Digital marketing agencies can refer to different kinds of businesses, including design-dev agencies, SEO-PPC agencies, as well as product-only.
Usually founded by people with creative and technical expertise, these marketing businesses often grow out of a partnership, with one business owner leading the development efforts and the other in charge of sales.
However, this division of labor leaves an important role vacant: finance.
As David C. Baker, author and agency advisor, explained on an episode of the Virtual CPA Success Show, “At least one of the partners has to think that one of their primary jobs is to understand and impact the financial performance of the firm. That’s job one. That’s even more important than culture. It’s more important than new business. Once you get that done — and you may need some help with that — then you can move on to those other things.”
“But if the firm isn’t performing,” he cautions, “It doesn’t matter how good your new business plan is. You won’t need one.”
Why Do Marketing Firms Need Accounting Services?
In the early days of an agency’s life, it’s possible to increase profitability through hard work and talent. However, when the agency reaches a certain size, business growth tends to stagnate. Even as accounts receivables trend upward, so do accounts payables. Cash flow management becomes more of a struggle. Networking just isn’t enough to fill the pipeline.
When a small business reaches this stage, they need something more than simple bookkeeping services or a subscription to some accounting software like Quickbooks, but most aren’t ready to invest in a full-time in-house accountant, CPA or CFO.
When this happens — usually around the $3 million revenue mark — agencies should consider outsourced accounting services. These services can range from transactional (filing tax returns, invoicing, and financial reporting) to strategic (tax planning, dynamic forecasting, and more) — essentially a financial planning and analysis (FP&A) position.
Both the strategic and the transactional can be covered by a virtual or fractional CFO who possesses both the accounting knowhow and the high-level expertise in creative agencies grow by developing and tracking key performance indicators.
How Do Marketing Firms Benefit from Specialized Accounting Services?
Working with an outsourced accounting firm means bringing financial know how onto your team — but along with that, it can be helpful to work with a firm that specializes in digital advertising agencies. A CFO with industry knowledge, including a deep understanding of the most important kpis for marketing firms, will have a wide range of experience in solving common challenges agencies face, for example around marketing their own services, setting competitive pricing, and making budgeting decisions.
Many of these challenges are financial, for example, how to build up a cash reserve that allows the agency to weather tough financial times.
However, a virtual CFO also addresses the business from a 10,000 foot view. As Adam Hale, Partner at Anders CPA + Advisors and Virtual CFO practice leader explains:
“We do finance, but we have a finance lens over the entire side of the business. We want to hear about what’s going on in marketing, we want to hear what’s going on operations, because that helps us craft the plan in that way, so whenever they come up with an idea, and we need to flesh it out, we can say, ‘Wait a minute isn’t that contrary to what we were saying over here and what we’re trying to do?’”
In order to have that level of understanding of the business, an outsourced advisor should meet regularly with the leadership team, ideally every week.
Metrics for Marketing Firms
A successful marketing firm needs to track these four main areas:
- cash: 10-30% of annual revenue in the bank, in addition to a tax reserve (40% of forecasted net income)
- financials: Net income should be around 15-20%, when you take into account gross profit minus production and overhead (admin, sales and marketing, facility, owner’s compensation)
- production: metrics like effective rate, utilization rate, average bill rate, annualized revenue per employee, annualized revenue per producer, annualized net income per employee and annualized net income per producer
- pipeline: current work as well as new clients that are (reasonably) expected to come in, calculated as a percentage of available team capacity.
A skilled advisor can help keep an eye on these metrics, making improvements as necessary, allowing you to take calculated risks in good times and to stay afloat during tough times by making data-driven business decisions in real time. When you review financial statements together, they won’t just report on your businesses’ history. They help you react to the present and plan for the future.
Considering outsourcing your accounting services? Learn more about our virtual CFO services for marketing agencies or schedule a complementary consultation with our virtual CFOs below.
