How to Create a Profitable Creative Agency

How to Create a Profitable Creative Agency

Created by Butt Miller

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©Roland Moss 2015 All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, me- chanical, photocopying, recording or otherwise without the prior permission of the author.

Foreword

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Introduct ion Plan, plan, plan…

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Get Your Pr i c ing Strat egy Right Optimise your day rates

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Cos t ing Sys t ems Good for the client – and good for you

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The Value Propos i t ion Make your offer irresistible Proj ect Author i sat ion Create happy collaboration

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Purchas ing Make friends with the client’s Purchasing Department

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St op Giving Stuf f Away The Creative Agencyweak spot

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The Right Team Manage your workforce for maximumprofitability Foreign Exchange Use currency exchange rates to your advantage Sys t emi sat ion Operate a tidy, organised and sellable business

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Increas ing Your Sales Usewho you knowandwhat they think

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What El s e Do You Need To Do?

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And Final ly. . .

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Running a creative agency can be incredibly challenging, but get it right and the rewards are fantastic. I should know – it’s been my sector of special professional interest for nearly twenty years. My name is Roland Moss and I’m a Fellow of the Association of Chartered Certified Accountants. From 1995 to 2003 I worked as Finance Director for a number of successful creative agencies, learning from the inside what you need to put in place to create a really profitable creative agency. I am now the Managing Director of Butt Miller Limited, a Chartered Accountancy firm that advises growing owner-managed businesses. Creative agencies form one of our chief specialist areas. In this book I concentrate on the business advice needed to create a profitable agency. This is one of the central pillars that will drive your success and integrate with the equally important areas of innovative tax planning, sound budget setting and the use of technology.

This echoes Butt Miller’s service mantra: to provide ‘innovative tax planning and insightful business advice using leading edge technology that drives commercial success for our clients.’ No business can afford to ignore sound business planning, and I hope this book will help to focus your own planning. If you need more personalised advice tailored to your specific situation, please contact me at [email protected] or through our website, www.buttmiller.co.uk.

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‘Not planning is planning to fail!’

BUT… not being able to measure your progress as you follow your plans is ALSO a recipe for failure.

So, to create and grow a profitable business you must find the time to:

1. Plan where you want to take the business; 2. Plan how you believe you can get there; and 3. Plan how you will measure your progress.

Planning is not rocket science, but it needs to be factored into your role. Planning is an ongoing business function, but there are some well-defined steps to mark your progress too.

Creating your plan

1. Mission statement: If you don’t have one already, start by creating a mission statement for your company. Ask yourself, what is the business trying to achieve?

• This is really important as it clearly identifies where you want to take the company and will allow you to make better decisions.

2. Success drivers: Determine the key areas or activities that the business will have to excel at to achieve your goals – from sales drivers, service innovation and client delight to team happiness: • It is also really important that you share the mission statement with your team to get them on board, and invite them to assist you in achieving your company’s goals.

• What are the key underlying success drivers for your business?

• What are the key influencing factors that directly drive your sales, costs and cash flow?

3. Action plan: Create an action plan to ensure the success drivers are maintained (either constantly or at regular prescribed intervals) and to monitor their success.

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Your action plan is a dynamic plan, not a static one – every success story comes from constant adaptation, revision and refinement of the action plan. Achieving your goals will only happen if you take action to drive your business forwards. Not sure where to start? At Butt Miller we have created a service package – the ‘Documentary Package’ – which has been designed for companies that want to grow. We work through the process with you, identifying and capturing all your key success drivers onto a single sheet of A4 paper which is easy to understand and will ensure you carry out all the really important actions that you have identified as crucial to your business success.

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A solid pricing strategy is crucial – it ensures that if you meet your sales targets, your sales revenue will cover your labour and related employment costs, your business overheads and, of course, the net profit you’re aiming for. Your revenue is typically a combination of your day rates and the mark-up applied to external bought-in costs. However, external factors can influence your pricing strategy.

1. Your client’s Purchasing Department may put increasing pressure on you to drive down your prices.

However, the same Purchasing Department can actually become a useful ally within the client company (something we mention in Section 5), so you need to negotiate with care.

2. You may be required to sign a supplier contract that precludes any mark-up from being applied.

When this happens, you breach it at your peril; your bad practice may be exposed and you could be forced to pay back this element of the revenue (and profit) if the client insists on reviewing your books. However, if you cannot apply mark-ups, you need to ensure that your day rates are sufficient to cover your labour and related employment costs, your business overheads AND your target net profit.

3. Calculating the correct day rate is not as easy as it may seem.

You need to factor in the extent to which you use freelancers within your business and also the element of non-chargeable time that your delivery staff have. It is absolutely vital to devote care to this calculation if you want your day rates to deliver the profits you are aiming for.

So, be prepared.

Make sure you devise a pricing strategy and a rate card that allows you to cater for both circumstances – day rates alone and day rates plus mark-ups. However, you want to ensure pricing consistency, so your teammust be made aware of the different rate cards along with the circumstances in which they should be used (see Section 2: Costing Systems).

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Your costing systems directly impact on your profit and reflect two essential calculations: your hourly or day rates and your mark-up percentages. And these will not necessarily be the same for every client, so you and your sales team need to be methodical and organised. To maximise the profit on any project, it is important that your team uses a costing system that is appropriate for that project; i.e. with the appropriate rate card and predetermined standard mark-up percentages. If, say, you have negotiated a discounted rate for a particular client, you can then stick to this rate card for each related project. As well as ensuring consistency of pricing to each client, this also enhances your ability to manage projects profitably. And for this I recommend that you assess your profit margin at two stages:

1. After all external costs are taken into account; 2. After both external and internal costs are calculated.

This way, you can use the information when preparing your company budgets, making any adjustments necessary to maintain your target profit margin.

The balancing act

When working to client-specific rate cards and profit margins, clearly you are dealing with a fine balancing act for each individual line of work. But getting your costing systems right means that your team can confidently design the job specification appropriately to deliver both client expectations and desired margins.

Integrate costing and accounting systems

There are plenty of costing systems to choose from that allow integration with your accounting system, and this is always the best route to take. It will provide you with the financial control you want as well as allowing flexibility to cater for your clients’ needs. At Butt Miller we have developed a stand-alone spreadsheet that allows complete flexibility in building your budget. You can meet your clients’ expectations and, at the same time, build in the financial controls that are necessary when pricing your projects and managing them. It allows you to use the appropriate rate card, and you can produce clients’ budgets at the press of a button. If you have not already standardised this aspect of your business, this is a good starting point.

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You are competing in a crowded market. This means that being able to articulate the particular value that you, and only you, can offer to your client is an essential ingredient in your proposal.

Value, as perceived by your potential client, is made up of two components:

1. Tangible benefit: what they actually ‘get’ – i.e. the visible, countable, touchable or measurable product or service you will be delivering for your clients;

2. Intangible benefit: the way that they get it – i.e. your service standards and the experience they have when you deliver your service.

Communicate the value

Tangible benefit clearly has an easily assessed value, but intangible benefit has important value too. And It really is important that time is taken to explain in great detail what is being delivered in both of these areas so that the quality and value is clearly understood by the client. It is also important to reiterate this value at all touch points your client has with your organisation (website, office, team, etc.). Your messages need to be consistent, clear, concise and easy to understand.

Measure the value

If you can measure the return on investment your client will receive, then this puts you in a very powerful position. You can even introduce value-pricing which will align your return to the value you are delivering for your client. The better the return the higher your fees, so this becomes a win-win for both your client and yourself. Measuring the return on investment is not always easy, but there is a simple question that can be used: ‘WHY?’ ‘ Why is the client undertaking the project? Why is it so important to them and why do they need to succeed? ’ These questions need to be continually asked until the real purpose of the project is clearly understood. Then you have an opportunity to determine if a return on investment measure can be established.

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‘Creativity’ doesn’t mean ‘disorganised’. Each and every project needs to have a rigorous framework governing the deliverables and the payment schedule.

So, once you have agreed the price for your project, it is important that you issue the client with a Project Acceptance Form (PAF). This details the key deliverables, the value of the project and the agreed payment dates. The client should sign and return this document to you. Finally, before undertaking any work, you should ask them to raise a Purchase Order for the value of the project.

Self-funding projects need a payment plan

When costing your project, you need to assess the payment profile that is needed to ensure your project is self-funding. Therefore, as part of your negotiations with your client, you need to agree your payment plan. A typical payment profile is one third on authorisation, one third part way through the project and one third on completion.

Changes to the agreement

Sometimes a client will change the scope of the work after the PAF and the payment plan have been finalised. When this happens, you need to draft Project Change Notices (PCNs). It can be tempting to keep life simple by absorbing the cost of these changes into the original price of the project (see Section 6: Stop Giving Stuff Away); however, what you should be doing is seeking additional fees for these changes. Therefore, it is very important that whatever costing system (see Section 2) you use, you keep a record of the project variations and, more importantly, issue a PCN to the client in which you detail the agreed change and the extra fees to cater for it. The PCN should also update the client on the current value of the project when factoring in the latest PCN. It is then important that the client signs the PCN to authorise the change, with a signed copy being retained by both parties. And don’t forget to ask the client to raise an additional Purchase Order for the value of the PCN.

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Who are you negotiating with when you are pursuing a contract? Increasingly, and especially with larger clients, you find yourself talking to a Purchasing Department. It pays to know how these people work and the angle they work from. Any contract negotiation is a tug-o’-war between opposing interests – your profit and their getting the best value for their money. However, within your buyer’s own camp there may be opposing interests – those looking for the best financial value and those interested in the best project outcomes. So, approach your negotiations knowing who you are talking to and what their primary interest is.

Understand their positions

Purchasing has one primary goal: to improve on the financial deal as much as possible. But the person/team/department that is commissioning your work may well be focusing on the broader value (see Section 3) that your input will add to their work and achieving their goals. In your negotiations, this latter voice – the commissioner of the project – is your stronger ally. So, to resist any pressure to reduce your price, keep your own focus on the value proposition, including intangible as well as tangible benefits – for example, the quality or speed of your service, the unique insight your company has to their project, etc. Once the project is underway, should there be any changes to the original project agreement, your ally will be even more important as they understood the broader value and will be more likely to fight your corner during any renewed negotiations.

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Creative agencies often behave like charities, giving things away. Why? It’s because we all love doing what we do and sharing it with clients. But we’re all our own worst enemies. The creative sector is all about the next big idea and pushing the boundaries to blow our clients’ minds with our creativity. This is very important, but if you want to make a profit, you need a sense of reality. Yes, you want to delight the client; and yes, the client’s budget is finite so the next big idea might well be out of their range. But no, that is not justification for working without being properly paid. Say you have some extras that will add real additional value to the project but go beyond the agreement and the client’s budget. Do you add them anyway, without charge, in order to deliver the greatest client satisfaction? Or do you settle for what you know is not the very best outcome whilst protecting your profit margin? Neither solution is ideal, so one answer is to try to persuade the client. You could, for example, suggest the small extras, offering costings and a persuasive argument for the greater value they will bring. But you must leave the decision to the client.

Balance your creative and rational thinking

The safest way to avoid giving stuff away is to ensure that both your delivery and creativity operatives are present at the client meetings when taking the brief. This delivers a safe balance between creative aspiration and business reality. Your Account Manager for the project/client is there to ensure that the client’s expectations are met, both creative and cost-related.

Internal communication is vital to this creativity/delivery partnership and is what allows the company to maximise the profit on each project.

For example, it is important to charge the appropriate level for account management, but often this vital role is given away to the client for nothing. I spent some time working for an AV supplier and saw this happening. Within one year, I managed to add over £100,000 to the bottom line by recognising this issue and giving the team the confidence to charge for this service. [See Section 9: Systemisation, which is also relevant to this topic.]

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Any creative agency is only as good as the people who work for it. But this is almost always a mixture of in-house staff and freelancers. The balance requires careful management, not just for project outcomes but also to maximise profit. It’s a tough job trying to manage the workforce of a creative agency. You want the best people, and if that means attracting them by offering them a place on the payroll, it’s hard to resist. But sometimes you know there will not be enough work to justify this. And sometimes the best people prefer to remain as freelancers. You also want to be able to leverage your workforce when putting together proposals. Showing that you have the right mix of expertise can help to seal the deal.

Juggle with care

The twin dangers, therefore, are compromising your profit by employing too many staff and compromising your effectiveness by not having enough. You also need to match specialists to their relevant workloads: there’s no point having the best creative brains in any particular creative discipline if there’s no work for them.

Measure and analyse

During every project, be sure to keep detailed timesheets. These not only ensure you charge properly for time given to the project, but also allow you to observe and measure staff utilisation against profitability. A good rule of thumb is that at least 75% of actual recorded time should be chargeable to the client; any lower than this and you are probably overstaffed or not using the right mix of people in the project team.

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Many creative agencies now trade internationally, but the fluctuating foreign exchange rate can have an equally fluctuating impact on your profitability. It’s a risk you take every time you buy overseas goods/services in the local currency or agree prices with your clients in their local currency.

Get it right, however, and your foreign exchange gains can be substantial. I know!

To get some perspective, all you have to do is look at movements in the US Dollar-Sterling rate over the past 11 months:

From this graph, you can see instantly the volatility in the exchange rates that makes it so important to have a sound foreign exchange strategy. When pricing jobs in foreign currency, it is best to seek professional advice with regard to the rates that need to be set. However, here are some useful guidelines.

The golden rules

Here are the essential rules you need to followwhen working in other currencies; rules that maximise your chance of a gain rather than a loss on any change in exchange rates:

1. Identify and allocate a suitable buying and selling exchange rate for each project. This will be based on your analysis of the market trends and on

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the length and timing of the project, and is unlikely to be set at today’s exchange rate.

2. When buying in an overseas currency but selling in Sterling, convert the overseas cost at a rate lower than today’s rate. Howmuch lower will depend on a number of factors, such as the length of the project and the completion date.

3. When buying in Sterling but selling in an overseas currency, convert the sale figure using a rate higher than today’s exchange rate.

4. It is also very important when selling in an overseas currency that the day rate card is set in the currency you are selling in. This way, the currency rate will always remain constant and it will be the UK converted rate that will vary, depending on what the project exchange rate has been set at compared to the rate used to fix the rate card. When setting the currency day rates, a long term view needs to be taken in order to avoid future foreign exchange losses. 5. There is a third complication, and that involves buying in both Sterling and other currencies and then selling in one of those overseas currencies. This can be complicated, but generally you will use today’s rate to convert the cost into Sterling as protection will already be factored in by selling in a currency where a higher rate has been used than today’s spot rate.

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In Section 4 (Project Authorisation) we looked at the need to balance creative vision with rational planning. Here, we add another layer of order: systemisation. Systemisation is simply the creation of processes and procedures that ensure smooth functioning and profitable activity. The key systems that every business must implement are:

• The selling process : making sure the value proposition is clearly defined and consistently presented to maximise sale conversions;

• Your proposals (as far as possible): although every new project will be unique, having systems or processes for writing proposals will help you to plan and deliver projects more efficiently;

• The costing system : as explained in Section 2, systemised costing ensures you meet your target profit margins every time;

• The delivery process for each service you offer: being organised and systematic keeps your work on track, makes for happy clients and safeguards your company’s reputation.

However, the reasons extend beyond the improvements to project costing and delivery…

Can your business manage without you?

In any type of business, systemisation is essential in maintaining day-to-day operations. Put simply, systemisation enables the business to run without you. This can be a tough proposition for the type of person who is naturally drawn to creative work, but remember: you are running a business first and foremost. Any business that is over-reliant on you being there is not a strong and resilient business.

Can you sell your business?

The other measure of a business’s resilience is its market value if it were to be sold. And here’s a powerful fact: a systemised business is worth up to 87% more than a non-systemised business.

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The advice given so far will let you build a strong foundation on which to increase your sales. However, increasing sales is a specialist area requiring a number of different activities. The key is to identify the appropriate activities, perform them on a regular basis and measure their success. And this is definitely a part of the business that needs to be systemised.

Upselling

The best and most immediate source of increased sales is your existing client base; you just need to find opportunities to provide more valuable services to them. This requires an effective channel of communication to make your clients aware of these opportunities. With our own clients, we use a wonderful tool that allows us to easily assess these opportunities on a client-by-client basis.

Referrals

This is the second best source of increased sales. After all, if you have done a great piece of work for your client, why wouldn’t they want to refer you? However, it won’t happen all by itself – you must have in place a referral system to encourage or incentivise this. Again, we have developed a great system for you to use for referrals.

Letting people know you’re there

Thirdly, there will always be people who simply don’t know that you exist. Rectify this and you have a much better chance of increasing sales. We recommend you follow the following actions to achieve this: • Existence: People need to know that you exist and what you do. Your website and your social media are essential integrated tools to help with this. Your website needs to be easy to find and easy to navigate, and it must clearly explain what you do and especially the value you can deliver. Your social media must be run efficiently and effectively, with all links set up and with all your key messages being pushed out over the various social networking sites, as well as using your team’s social media channels. • Perception: Client testimonial can be as useful as client referral – so you need to do whatever it takes to ensure that your current clients really like you and are saying great things about you and the work you do for them.

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Devise a system to monitor this regularly (e.g. by customer survey) to check that customer perception remains positive, and use this information to assess areas for improvement. • Targeted communication: Social media (Twitter, etc.) has created the perfect vehicle for targeted communication. However, you need to create small nuggets of information and distribute themwhere they will resonate most with the recipient readers. Your social media content should be engaging and fun, not overtly promotional – it’s a way to let people know you exist and to share some of the value and buzz that your work can create. • Business community: Both you and your clients have their own industry communities, often with publications to inform and entertain them. You need to be active within these and build good relationships with the editors of the publications. If your clients are reading, you want to be featured as regularly as possible. • Events: From focused one-day conferences to large-scale trade fairs, there are always events that are worth participating in. You can even organise your own to bring potential customers right to your door.

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As I said at the very beginning, a goal without a means of measuring progress towards it has little use. So, whilst this book deliberately focuses on some strategies to increase business profitability, their success also depends on reliable business performance monitoring.

Performance, measurement and improvement

Working with experts, we have developed a system called Performance, Measurement and Improvement. It brings together the key actions that the very best run businesses routinely undertake.

There are many tools in this system, but some of the key actions you should be taking are to:

• Prepare annual budgets: By setting budgets you are setting yourself a challenge. This incentivises you to both push harder and review your performance against your budget. Forecasting for a full year sounds ambitious but encourages more proactive management. And we all respond to a challenge! • Prepare regular management accounts: Management accounts are some of the key reports for your own internal use. They let you compare the actual financial performance against budget for each individual project undertaken. This assists you in running your business and allows for more proactive and informed decision making. • Hold regular board meetings: Take time out of the day-to-day business and follow a set agenda to assess the performance of the business and the progress you are making against your one-page plan (mentioned in the Introduction). • Identify relevant Key Performance Indicators (KPIs): These allow you to assess the performance of your business and how you compare to the industry average. They can include some of the following:

• • • •

Turnover by employee

Profit by employee

Gross Profit by line of business

Team utilisation and recoverability rates

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Thank you for reading my book! I hope you find some of the secrets of success that I have shared with you relevant to your circumstances. I could write a whole book on each topic, but this will at least give you some pointers to help you create the profitable business you desire. If you are not sure where to start, Butt Miller offers a part-time Finance Director package which means that we put a lot of these practices in place for you.

If you would like to discuss this or any topic from the book in relation to your own business, please email me or contact me through our website.

Phone: 01276 25542 Email:

[email protected]

Web:

www.buttmiller.co.uk

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