking time right now, but you want to track time, my recommendation is, you know, typically there are three major categories. You know, sometimes there's a fourth one, if you're a more technical agency, like a software development agency, but usually it's just three and that is direct client facing work, sales and marketing work and general and administrative work. And then within the direct client facing work, you kind of have a further breakdown to say, what's the client I'm working on and what's the project we're working on. But besides that, like you don't need it that much more granular. Like, you can put detail in your time tracking, like, if you want to, just so you can remember what you did, but for the most part, like, those are the major things that matter, and as long as people are tracking to that level, like, for me, I think that's all that I I really need.

Chris DuBois 9:16
Yeah, I think that's, that's probably as much as a you'd have to go to get like, level of detail that you're actually going to use for decision making. With a lot of my clients, we do a time study as one of the first things to get just two weeks, like looking at their how, where their time is going, and give them a spreadsheet. It's just like, just track when you start something, when you finish it, and just write, was it for the business? Was it for personal stuff? Like, you know, just just so we have an idea of whether you're spending more time, like, delegating, doing work, deciding, designing, also from Clockwork. I'm Mike Michalowicz, but the Yeah, just doing like, when you have that information, you get to make much better decisions. And so totally, yeah,

Speaker 1 9:58
can I share a story? Worry about that specifically. So one of my clients, when we started working together, because, like you, I also am a huge advocate of time tracking. We started time tracking pretty early on. And one of the things that was uncovered they have a unique pricing methodology, which is to say they kind of fall somewhere in the realm of, like, sprint based pricing, right? So, like, for the most part, they're not, they're not billing time to their clients based on hours worked. But what they do is they say, here's the team, and each week that this team is engaged, you know, X number of FTEs or whatever, we're going to bill whatever rate. Well, wouldn't you find, wouldn't you know, as as we went, what was happening is they were forecasting 100% or like whatever the normal full utilization looks like for one head. They were forecasting that. So they were making plans according to this one person is dedicated 100% to this one client. Well, when push comes to shove, they're working on a larger client. This is very applicable for large enterprise engagements. Their point of contact was out of town that week. They were on vacation, and so their part of the project came to a standstill, and they were kind of just twiddling their thumbs. They weren't they were still doing some work, but it was way less than one FTEs worth of work for that week. And when we were doing time tracking, we could identify that right, as long as you don't have that time data, the only thing you're left with is, here's the plan for what we want this person to do. But time data helps you to see that this is what has actually happened in a systematic

Chris DuBois 11:33
way, right? So let's go. I can't remember this was us talking before the show or now on it, but I think it was on it talking about the exit being exit ready. When are you join? What steps do you think agencies should be taking then to make sure that they're actually exit ready?

Speaker 1 11:56
Yeah, well, I think that the number one like when I'm when I'm advising clients through this to get ready. You typically when, when we're working together, we're working well before you're engaging an M and a consultant, right? Usually you're working with an M and a consultant. You're pretty close to exit, probably within the next year. You're working with somebody like me, because you're 345, years out from a potential exit. You might not even be thinking about exiting just yet, but you're it's something that you've considered somewhat. So I usually have a lot more time to work with my clients before we even get to that point of exit. And typically, what I like to see happen at least in that first year that we're working together is I like to hit the reset button on their client acquisition system. And what do I mean by that, nine times out of 10, when I look under the sheets of agency's finances, nine times out of 10 they are under resourcing in their sales and marketing function. So my typical benchmark is, I like to see 15 to 20% of your revenues be spent on sales and marketing costs as an investment in order to get things kind of dialed in. It's not to say they're going to be spending 15 to 20% forever, but at some point, if you want to really figure out your client acquisition system, you have to properly resource and run experiments. But most of the time, these agencies are running on anywhere from three to 8% of the revenues that they're spending on sales, marketing. And then, you know, part of the reason they do that is because, well, all of my business has been referral up into this point, and so I can get away with that, or I'm doing the bulk of the work. You know, it's so all these things are predicated on, you know, the old business model for them. But what they don't realize is, if you really want to get to the next level, you need to be experimenting and trying new things in your sales and marketing engine. So back to your original question. What are some things that people can do to get ready for exit? To be exit ready? I think the first place you have to start is you need to work on your sales and marketing approach. You need to I've got a number of people who I know that are go to market strategy consultants. Those people would be really helpful to help you define your ICP. I've got some sales coaches that I recommend working with. There's all sorts of different things, but we need to properly resource for that in order for us to get even on a track of of making more money,

Chris DuBois 14:20
right? Yeah, going back the number of agencies that I've talked to who completely bet on referrals, and now all of those referrals are drying up. And it's like, but you never set in place, right? The sales and marketing budget to be able to do this, and and part of that is also probably, like, margins are already tight as an agency, right? Like they're going to be thin, and so if you can pull another 5% somehow by not putting it in, because you're like, Well, we have referrals to bet on, I might as well put that in my pocket. And it's, it's kind of moving out of the proactive state that you want to be in, though, yeah.

Speaker 1 14:54
And I mean, just to kind of piggyback off that, this is actually something that I have a real issue with. Right not to call people out, but I think there are a lot of charlatans out there who want to sell you a bill of goods in the agency space, in the agency consulting space, and be like, if you're not making 30 plus percent profit margin, like you don't know what you're doing. And I'm like, What are you talking about? I'm pretty sure if you're making 30 plus percent profit margin, you are under resourcing something else growth wise in your business, I have concerns about that. That's a red flag for me. So I think, I think part of the issue is you have a lot of these charlatans that are, you know, spouting out all this garbage about what your profit margin should be. I take a nuanced approach, and I say, I don't think it's about profit maximization. I call it profit optimization because it depends on where you are in building your agency. You know, if you are just starting out, let's say you're a million in revenue, you really need to be working on your client acquisition system. You've got enough resources to do it right now, you're probably looking at maybe somewhere between zero and 5% profit margin if you are properly investing in your business. And that's not a bad thing,

Chris DuBois 16:01
right? Especially like you can make sure your paycheck looks good, right? And then it's factored into anyways, yeah, I do like that. You said profit optimization. When I was an agency CEO, the founder and I kind of kept certain roles, rather than calling ourselves visionary integrator and maintaining that we were the revenue generator, profit optimizer. And so my role was entirely around profit optimization. He worried about bringing revenue in. I worried about, how do we operationally make sure that we're keeping more of it to be able to deploy as necessary. So good and and just shifting that mindset, like around those roles and stuff, made it a huge difference. And so, like, at one point we did, we had over 40% profit margin because of some big projects, right? It wasn't like a consistent thing, but we had some very and so we were able to say, Okay, we need to deploy this now, because we're like for growth, and we had, we're able to make a great plan for for how to use that and all that fun. So yeah, I like that

Speaker 1 17:00
profit optimization. I'm curious with with your experience during that, like, how long of a stretch were you guys doing, you know, 40% profit margin before you started to kind of, then reinvest that back in your business. It's

Chris DuBois 17:11
pretty quick. It was, like, within a quarter we had it and then started to deploy it and like, and we set, I think, 25% was, like, our target. That's what we said we're going to spend down until we we hit this point. Make sure we get enough cash reserves, right, and in case something happens, but then otherwise, like, what do we need to do for the business? And it's fun when you have that money to be able to do that, because it's a little less nerve wracking than when you're playing the opposite. Yeah,

Speaker 1 17:37
true. Very true. Well, so one other thing I was going to mention, you know, back to your original question, like, what are people doing? What should people be doing to, you know, get themselves on a path towards x already? Again, I think the first, first and foremost, I think you really need to focus on your client acquisition system. Because I'll tell you this right now. And you know this by it from experience, a full pipeline cures a number of problems in your agency, like nine times out of 10 like that is really, at the end of the day, what you need, as much as I would love to say, you just need a fractional CFO to help you understand no you really need is revenue. That's what you need. So you focus on that first, and then I think the next thing after that, once you get to a certain critical mass, or a certain kind of like consistency in your growth trajectory, is really focus on that EBITDA, that the bottom line. Because, I mean, even just today, again, I was on a webinar where we're talking about mergers and acquisitions in the agency space, and it was reinforced yet again, typically the multiples you are going to be getting are not based on top line revenue, but on bottom line revenue. So that's why, I mean, even one of my clients we're working on 2025 budgeting, and part of what we're doing is we're really focusing on EBITDA, or the bottom line, as the primary kind of metric that we're all rallying behind for 2025

Chris DuBois 18:52
Yeah, it makes sense the growth of your pipeline as well. Like, that's really one of the reasons why I've so I was just going to do leadership coaching for agencies, but I realized very quickly, most agencies can't just afford leadership coaches, right? Because they don't have the money to throw around. But what if we I came in and I offered some of my insights on how to build a great offer, get you some revenue there, and now I can stay on and help you with your leadership challenges and help you with your processes and everything else. But the first thing is, let's bring some revenue in the door, then we can optimize for profit, because we have revenue that we can play with and get the team, you know, in line and stuff. So, so good. Like this, I love that we're good. We're pretty well aligned here. I'm liking all this. How do you when it comes to, like, forecasting, right? Like, I didn't expect to have 40 plus percent margins and stuff. So, like, that was a surprise because of some projects. But like, how, what are some of the things that agencies could do to kind of set a better foundation for forecasting? Yeah,

Speaker 1 19:53
the number one thing that I wish more agencies would do is they would leverage their CRM data and so. Yeah, because chances are, you know, a lot of the people, lot of digital agency owners, actually have some degree of competence in the sales process, you know, because most of them are marketers or sales, you know, agencies, or, you know, again, people who have some background in this, in this space, I think what a lot of times happens is they do all this really great work on the sales process, but they completely neglect the connection between the CRM and a financial model, you know, and so, like my approach is actually pretty straightforward and pretty simple, like anybody can just steal this approach. It's not that hard, is we literally. We use coupler.io to do a data port, and we go straight into HubSpot, we dump it all out into Google Sheets, and then we work our formula magic, and essentially run we combine your your the one, the engagements that are already signed, and then we layer on the deals that are in pipeline, you know, and depending on the deal stage, you have different percentage likelihoods of close, and so you want to properly weight that so that you can, you know, forecast according to your expectation of your revenue, not, you know, just the absolute value. So if it's $100,000 project, but you're only 70% likely to close it, that's really a $70,000 in your weighted pipeline, for example. So if I were to say, you know, the easiest thing listeners today can go and do is start using your CRM data. And why I say that is because a lot of financial forecasting tools that are out there, ie QuickBooks. Let's be real. Pretty much everybody's got a QuickBooks count. QuickBooks claims to have forecasting abilities. Forecasting in QuickBooks is absolute hot garbage. Do not use it if you make decisions in your business based on your QuickBooks forecast, you were going to be in a really bad spot, because what it does is it just says, Well, what did I do the last three months or the last 12 months? And I hate to bring it to you, but you and I both know agencies are not that predictable, right? You can't look at your past performance and say that's what's going to happen in the future. Happen in the future. But what is a lot more predictable is what you have in your CRM,

Chris DuBois 22:09
Yeah, agreed. The couple challenges, man, I got so many things you're like. You give me so much to go off here with these. All right, so one chart that was extremely helpful for me, and we love them. The agency I give to all my clients is just a 12 month rolling revenue tracker, so that you can see. It's not great for forecasting, right? But you can start to notice when things are going off, off the tracks, because you can see a percentage change every month that's based off the previous 12 months. And so now it's you have a, you know, more numbers and more kind of background to be able to balance some of that. And so that's been super helpful. I think one of the challenges I have found with people using their CRM data is is for the weighting of those various stages where they'll say, Oh no, I close 70% of the people if they get here. But when you actually look at it's like, no, you close 40% right? Like, and so a huge discrepancy, because they're not necessarily tracking all the numbers to actually get an accurate, you know, percentage to be able to forecast. And so they're not doing some of the things that are necessary. Yeah, I

Speaker 1 23:17
think that's that definitely goes without saying. I think, you know, part of the assumption here is, part of your process in using CRM is that you are routinely checking those things through checking things, like you said, about what actually is your close rate percentage based on these deal stages, and also looking at like, what is your average days to close? Because I think that's another big and very important number when we're doing forecasting. So I'd agree with that.

Chris DuBois 23:41
Yeah, I like just looking at sales velocity for for a lot of stuff, just to be able to track on the day to day, right? What do I need to be doing in order to drive more revenue in here? And once I realized that all of the all the numbers within the formula, which because your number of leads, your win rate, average deal size over your length of sales cycle. I think I got that right, but the each number in there has equal weight, and so when you start actually tracking your sales velocity, it's like, okay, I can double my number of leads, or I can double the deal value, or my double my win rate, or have my sales cycle length, and now each of those has the same impact. So rather than trying to do everything in your business at once, you can say, what's a low hanging fruit here, pick that one number, and now you can potentially increase the number of revenue coming in every day purely by touching this one number. And that was it was profound for me when I found it out. So for anyone listening, hopefully that benefits you.

Speaker 1 24:46
I love that. That's really good. And when you're doing that too, did you typically find find that you guys gravitated towards one approach or the other, or did you kind of just, like, switch it up all the time,

Chris DuBois 24:58
almost every time that I bring it up? With an agency, they have, like, their focus, like, if, if the person has a strong marketing background, right, they're going to say, All right, I'm just going to get more leads, right? How do I bring more leads? If they have more of a sales background, then they start leaning on, okay, well, let me see if I can increase the deal value, right. And it's like a challenge for them to keep doing that, but so they'll naturally go to those things when you it might be really easy to drive some more leads in. And so if you just forget raising the deal value for now, right, maintain what you got, and then just go influence another number, and you can bring that up pretty quickly. And then when you have more leads, should be easier to increase your average yield value, because you can start testing out messaging and testing out offers like, a lot faster, because you have more conversations, yeah. And so by bringing all of them up kind of sequentially, you know, just keeping that even bar, I guess, becomes way better, and then make a challenge of, like, producing the sales cycle length, right? It doesn't seem substantial, but if you can, like, reduce that by a couple days for every single deal the end of the year, that's revenue that came in, right? Like, way faster. So I want to

Speaker 1 26:01
pull on that thread, if you don't mind, because this has actually been a very relevant, I feel like, across the board with my clients, we've all felt, you know, somewhat out of our control. The closed cycle, I think, has really extended. Yes, certainly last year it really stalled out. But I think we've even seen some some lingering effects into 2024 so I hear what you're saying, and I'm, in theory, in agreement with that. Of like, let's see what we can do to shorten that closed cycle. But for the client who comes to me and says, Tony, I wish I could do that, but, like, practically, I don't have any control over this. What would you say to somebody like

Chris DuBois 26:39
that? I think there's so many variables A lot of times, especially if the the person running sale, usually it's an agency founder. They don't always have a ton of sales experience, right? A lot of them will let the prospect control the sales cycle. And so they set like, hey, I'll get back to you on this date. It's like, well, actually, can we meet next week? Right? Let's, let's just chat next week. We'll do a quick check in, right? See some progress, so you at least maintain some control. And you kind of say this is what the agenda will be for that meeting, right? But you're, you're kind of still forcing it forward, even if it's not happening. There's some that like, yeah, they're going to forget about you. That's it. Often it's because there's no urgency, right? There's no There's something with your offer that doesn't get after the right pain point that they're feeling right now. And so, so if you can go in and say, like, I can resolve it, like you're feeling this every day, let me resolve it for you, and it goes away, right? Like you don't have to worry about this. Yeah, there's also the challenge of in in in B to C, if I buy the wrong toothbrush, I'm going to return it, right? I'm going to get a different one. Hopefully they don't put it back on the shelf. But in B to B. Now, when Bill hires me, if I don't work out for them, like Bill's job is on the line, right, I potentially influence his status. And it just might not work out right. And so I need to be able to give as much proof as possible to increase the perceived likelihood of achievement through me, that they can get this dream outcome. Because not only do I need to get get them that win, but Bill, or whoever the person is right, their status is attached to that win. And so, yeah, there's so many like variables that you have to kind of pay attention to within this. And it could just be like, Objection, if they're hearing the same objections and not tracking them. It's like, Go pre address them. Put that on your website, include them in your offer. Include like the solution to that objection as something you're just going to give them. So before they even bring it up, you're already saying, I take care of that for you. That's so good. And now your sales cycle just shorten dramatically.

Speaker 1 28:47
Well, and I think that's that's really helpful, because I think that is a lot of low hanging fruit, if we're being honest. Like, I think there are a lot of times what you had said about needing to your offer might not be well packaged to create a compelling, like, urgency for like, why now? And I've, I mean, I certainly have seen that for being honest. Like I seen that in my own, my own practice sometimes as well, which I'm always like trying to readdress, but, but in my for my clients, like, I can see that. I can perceive that in how they construct their offer. I think it's probably worth noting that some of the stuff also depends on the types of clients, like where you are in the market, where you're trying to reach your clients. So if you're working enterprise level clients, there's going to be a lot more complexity to address in terms of, like, bringing that closed cycle down, and you might actually not have hardly any control over that, because, you know, you get a multi million dollar, you know, almost billion dollar a year company that you're selling into, and they've got very rigid finance process. I know I came from corporate America in the finance world, so I know, like, how rigid some of these budgets and processes can be. So it's probably helpful to clarify, like, this is. I would imagine, largely applicable for more mid market, certainly small businesses. But the larger the business you go, it gets a little bit harder to address the days to close,

Chris DuBois 30:09
yeah, and there's definitely, there's certain things you can be doing. Max trailer is a huge proponent for building relationships with everyone in the C suite, right, so that you can influence that more, and even at an enterprise level, that can help, right? If you're, yeah, you might be directly talking to the CMO, but if your buddies with the CFO and you find a way to make sure they know it's going to be a good investment, and the CEO, you know, you got their ear, and they're telling the CFO, like, hey, we want to hire these guys, right? That you probably still can't influence that, but depending on the size of the company, getting into those relationships becomes hard, and so you got to have a strategy for how do you do that? That's right. The other piece is like, just go look at most agency websites. They don't even have an offer. They have services that they list. And that's so true. So especially for if you know, if you are mid market or looking at SMBs and stuff the it's like, someone's going to go to your website, they're going to see all these services, but there's no real like, offer. So they're just going to go look at other companies that have the same services, and they're going to try to to bet on, like, who can get me the closest to this outcome? And really, it's going to come down to the price that's right. So, so now they're going to go into, you know, talking to you, looking really like to negotiate and, like, try to get that price down as much as they can, instead of you having an offer that's tied to the dream outcome, where they come in and say, That's exactly what I need. Here's my check, right? Like,

Speaker 1 31:37
yeah, yeah. So piggybacking off of that, though, like, if we're honest, probably most of the reason why many agency owners don't have a very compelling offer is because they don't really even have a compelling or clear ICP,

Chris DuBois 31:51
yeah, one target audience, one problem with one solution of service. You can if you can do all of that right? And eventually you start adding on other services. But this whole idea, and I'm gonna ruffle some feathers with this one, the idea of a full service agency is, like, you can't be an expert in everything, and at that point, like, your client is paying for convenience at that point, but they're not paying for the top tier results, right? So you're essentially saying, Yeah, hire me if you just if you want convenience, but like, hiring an ad agency is going to get you far better result for ads than someone who does websites, ads, design, everything else.

Speaker 1 32:30
So I have a, I have a hypothesis that I think says is like a yes and to what you're saying, which is to say, I think you need to be mindful of the market that you're into, right? So lot of marketing agency like So back in, you know, call it 2030, years ago, marketing agency world was a very different space. It wasn't yet commoditized, but where we are today, in a commoditized market, it doesn't work to be a I do everything place anymore, because if you do that, at that point, you are now you are in the bucket of commoditized. And really the only play you have is a competitive advantage in your pricing. That's it. But if you are in a cutting edge field, if you are in a place where there aren't a lot of people that have flooded the market, ie software development, although it's starting to become a little bit more commoditized with the commoditized with the rise of not only with AI, but also with offshore, really, really good offshore talent now, but by and large, the software development agency is still a little bit insulated from this issue, so they can play a little bit more of generalists and still get away with it. But it's not going to be long before they're going to be in the exact same spot that spot that marketing agencies are, where a lot of their services are going to be commoditized, and they need to go after a much more clarified niche and audience,

Chris DuBois 33:51
right? And so that's where having that that one problem that you solve, so that you can tie the dream outcome to it. So when someone comes to your website, you can say, Hey, do you want this piece of software fully developed and done like this and like you kind of get them anchored to that future solution, and so that you don't say, we develop this, we do this because then, yeah, you're just in that bucket with everybody else, instead of getting them to think about and get in the future pacing and all that. Yeah, going back to some finances stuff, not every agency owner is good with numbers. I think everyone kind of enjoys playing with the numbers, and maybe that's just me, when you're the one, like responsible for them, because it's like, oh, look at all the money coming in. Probably less exciting when the offset is true. But how do you recommend they get the like financial literacy to be able to even know what to look at?

Speaker 1 34:48
That's such a great question. You know, fun. Fun enough. Fact, equip my business, and I'm actually, I'm wearing, wearing my shirt right now. This is our tagline. Literacy is power on the back, it says, Learn the link. Of business. I'm such a huge proponent of knowing and understanding the language of business, ie, accounting does so much to set you apart from your peers and your competitors. And so to your question about, like, Where can people go to learn this stuff? I did create a course for freelancers in particular, because I see freelancers on the continuum of agency world, right? Like most, most agency owners started off as freelancers. That's That's how many of them kind of cut their teeth. They started off as freelancers. They moved to kind of a freelancer Plus model. Then they created a micro agency, yada yada, and they're so on and so forth. So I created this course that's very basics, understanding of like, how to keep your books. So for people who are listening, who might be more on the freelance side of the house, I would highly recommend, I mean, I'm a little bit biased here, but, like, I'd recommend, just go, take that course. It's gonna help you to know how to keep your own books. And I think when you are in the spot of learning how to write your own financial story, you're that much more likely to understand it as things get more complex. Because the reality is, is like, even when you grow, you know, to a million or 10 million or 20 million as an agency, agency finances are just not that complicated, right? It's not a complicated you're not an inventory business. So you don't have a lot of that complexity there. It's just that the numbers get bigger. That's it. But the fundamentals of the business are pretty straightforward, right? It's what's your revenue, depending on if you're talking to like an a marketing agency or an ad agency. You might need to clarify, what's your net revenue, right? So not, not what your what's your gross revenue, and then ad spend and all that kind of stuff. We're seeing net revenue, net revenue, cost of sales, sales, marketing, General, administrative, sometimes research and development. And that's it, right? That's, that's your income statement, right there. So I think that would just be, that would be one thing is, is understand just the fundamentals, the basics, which is your income statement. Most of the time you don't have to really worry about the balance sheet. But yeah, I'm curious. I throw the question back to you. You mean you you as a non financial person? Where have you found it's been most helpful to get that education

Chris DuBois 37:18
Google to to find other like, I basically found a bunch of spreadsheets that did what I wanted them to do. And I eventually started using chatgpt Once I came out where I could say, hey, I need to track this number. What's the formula? How do I set up these cells in order to do this? Then I just made the spreadsheets, and I set it up in a way that everything talks to each other so that I don't have to like I know the numbers are doing what I need them to, and I don't have to think about the math behind it. I just know as long as I put this value in this cell, everything else works. I do need my tax guy to verify everything at the end of the year, because I'm not about to be friends with the IRS like that. But, yeah,

Speaker 1 38:02
I mean, so can I? Can I piggyback off of that real quick? Yeah. So one of the things we talk about in in my course, is a lot of times when we think about numbers, we think about our accounting, if you will. Usually we're thinking about tax accounting. We're thinking about, Oh, I need to file my IRS, you know, my 1040, whatever else like that. But we are missing out on so much meaningful data if we think that the only reason we keep books and records is that we can file our taxes right like you will be set up for failure if you do not understand your numbers outside of what the tax implications of it are. And so, you know, this is where I talk about, like, there's, truly, there's three audiences at any given time. And for many agencies, it's usually just like two audiences, it's government and then management. And I think we need to do a better job in the agency space of creating a category for I need books that I can make management decisions based off of. Because I think, I don't know if this is the case for you, but I think a lot of agencies are overly reliant on, I keep books just for taxes, and then they don't touch them for any other purpose.

Chris DuBois 39:11
Yeah, I definitely see that happening. I think one of the challenges is that a lot of agencies don't know what decisions they should be making based off the numbers, and so when you know what decisions you have to make, and then you kind of backwards plan from there, right? If I need to make this decision, what data do I need? And then you realize, like, oh, this financial information would be very helpful for me. Like, you can start paying attention to those numbers a lot more. Yep, yeah. I

Speaker 1 39:33
mean, if I can just give like, sparks notes real quick again, if you think about, like, the three primary categories, cost of sales, your sales and marketing, and your general administrative on the expenses side, on the expenses side, you know, typically, gross margins are an excellent indicator of something that is flawed in the fundamental of your business, right? So I see it. The reason why I talk about ICPs all the time and I talk about sales and marketing all the time is because I see it play out in my gross margins. If I have an agency that is. Making less than 50% gross margins. I know beyond a shadow of a doubt they don't have a clearly defined ICP. Their offer is floppy at best, and they are not pricing according to the market. So gross margin is a great indicator of even the positioning of the service, right? So I've got one client who they're consistently between 60 and 65% gross margins, well positioned, very premium brand. And then on the end of this other end of the spectrum, I got some one that's more, you know, 47 48% somewhat up to 52% gross margins. And they struggle a little bit, you know, partially because of the nature of the the nature of the work that they're doing, but also because of just the the lack of an ICP. And so I can find a lot of opportunities for growth if I look at just my gross margins right. So that that right there, I would just say, let's see if we can get our gross margins accurate sales and marketing. This is what I was telling you before. Three to 8% of your revenues, typically, is what people are spending, and that's why their sales, their pipeline is so dry, so there needs to be more spending there, and then general administrative, let's be honest, there's a lot of GNA creep and runaway GNA costs before you know it. You've got way too much overhead people who are not generating revenue, who are not helping you to potentially generate future revenue. I mean, you're kind of setting yourself up for failure if, yeah, if you're not addressing your DNA spending, yep.

Chris DuBois 41:36
So let's get into the 8020 for agency finances. It what is that big domino that founders could knock down today to make all of their finances just easier to manage in the future? Yeah, this

Speaker 1 41:50
is gonna sound incredibly boring, so I apologize everybody who's listening to this, usually the good stuff. So the good stuff, it's so basic, and I'll tell you this right now, it won't take that long to figure out get your chart of accounts set up, right? Really, I mean that that's going to get you so much further, right? Because, because Chris, like, I kid you not, the number of times I have conversations with, uh, agency owners, and the amount of times where they're like, Yeah, I have a bookkeeper. But I can't tell you the last time I even looked at any of their reports, and I'm like, why is that? It's like, well, when I open it up, it's just like, line after line after line after and it's just like, I don't know up from down, I don't know left from right. It all looks so confusing. It's like, can I just tell you this right now, if that is the report that you need to be looking at. No wonder that you hate looking at your finances. It's not it's not a I'm a bad at math. That's not it. That's not the problem. The problem is your chart of accounts is an absolute dumpster fire. And so as a result, the reports you're getting are just hot garbage. I couldn't make sense of them if I wanted to. So if you want 8020 rule, like we're talking do it today. Go and make sure that your chart of accounts is set up in a way where you can be successful by just clicking the report button, and you can understand at a high level what's happening in your business.

Chris DuBois 43:18
There you have it. Folks, go knock it out. Man Tony, this is a we, we went all over the place. So this was a good conversation. I got two more for you. Yes, the first being, what book do you recommend every agency owner should read? Yes,

Speaker 1 43:33
this is one of my personal favorites. I tell everybody I talked to about this. It's called multipliers. I have Liz. Liz Wiseman, you're familiar, yep.

Chris DuBois 43:42
Greg McCune did the some of the research for that book.

Speaker 1 43:46
Yep. It's so good. I had so many light bulb moments when I read it, partially because, like, Oh, I see myself doing this stuff, but also like, giving me words for the experiences I had working with managers who were accidental diminishers. So highly recommend especially, and I say this especially for agency owners, because, you know, the bulk of the work that we're doing is it's empowering people, and it's all about the brain trust of the people. And the best way to unleash the power of your people is by multiplying their impact by doing all the things that they talk about in the multipliers book. So it's a good, good book, good read.

Chris DuBois 44:24
Yeah, the concept, it was something that I learned in the military, where you have tools and individuals who can become force multipliers. And in one of my roles as a executive officer at a company level, it was like, I'm never going to be the guy shooting my rifle, but I've got a radio, and on that radio, I was talking to, you know, the helicopter pilot, the artillery, my mortarman, my sniper team, moving my men on the ground, talking to my vehicle commander. And it's like doing all of that at once to facilitate everything that we needed happening. It was like that. That's was like my understanding of being forced. Multiplier. And so, yeah, when you get into the leadership side of multipliers, like, if you can bring that to your business, it's like, unstoppable. So where can people learn more about you?

Speaker 1 45:13
I would say LinkedIn. I post every single business day, and I also have my own podcast, the dev launch podcast, which we currently are on a schedule of every other week we publish, but I have such a backlog of episodes, I might change that to weekly, but oh my goodness, I love having the conversations I've been having on that podcast, because I learned so much for nothing else. I just like, feel like I'm getting like a mini MBA just by listening to people's experiences and thoughts.

Chris DuBois 45:42
Cheers, so I checked that out. Awesome. Well, thanks for joining.

Unknown Speaker 45:46
Absolutely thanks. Thanks so much, Chris. I appreciate

Chris DuBois 45:53
it. That's the show everyone. You can leave a rating and review, or you can do something that benefits. You click the link in the show notes to subscribe to agency forward on substack, you'll get weekly content resources and links from around the internet to help you drive your agency forward. You.

Transcribed by https://otter.ai