Agency Forward

Chris DuBois 0:00
Hey everyone. Today I'm joined by Brandon cordauer. Brandon is the founder and CEO of aura, a strategic advisory firm helping marketing agencies scale with clarity and control. He specializes turning messy financials into real visibility and helping agency owners make smarter and more confident decisions with their money. I brought Brandon on because most agencies don't fail from a lack of talent. They fail from poor financial visibility. Brandon helps founders understand what their numbers are really saying and what to do about it. In this episode, we discuss the difference between a bookkeeper and a Strategic Finance partner, how to spot hidden red flags inside your P, L, why your margins might not be as good as you think. And more, no one was asking for another community, but I've made one anyway. So what's different? The dynamic agency community is designed around access, rather than content, access to peers who've done it before, access to experts who've designed solutions, access to resources that have been battle tested, and right now, the price for founding members is only $97 a year. Join today, so your agency has immediate access to everything you need to grow. You can join a dynamic agency dot community and now Brandon court our 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. Why do so many agency owners struggle to trust their financial data.

Speaker 1 1:44
That's such a great question. I think there's this misunderstanding of what should an agency owner be looking at. And most agency owners are running their books on something called cash basis, which is like the basic form of accounting that most businesses use. And the way you do that is you look at your bank statements and you look at your credit cards, and when you see money coming in, it's recorded as income, and when you see money leaving, it's recorded as an expense. And it's very easy to do that kind of bookkeeping. The problem with that is it creates a lot of timing differences in the financials. And so what you end up with is you end up with a lot of margin swings. One month may be a very large profit, and the next month could be a big loss. And it really just depends on when your customers are paying you and when you are paying your vendors or payroll, and that creates confusion, because agency owners get very frustrated that they're not able to look at their financials and make sense of it. But there is a way to overcome that, and something called accrual accounting. And what accrual accounting does is it aligns revenues and expenses together in the same period of time, getting rid of those margin swings and those timing differences. So that way, you can see okay, for the amount of revenue I actually earned this month, regardless of when my customers paid me, here's the amount of revenue I earned, and here were my costs against that. And then by seeing that, you then get accurate insights into what your true margin is, and then you can actually track that month to month, and you can see trends about where the business is going. And so I think that's probably the biggest misconception, is that you can get that visibility. It's just it requires a little bit more sophistication to do it properly,

Chris DuBois 3:41
right? I'm running on a cash basis because I'm a solopreneur, like, I can handle that. That's about as much as I can handle when it comes to Financials. But, yeah, it's it crushes you when you like, I had one client who missed an invoice but paid the next month's invoice. Realized, Oh, I didn't pay that month, and then paid it in this month. So now I have, like, this month looks better because I have like, extra cash, and it's just like, Yeah, but when I actually look at my numbers, like it doesn't add up, right? It's actually more gradual, yeah?

Speaker 1 4:13
And another great example is, like, payroll is a big one, so people that have bi weekly payroll, right? You're getting paid every other week. And so what that means is that there's going to be two months the year that you have three pay periods in a month. And so for 10 months of the year you're actually under reporting your Payroll Expense. And then for two months of the year you're grossly over reporting. And so once again, you get to this place where it's like, if you actually want to know, like, how's my agency doing? What are my true margins? You can't get there on cash alone. And you know cash is perfectly fine when you're a solopreneur or even a smaller agency, but when you start to get larger and you need to start really reinvesting back into the agency by developing a leadership team. And, you know, really increasing sales and marketing spend, it becomes really important to make sure, am I hitting the right kind of margin, and will I have enough profit to reinvest back into the business, right?

Chris DuBois 5:11
So what, what would you say is the first step for getting into the accrual accounting?

Speaker 1 5:16
So first step is time tracking. And I know that's, that's a nasty, yeah, that's a nasty word in the agency world, and I get it. But the reality is, you're not going to be able to get accurate data if you're not time tracking, because without understanding who's working on what account and when people are doing billable versus not billable work, you're not able to really then take that information and incorporate it into your financials. And so I know nobody likes to talk about it, but it really is a necessity in a business is to understand time tracking. And even as a solopreneur, I really encourage time tracking, because when you are small and you're wearing many hats and working on many clients, you don't really know where your profitability is. But as you start to grow and you need to bring on staff, you need to understand like, Am I making enough margin to even bring on staff? Do I even want to continue taking on this kind of work. And if you don't know how much time and effort is going into your clients, and you're not able to track that and determine what your margin is, you will dig yourself into a ditch if you're not making enough profit,

Chris DuBois 6:34
right? So we've been recording for about five minutes, and literally everything has come back to data so that we can make better decisions. What are some of those key data points that we want to look at so that we can make good decisions within our agency?

Speaker 1 6:51
That's a very good question. I think, to me, the biggest impact you can have on your financials is something called gross margin. And so gross margin is basically your revenue minus your direct costs, gives you gross profit. If you take that number and divide it by revenue, you get a percentage. And gross margin as a percentage is going to tell you, am I making enough money doing the work for my clients that I am, and a good rule of thumb is really any service based business, let alone an agency, should really have a minimum of like 50% gross margin. If you don't have a 50% gross margin, you're going to have a very difficult time scaling your agency. And so that, to me, is like the biggest lever you have in being able to increase your profitability, because increasing that gross margin 10 percentage points has a significant effect on the bottom line. For instance, if you're at a 60% gross margin and you go to a 70% gross margin, you actually increase your overall profitability by 56% and going from 60% to 80% could grow your profitability 150% and so even just 20 percentage points, it's like, oh, 60 to 80 it's not that, oh, it has a huge effect on the bottom line. And so I would say overall, that is the biggest metric. I would say the second one would be something called your net operating margin, which is basically net profit before interest expense and taxes, if you were a C corporation and so that number there you ideally want to be at 20% now the caveat to that is, a lot of people are doing above 20% but the reason they're doing higher is because they're not actually paying themselves the wage that they should be, right because we're tax advantaged to take a lower salary and take more as distribution. But if you actually put in your true replacement costs within the agency, if you as the owner, step out and say, Okay, what would it actually cost me to put people, inject them into the agency doing the work I'm doing? That number should be 20% and if that number is less than 20% then you need to figure out how you can increase the overall margin on the clients you're servicing. Yeah,

Chris DuBois 9:17
one that one, I think it's also important. Because I've talked to agency owners who are thinking, Oh, I'm looking to sell. Let me not give myself a huge paycheck. So my numbers look better, not realizing that whoever's buying it is going to base it off what the cost for bringing in someone to run the agency would be, and now it's going to impact your numbers. Like it doesn't matter. Just pay yourself. You just lost money by not paying yourself

Speaker 1 9:41
exactly. I mean, it's not, you know, people think they're sneaky, but to your point, this is very commonplace, right? So you're going to have these adjustments to your EBITDA, and this is, that's a perfect example of a place where they would adjust, okay, yeah, what is the replacement cost for you within your agency? Regardless of what you were actually paying yourself, right? And so when you kind of start looking at it that way, and as long as you can hit that, if you're hitting that 20% metric, and your margin is, you know, gross margin is 50 to 60% or greater, you've got a healthy, scalable agency. If your numbers are lower than that, what you're going to find is the only way you can continue to grow is likely through either taking on investing capital or debt. And I've unfortunately run into too many agencies that were so focused on top line revenue growth that they loaded themselves up with debt, only to find that they're not profitable still at the end of the day, because they didn't focus on the systemic problem in the agency, which is they were not generating enough profit to start with. And so there's this misconception that, okay, just bringing in new business is going to solve this problem. It doesn't. If you're not profitable on the services you're offering,

Chris DuBois 10:59
a curiosity, were they taking on debt via investors or loans? Loans?

Speaker 1 11:04
Okay, and so I was talking to an agency about six weeks ago who was doing about 5 million in top line revenue, and they only had a 5% margin. So they were $250,000 in profit. The problem was they had millions in debt, and so any profit that the business was generating was just going back to servicing that debt, so they had nothing to show for it at the end of the day, right?

Chris DuBois 11:27
And was reading some stuff recently of a couple guys who were looking seeking investment for, like, a service firm. And it was a lot of people just saying, No, don't do that. Like, all these bad reasons for doing it, but I simultaneously know someone who grew their agency very fast over three years and then was able to sell because of investor money to make it happen. Oh,

Speaker 1 11:50
absolutely right. It really comes down to, how are you going to use that investment? And at the end of the day, you're still only going to be valued. You're not going to be valued on top line revenue, right? Your value comes in on the profitability that the agency generates, and so you're going to receive a multiple of EBITDA or profit. And so, yes, absolutely, the leverage of you need working capital, right? And that's another reason why actually accrual accounting is so important is because you're speaking the language of finance. And so when you go to a bank to get a larger line of credit, or if you're going to exit right, you're speaking that language of finance leverage is, is everything it's about. Are you using leverage in smart ways? Right? Right? And if you're only focused on top line revenue growth, but you have bigger problems in the agency, which is, it's not generating profit to begin with. That's where your focus should be. You know, one of my favorite little sayings is, revenue is vanity and profit is sanity. It's actually

Chris DuBois 12:52
come up on quite a few episodes recently. Same thing I like viewing, like business as a game of debt, where, for a lot of things, it's just attention debt, right? Like I'm going to start my practice, I'm going to focus on marketing, and might mean I'm not paying as much attention to operations, sales, other things. And so I have to be okay with that. I have to make the deliberate decision when I take investment, I'm now saying your money is makes it so I don't have to pay attention to these things, because I can't, like, bring other people in to run these, or I can buy systems and do these things, but still have debt that's being accrued in there. I think the key point to what you were saying is, like, when you're not using the lens of profitability for those decisions, for like, the decision of debt, how are we actually processing this?

Speaker 1 13:40
Well, you bring up a good point, and I would even take it a little step further, which is, you know, businesses all opportunity costs as well. So, you know, we can only do so much within the business. And so the question is, what is the opportunity cost by you not focusing in other areas, or have other people focusing in those areas, right? And so it's important to be considering those opportunity costs, along with with what you're seeing as well. But yeah, no, definitely look, business is leverage, right? It's, it's, how do you maximize the return on that leverage? And ultimately, what I like to make sure people focus on is, how do you deliver the highest value service to clients at the greatest margin for you? And all that's going to do is allow you to scale easier, be more profitable, reinvest back into the business, or just live off those profits, if you want to. But it gives you that flexibility if you create a healthy, scalable business. It gives you the freedom to choose how you then use those funds.

Chris DuBois 14:46
So that's a question I'm asking a lot of people now, because I'm super interested in the answer. A lot of the agencies I work with, the challenge isn't profitability at their stage. They're not making enough revenue to where influence. The profit at like, their margins actually has, like, a bigger impact, right? If you're only making 100k 200k It's like, which actually that's way smaller than any client I'm gonna work with. But in this example, thank you, everyone for staying with me, for that having a 20% you know, net profit margin versus, I mean 2 million and now we influence that by 5% like we're talking what, $5,000 difference at one point versus, I don't even know how to do the math on that, that number later. So like, at what point, and this was a super long winded way to get here, sorry. But at what point do you say, hey, now we've, we've hit enough revenue that we should really start prioritizing more profit. Obviously, we're not completely like ruling it out as we're we're starting. It's still in the picture, but revenue might actually be the bigger requirement at certain sizes. Where does that shift?

Speaker 1 15:53
Well, I think even from the beginning, you just want to make sure that the type of work you're doing is profitable and scalable, because unfortunately, I've just seen so many businesses that from the beginning weren't profitable. So even if you 10x or 100x the amount of revenue at the end of the day, there's not going to be really much to show for it. And so I do think from the beginning, you want to make sure that you are maximizing the value that your clients are receiving, while also, at the same time, you know, maximizing the profit that you were able to generate on that. And so I think one of the biggest levers for both revenue and profit growth, in my opinion, is finding a niche, right? Because now you're no longer competing with others. It's no longer a race to the bottom of who's the cheapest to perform the work. It's really you are able to speak to your ICP right or ideal client, and you can, you know their pain points, you speak their language, you bring value to them, and with value comes higher price right at the same time, it gives you a competitive advantage over other ones that they're seeking that okay, are industry agnostic, and they work with everyone. So why? Why would I work with somebody who works with everyone, when I can work with somebody who's an expert in my industry. And so I think that's one of the biggest hacks, is really finding a niche. I wish I had done it much sooner. I waited far too long to find my niche. Music to my ears

Chris DuBois 17:30
This is, I mean, it's literally what I'm presenting on tomorrow for the summit, which this episode will be out after that. But I think the those who go full service, or don't focus down. I think you can't who is Tony Wilson? No, I'm just gonna keep naming names. I think it's actually Marcel Petipa who brought this up. It's like the math can still math for those businesses. It just might not be as sexy. And what I found with those going full service, or those serving everybody, it's like very frequently, you're not finding the target audience who's looking for expertise and like that high level service, they're just looking for one throat to choke. They they're prioritizing convenience over results. And no one is going to pay more for convenience than premier results. And so when you just take that, it's like, yeah, you can still have a business that works, but like, it's not going to work as as fast, like you're not, you're definitely not going to see those profit margins. We're talking

Speaker 1 18:26
about No, no, and it for a myriad of reasons, right the well, obviously you can, you can, you have more value, can charge a higher price, and then internally in the organization now you can really streamline processes around one specific niche, versus if now you're going into a new industry you've never gone in before. Now there's a lot of time and effort to learn that industry, right? And so you do that, if you do that every time with somebody new, what are you doing? You're eroding profitability, because that's time that your staff and you are having to spend figuring out the nuances of that industry. You brought up an interesting point, which is about full service. And I see this a lot with agencies that start they want to turn full service right, because they want to offer everything to their clients. And what I find with many that do that is they're not actually, they're not looking at the margin per service offering right? And that what it comes back to, time tracking, right? Time Tracking 101, is okay. How much time are you spending on a client? Time Tracking 201, is okay. How much time am I spending on my client, and what service am I providing for that client? Because with that information, then you can actually see what is the margin. Not only am I generating per client, but per service offering. And you think offering this new suite of services to your clients is going to help grow the bottom line, but what you may find is you're losing money offering many of those services. And so I think back to your point really like, find what you're good at and double down on it and make that. Path

Chris DuBois 20:00
surprised we didn't connect sooner. This is just everything you're saying, just it's right on. I preach one audience, one problem, one service, the closer you can get to having that easier it is. Have an offer that is just compelling. You don't have to convince people in a sales call. It's like they're showing up with their wallets open absolutely and so okay, if, if you had to pick, like, that kind of 8020, rule, right? Like, what are those, those few things that an agency should be focused on in order to maximize profit? What would you and you might have already said them, so I might have just given all that away. But let's just recap under that question, sure, what would those points be?

Speaker 1 20:42
So I think if kind of going back to understand your customer, who is your ideal customer, understanding their pain points and what they need, and then being able to drive service around that in a way that you can do efficiently internally, is the path right? And so it all goes back, ultimately, to get enhancing the gross margin. How do you maximize the gross margin? How do you find the right client to go after, and then find your go to market strategy for going to them? If you're just referral based and you're sitting around waiting for the phone to ring, the wrong kind of business is going to be coming to you. You have to go out and attract the right kind of customer. And that's the con. That's the con or the the reason people don't want to niche, right? Because if you have referral sources that were consistently bringing you opportunities, and now you've kind of diverted. Well, those may dry up, but the reality is a lot of that business coming to you may not have been the right kind of business, and so you've got some short term pain you're going to deal with as you find your niche and double down on it, but I do promise that kind of going head on with that and then bringing on the right kind of business, knowing the right kind of business, knowing what you're good at and what you make margin doing is important, right? Because once again, it gets back to this is how you're going to scale and grow the agency. And if that's important to you, figuring these things out earlier is really going to make it that much easier to kind of go on that path. And if you're not there currently, but you're in a place where the agency is a little bit larger, but you're struggling, then you may want to evaluate, okay, what can we do from here forward? And look at the look at the book of clients you're with, and who do we like working with, and what value do we give them? And how do we double down and get more of that kind of business. I think that's really the 8020 at the end of the day is because ultimately it all will trickle down from there. If you deliver good work, high value, and you're generating enough profit with it, everything else is going to fall into place,

Chris DuBois 22:55
right? What are your thoughts on Project margins?

Speaker 1 23:01
So I think ultimately, the thing is, with margin around projects, is I, it kind of goes back to if you're not generating a 50% on a project, and that's, that's not the kind of business I would be focusing in. I obviously, I'm a little bit more of a fan of retainer work than project work, because it's recurring in nature, and the fact that it is recurring means that, over time, you can continue to optimize and become more efficient in what you do and find ways to enhance the margin in a project. You're kind of you're stuck in that project. And look, some people have to only focus on project, and that's fine. Make sure, when you're pricing, that you know how much time it's actually going to take. Build in some buffer in there, and then really, kind of, you know, afterwards assess, okay, we thought it was going to take this How much time did it actually take? Because if you don't take that time to reassess and evaluate. You may lose money on every future project because in your mind, you have a pricing strategy of how you're estimating for that. But that may be wrong, so I hate to do this. It all comes full back circle to time tracking. So key, yeah,

Chris DuBois 24:16
it. Time Tracking is one of those things, like everyone rallies against it. I can't remember who told me this now. They're like, yeah, every agency owner goes through the cycle where they it's not a cycle, it's just a path. They're like, No, we don't need time tracking. We're not good. And then like, oh, well, time tracking would be good. And then they're like, Oh, why didn't I do this earlier? And it's like, if you could just speed that up everybody, maybe it's something you have to learn for yourself. And that's why it's like, it's valuable well.

Speaker 1 24:42
And I think, you know what they what they find is they get pushback from the team, and I think the team needs to understand the importance of it as well, right? Guys? We're not just doing this to give you an extra thing to do. We're doing this so we can evaluate what's the right kind of. Business, what you know, like what's working and what's not working, right? If people are invested in the success of the company, which I would hope every one of your employees is, they should understand why this is so important. And on top of that, I think it's important to emphasize that this is not for micromanaging, right? Because I think some people get concerned around time tracking, because they think, Oh, my employer is just trying to make sure I'm working all the time. That's absolutely and I think you need to relay this is not about that. This is about understanding where the business is, what's the right kind of work we're taking on and really then doubling down on that. And I'm very much a believer in my own organization. Look, if somebody can get a 40 hour work week done in 20 hours, good for them, right? I am happy for them, right? But I just want to know that I am generating a certain amount of margin delivering my service to my clients, and I need to be relentlessly focused on that to make sure that I can grow a healthy, scalable business. Yeah. Business.

Chris DuBois 26:03
I have known a lot of agency owners who do look at it more as the opposite you do. We, you and I are aligned on this, thinking of like, hey, we did 20 hours. Like, yeah, good. But they're trying to micromanage to make sure people are working. It's like they don't see the value of just knowing where those hours are actually going, because something has come up multiple times in here is like, you have this service based, like, economies of scale, right that we can, we can leverage by just knowing where those hours are going. And so the way I would frame this for our team is like, hey, remember that time you had to work, like, 50 plus hours a week, and it sucked if we knew how much time it was going to take you to do that because we had the data to back it up that never would have happened, and it'll never happen in the future. It's like, wouldn't you rather have that?

Speaker 1 26:48
Like, Oh, absolutely. And I think it gives you some good insights into because if you have a team, if you have people in place that are really efficient, and they're your A players, the reality sometimes is that your A players are three to four times more productive than your B players. And so when you can cap when you can see a player opportunities, sometimes there's financial motivation there, and you can create an incentive structure to say, Hey, I know you're getting a 40 hour work group done in 20 How would you like to create a bonus plan where, you know, basically it's going to be cheaper for you to incent that person to take on more, and then it would be to hire a whole other individual. And sometimes people aren't motivated, right? That's right, especially you know, a lot of younger people are more motivated by work life balance and understanding that it is important and not pushing that on them. But for some people, you know economic incentives outweigh and knowing that you can get a lot more production out of those people is a real hack to basically just adding to the bottom line,

Chris DuBois 27:54
right? So at what point should agencies like consider bringing on a fractional CFO?

Speaker 1 28:01
So I would say that agencies should understand their numbers from the beginning. I would say, if you're doing 500,000 to a million, that's really when a crow becomes paramount, and that's when you don't necessarily need a CFO, but you do need a controller. Right? When you are evaluating CFO, a CFO, in your mind should be, my numbers are clean. I'm getting everything I need monthly. But I need strategy. I need more reporting. I need analysis. That's really what you should look to when you're exploring a CFO. What I personally would probably avoid is if you have a bookkeeper in place giving you especially cash basis financials, the often the next step people think of is, oh, I need a fractional CFO. And what they're going to find is we end up in a garbage in garbage out situation, because a true fractional CFO does not want to be closing your books. A fractional CFO wants to be doing analysis, but if they're relying on poor data to do that analysis. Well, you're not going to get a lot of output from it,

Chris DuBois 29:02
right? Well, and it impacts them for, like, what they can actually do for a strategy anyway, so they're just going to get upset and want to take off totally. And look,

Speaker 1 29:12
it's an unregulated industry. Anybody can call themselves a CFO. And so what you're seeing more and more is you're seeing more bookkeepers call themselves CFOs. And if you, if you run across a CFO that wants to be closing your books, kind of a red flag, right? That's typically where, like controller. So really look the next step after bookkeeping really should be a controller, right?

Chris DuBois 29:35
That's a good, good tip, right there. So as we wind down, I have two questions for you, first one being, what book do you recommend every agency owner should read?

Speaker 1 29:47
So I think to kind of come full circle, right? We want to make sure we're generating the right margin with the right service offering. And it's kind of cliche, but I really do enjoy Alex hermosa. These 100 million dollar offers for this reason, because it gets you to think about what is my right offer, who is my demographic, and am I profitable servicing that? So for anyone who I know, a lot of your listeners may have listened. If not, it's a very impactful book, just for this reason. So I would say that would be the one at the top of my list if you haven't

Chris DuBois 30:21
read it, awesome. Last question, Where can people find you?

Speaker 1 30:25
So you can find me on Instagram. I'm at aura, CFO, a u r a CFO, and I'm also on LinkedIn with my name just Brandon Cordova. Thankfully, I'm one of one. There's no other like me. And yeah, and anyone can feel free to email me at brandon@orccfo.com, I'm very passionate about agencies, um, being profitable and successful, whether they're working with me or not. And if there's any finance related questions, happy to always schedule a call and talk

Chris DuBois 30:55
to someone awesome. Brandon, thanks for joining, Chris.

Unknown Speaker 30:59
It's amazing. Thank you so much.

Chris DuBois 31:05
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 sub stack, you'll get weekly content resources and links from around the internet to help you drive your agency forward. You.

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