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Building a strong financial foundation for your agency (featuring Ryan Watson)

In this episode of Chats with Chip, Ryan Watson of Upsourced discusses the critical role that financial planning has in growing a successful agency.

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[social_warfare]

In this episode of Chats with Chip, Ryan Watson of Upsourced discusses the critical role that financial planning has in growing a successful agency.

Ryan explains that the fundamentals that you need to follow will help you in good times, as well as in any possible recession that may (or may not) be on the horizon. He notes that the impact in an economic downturn varies from one agency to the next, so your best bet is to prepare for any outcome.

Chip and Ryan also talk about the difference between tax accounting and business financial planning. They explore some of the things that you should be focused on (as well as a few things that may be misleading indicators of true success).

Key takeaways

  • Ryan Watson: “It’s shocking to me the number of really large mature agencies, north of 5 million, who are still not dialed in at the project level.”
  • Chip Griffin: “Time tracking should be as simple as it needs to be in order to get you the data that you need to make a smart decision. But you gotta have the data.”
  • Ryan Watson: “The most important thing for small agencies is figuring out what is my unique reason to exist and how am I going to acquire customers who want to buy that?
  • Chip Griffin: “The same management tactics that you would use outside of a recession are the ones you should be using if there is one.”

Resources

About Ryan Watson

Ryan is an experienced operations and finance leader for creative agencies and venture-funded startups. As a partner at Upsourced, he helps scaling agencies build better plans, see the future and drive profits. Prior to Upsourced, Ryan led operations and finance for a large influencer marketing and ad agency, Ahalogy, where they built the team to over 50 people and $10M in annual AGI before selling to Quotient Technology (NYSE: QUOT) in June 2018.

Related

The following is a computer-generated transcript. Please listen to the audio to confirm accuracy.

Chip Griffin: Hello, and welcome to another episode of Chats with Chip. I’m your host, Chip Griffin, the founder of SAGA, the Small Agency Growth Alliance, and I am delighted to have with me today a really interesting guest who’s gonna have, I think, some useful perspectives on the financial management of your agency.

Something that we’re all interested in and yet maybe we don’t want to think about every day. But but Ryan does. Ryan Watson, a partner at Upsourced. Welcome to the show, Ryan.

Ryan Watson: Thanks, Chip. Happy to be here.

Chip Griffin: It is great to have you here and, and before we dive in and, and, and start talking numbers and books and reports and recessions and all, who knows where else we’ll go.

There we go. Well, why, why don’t you share just a little bit about yourself with the listeners?

Ryan Watson: Yeah. Right. So, Ryan, I’m a, I’m a partner at Upsourced. Upsourced you know, if I only use like five words to describe us, I’d say we’re an accounting firm for creative agencies. I, I’d say the accounting firm component is a little bit of a misnomer in that unlike traditional accounting firms, we don’t really focus on the compliance aspects of businesses, you know, ala audits and taxes and things like that. Where we really get involved is partnering as the CFO for our agencies. And so what that means is we’re gonna do one of one or both of two things. The first is help you build systems to collect the financial and non-financial data you need to make decisions. And then we’re gonna use that data and sit with you side by side to help you make those decisions, right? So we’re gonna do your outsourced accounting and we’re also gonna provide an ongoing cadence of, of advisory. So that’s what we do.

Before my role at Upsourced, I helped run an influencer marketing agency that we sold to a public company Quotient in 2018. So I’ve been on both sides, both the client service side as well as the operator seat. So I know the space well.

Chip Griffin: Well, and I, I think it’s always helpful to have people who have been on both sides of the fence because, because it allows you to more directly relate.

It’s sort of like, you know, if you’re an agency owner and you used to work on the client side and hired agencies, you have a much better appreciation and perspective that can help you in doing your job better. And so, so I love that you have that, and I think it’ll be useful in this conversation.

Ryan Watson: Yeah, totally.

Yes, yes. Yeah. Total principal agents problem. Right. It’s very easy to be the consultant and say, ah, you should do this. But I, you know, it’s nice to have the empathy for knowing like what it really means to actually go execute that.

Chip Griffin: So right now you said you don’t do the compliance side. Does that, does that mean that typically if, if a client they would, they would have another local tax preparer type person that can partner with.

Ryan Watson: Totally. Yeah, and, and you know, for the most part, most people come to us that with already having a tax relationship, right? Like they come to us because they’ve hit an inflection point in their business. There’s a few inflection points along the road that we commonly see, and generally it’s okay, what got us here won’t get us there, and we need experts to help us navigate that path, whatever’s required.

And so generally, they’re thinking of us in that way and not in the like, you know, again, managing my taxes or providing my insurance, or whatever that is. Yeah.

Chip Griffin: Right. So I, I hadn’t intended to start here, but a, as I always do on the show, I follow whatever thread I, let’s do it. I see. So, I’m, I’m, I’m curious as, as you, since you’re working with a lot of different tax preparers for agencies Yeah.

What’s your, what’s your general perspective of them? Are, are most of these folks well suited to serving the kinds of businesses that they’re advising? You know, because I, I know that, that a lot of times there are folks who don’t really understand the businesses that they’re preparing taxes for, and that can be problematic.

Ryan Watson: Yeah, well look, and, and by the way, all of our, you know, agencies have this feeling and to some degree, and, and accountants, you know, I’d say like, but especially in, in the world of tax. And, and by the way, I’m, I’m a cpa, so I love my fellow CPAs. I, I love our tax preparers. But I mean, I’d say generally, like the general sentiment is nobody’s satisfied with their tax relationship.

Like everybody has a thing to complain about. Some of it’s valid, some of it’s invalid. I mean, what I would say is you know, our clients are increasing and, and look, we work with over a hundred marketing agencies, so I, I’ve got like a pretty good representative sample of the world and, and agencies are increasingly Complicated from a tax perspective, they’re increasingly distributed.

So in this wonderful country, the US we have you know, different tax regulations as it relates to the local jurisdictions, the states you know, separate from federal. And so, you know, as you start to hire employees in, in multiple states and in some cases, In Canada, for instance, like your complexity quadruples or more.

Not only with regard to the compliance of like, again, a perfect example. I’m working with a client right now where they’re implementing a policy related to reimbursing for work from home benefits. Right? Some states like California have implemented legislation that really forces your hand. To do things like reimburse for utility costs that, you know, don’t exist in like my state of Ohio.

And there’s both a compliance component to that as well as a, a tax implication component to that. And if you’re working with a sort of local CPA who is very specialized in, in your state or your, you know, tri-state area or whatever it is, they’re gonna really struggle to help your, to help advise you through those situations.

So, I mean, again, I would argue that like that there are many wonderful options, but they’re not all wonderful options, right? If, if I would say an increasing number of agencies are going to need to work with a large, regional, or even national firm. Who has the kind of breadth of experience, who can help you in multi-state situations, who can help you in sales and like SALT sales and local tax situations as well as other things like R and D tax credits and other kinds of credits.

So the, the short answer is as long as you’re working with it’s, it’s less about, in my experience anyways, it’s less about having very specific focus in a service-based business and more about having a breadth of experience across different components of tax. Does that make sense?

Chip Griffin: It does, and I, I think you make a great point about the complexity increasing, and I think unfortunately a lot of small agency owners don’t recognize the complexity that they may be getting into.

Yeah. Because, because in recent years, a lot more agencies have gone to work from home models, have gone to having employees who live. In far flung places, whether that’s inside the US or even outside the US and they don’t stop to, to ask what are the implications of this? Yeah, what have I created a tax nexus that’s gonna impact the business?

Do I, am I filing all the right paperwork for the employees? Am I compliant with all of the right regulations? Totally. Now fortunate, most small agencies aren’t large enough to trip these regulations. Well, you’re totally right, but the answer is in some places you are.

Ryan Watson: That’s right. So the the answer is you’re not, I mean, just period.

Like you’re not, and the question is really a matter of risk mitigation than it is complete compliance. But again, you need somebody who’s got a lot of experience with the concept of risk mitigation, who can talk you through the pros and cons of trying to completely comply or not. And so, Again, I, you bring up a wonderful question.

You should be very thoughtful about who you choose to partner with, and that should, that is likely to change as your business grows and matures. Right?

Chip Griffin: So, as you’re thinking about the, the firm from sort of a financial performance standpoint. Yeah. What are the kinds of things that you’re looking at with them today?

What are the, what are the key topics that you find yourself talking with agencies about over and over again right now?

Ryan Watson: Well, it’s a good question and I, I, it kind of brings up sort of a thing that we talk about a lot, which is our kind of way of viewing the world. And, and, and, and I guess what I would say is like, okay, so if you, if you go out in the world and you read like what are the key KPIs or what are the, you know, what are, what should, you know, what should agencies be focused on?

And how should I be managing my finances? Right? You’ll see a lot of somewhat generic articles that list like, here’s the 20 things that you should look at, right? Like, that’s the kind of con, that’s the, that’s the prevailing wisdom in the space. And, and we have a different view of that, which is to say, yes, there are probably 20 things that you could be looking at or, or focused on.

But that doesn’t mean you should be focused on all of them. In fact, there’s probably only one or two things that you should actually be looking at, at any given time, and that is very contextual based on where you are in the life cycle of your agency. Right. So for, again, I, I’m not gonna go into a long monologue about this, but very briefly, like we bucket agencies into one of four buckets, right?

We call them, they’re, they’re modes of agencies. We call it create mode. You’re in zero to 1 million in revenue, roughly. There’s build mode. You’re from like one to 3 million in revenue. There’s grow mode. You’re from like three to eight to 10 million in revenue, and then there’s scale mode. You’re north of 10 million.

And the kinds of problems that you face in each of those buckets are very different from one another. Right. And the kinds of things that we are looking for, and we are often working with our clients in is also very different. So, Let me, let me not just like completely pump the question. A very common, a very common mode that we work with clients in is in that build mode that sort of like north of 1 million, sub 3 million.

This is the point where like zero to one is all about just getting your agency off the ground, right? Like it’s sales and service. That’s the whole exercise. And from a financial standpoint, you’re probably not gonna be very profitable. It’s probably not very sustainable. And I would tell you as a finance professional, Who cares.

Don’t worry about any of that stuff. Just get to the point where this business should exist. Once you’re north of a million dollars and we’ve kind of figured out your unique reason to live, now we can work on the things like profitability as we work our way to the, the sort of $3 million mark, give or take.

So anyways, in that build mode, We are often talking about our clients. We’re talking with our clients about what we call the hierarchy of financial needs. So we think about the things you should focus on or the problems you’re facing in a hierarchy of needs. Similar to like Maslow’s hierarchy of needs.

Right? And the, the, the concept here is I’m only going to look at one stage at a time. I can’t worry about self-actualization if I don’t have shelter, right? So we are going to work our way through those stages. And so in our world, it’s like solvency is the first thing. So like, okay, can I make payroll next week. If I can’t, I’m not gonna worry about operating profits. Surprise, it’s bad, right? So like, let’s not focus on that and there’s nothing I can do. I’m not gonna outsell, I’m not gonna go out and sell my way out of making payroll next week. There’s no way that I have time for that. And so the things that we focus on are, are, are very specific to like accessing cash and pulling collections forward.

The next bucket, which is where we most often live, is project profit, right? So once I’ve cleared solvency, am I earning a gross margin, right? And, and the most common area that new clients come to us, where they struggle is in this area, right? We’d like to see agencies in the north of 50% gross margin. And, and we often get new clients that are south of that, right?

And so, And I’ll say one more thing and then I’ll stop talking, which is when I’m in a gross margin problem, I have one of two problems, right? My problem is either I have a utilization problem, in other words, I am paying for service people to do service, but I don’t have enough service for them to do, right?

So they’re not utilized. Or I have a rate per hour problem, so I have service people, they’re doing stuff, I’m just not earning enough money on the stuff they’re doing and to earn a proper gross margin. And by the way, that’s generally like scope creep more than it is I’m bad at pricing, right? So anyways.

We spent a lot of time.

Chip Griffin: I, I think it’s a little bit of both. I, I, well, it can be, I mean, it can, because I think there’s, there’s an over there, there’s an overly high level of optimism when pricing projects that you want to win. And so you’re like, well, yeah, we can really get that. We can be really efficient and get that done.

Ryan Watson: Yeah, yeah, yeah, yeah. I should, you know, sorry, maybe creep is the, it’s a scoping problem rather than a a hundred percent. I. I thought I was gonna get a one. Nobody went in and said like, I’m gonna try to get an $80 rate per hour. Right. No, no. They were thinking, I bet I can get, you know, whatever it is, buck 50, 200.

Right. And, and they were either being overly optimistic on the scope or they had a good scope and they just let it blow without, you know without writing it back end. So, but yes, it’s, it’s almost always scope.

Chip Griffin: And, and I love that you’re, you’re talking about project profitability, because that’s something that I talk about a lot because I, too many agencies just look at their annual p and l and like, okay, that, that helps me figure out what my profit margin is. Yeah. Kind of. But there are all the component parts and, and almost every agency I’ve ever looked at, there are certain projects that are subsidizing other projects. And you need to know which ones are the subsidizer and which ones are the subsidized, so you get more of the ones that are subsidizers, right? And, and then hopefully you’re not subsidizing anything and it’s just profit going to the bottom line, but, but you gotta look at it on a project level. You can’t just do it agency wide, otherwise you don’t really have the full picture.

Ryan Watson: I couldn’t agree more. And it is, I mean, I’ll, I’ll be honest, it’s a, it’s somewhat shocking to me the number of like really large mature agencies, like north of 5 million, who are still not, who have made it to that area, but are still not sort of dialed in at the project level. And, and you’re totally right, like there’s just so many downstream benefits of having a good understanding of project profit.

It’s, you know, there, there is just the sort of like direct, the direct result, which is I can find ways to add more leverage to this business. I can stop doing the unprofitable things. I can start doing the more profitable things. But there are so many other things that are true about the less profitable projects, things that like drain employee morale for instance.

Right? Right. These are the things that take energy from people. They’re our least favorite clients to work with. It could be net accretive to just let go of your bottom 5%. Absolutely. And, and and that’s the kind of stuff that people don’t necessarily think about or realize as they’re embarking on that kind of journey, but it’s a huge added benefit of doing it.

Chip Griffin: And if you’re tracking project profitability, it gives you the, the ability to price better for the future. Totally. And, and so many agency problems go back to pricing, right. If you say, well, geez, you know, I can’t invest in the future. Well you probably didn’t price correctly. I’ve got a, a morale problem.

To your point, it’s probably because you have a price problem, you’re trying to balance your books on the backs of your team. Totally. And you know any, so one of the first questions I always ask an agency is, you know, how many of your employees worked over 40 hours a week on a regular basis last month? Yeah.

You know, and, and if it’s, if it’s more than one or two because there was some particular random emergency, you got a problem. We have a problem here. There’s no reason for it.

Ryan Watson: Well, you, you bring up an interesting an interesting point. I was gonna ask you this before you even said the word, and now I’m really going to, which is what’s your take on…

so a thing that we, again, as I’m, I’m here and this is a, you know, I’ve got a margin problem and we, or a project profit problem and I’m trying to diagnose these, you know, where we often end up is in the world of time tracking. Yep. And time tracking is one of those third rail topics for a lot of agency owners.

What, what’s your view of the world on, on time tracking? Like what, what do you, what do you see? What is your opinion on that? I mean, I can certainly tell you mine.

Chip Griffin: I, I mean, I, I love grabbing the third rail. That’s, that’s, I, I had hair before I started doing that. Sure.

So, no, I, you gotta do time tracking. I mean, you tell, you know, and, and, and. If you don’t do time tracking, you have no idea how to manage properly. Yeah. Because you just, I mean, and, and, and most agencies that say they do don’t do time tracking, they’re doing it in some fashion. Exactly. They may not have time sheets.

Sure. But they’re having someone estimate, how much time are you doing on this? What percentage of your time is allocated to this client or that client? That’s still time tracking. I mean, I’m not hung up on, it’s gotta be, you know, a spreadsheet. I agree. Where you list everything minute by minute and all that.

I mean, I no it, it, it’s as simple as it needs to be in order to get you the data that you need in order to make a smart decision. But you gotta have the data. You can’t just go off of. Oh, you know, everybody seems busy. Let me go hire somebody.

Ryan Watson: Exactly. I know. I guess why? Well, yeah, I know. Well, it, and, and, and it’s, it’s you know, it, it’s, it’s interesting, right?

Because like, I’d say, you know, two topics on, on that. One being like We, we find agency owners that are, are often reticent to to, to do the time tracking. And, and I think it’s, it’s a function of like the perception of what asking people to record their time might be. I think there’s just this tracking time isn’t cool or it’s a kind of a big brother sort of a, a thing.

And, and, and that’s kinda like the number one opposition that we get. Like, oh, I cannot possibly ask my people to track time. And I would argue that if you’re feeling that way, you either have your own block or you’ve approached it in the wrong way, which is, I, I think if you’re approaching it from the standpoint of like, look, we’re not, we’re not doing this to, to micromanage you, we’re not doing this to control you.

This is for our all, all of our collective benefit. To your point earlier, which is, you know, if you’re, if you’ve got employees working north of 40 hours that’s a problem. So, They’re, you know, if I’ve got employees that are working more than 40 hours on a project, that’s a problem and I wanna get them help.

If they’re working far less, that’s also a problem. And I wanna get them things to do, whether it’s interesting internal projects or it’s other client work. I can’t solve that problem if I don’t have that data. Right. Right. And so I think that part of the trick is just approaching it the right way with people and enrolling them in the why.

Chip Griffin: Yeah. You gotta sell ’em it. And, and, and if you just tell ’em to do it, it will be big brother. But you need to explain to them what are the real benefits to them. Right, exactly. With time tracking. Exactly. And, and frankly, part of the problem is most owners don’t want to do time tracking themselves. And so really they’re, they’re laying it off on our team doesn’t want this.

They don’t want I know, but, but in a small agency, the, the owner is one of the most important people to understand how their time is being spent.

Ryan Watson: Well, that’s another really, I mean, again, not, not to make this a time tracking podcast, but I will say that’s another like key point, which is, You know, related to successful implementation and compliance.

One is just like selling people on it. The other is like, don’t ask people to do something that you’re not willing to do yourself. If you’re not leading by example, you’re not gonna get people to follow you, right? So you have to do it too, right?

Chip Griffin: You also need to know how you’re spending your time. It is the most press, most precious, let’s see if I can speak this morning.

Precious resource that you can have in an agency is the owner’s time or the partner’s time. If you’ve got more than one owner. It is the, it is the one thing that you can’t just go out and hire. Totally. You’ve got to know how you’re spending it and you’ve gotta make the best choices. And the only way is to know how you’re spending it.

And, and when I have an owner who tells me that they, you know, they feel overwhelmed. They, they never get to focus on business development or whatever they want to be focused on, well, why? How are you spending your time? Yeah. And, and they usually, well, I spend so much time on, you know, administrative stuff and I’m like, really?

How is that possible? You’re a million dollar business. There shouldn’t be that administrator that much administrative stuff. Let’s, let’s start itemizing it and, and usually what it turns out is they just remember the administrative stuff is so painful that they overestimate the amount of time it actually takes.

Yeah. And that hour that they spent on working with their bookkeeper that week just felt god awful, painful. You know that the call that they had with their tax accountant, Oh my God, that was,

Ryan Watson: I know exactly. I spent all week on it. Yeah.

Chip Griffin: Yeah. I mean, and, and so you’ve gotta do the time tracking because otherwise you just cannot make the best use of the resources you have available.

And I, I would, I do wanna go back to something you said earlier. Yeah, go ahead and, and push back a little bit on something maybe not Yeah. On, on something you said, which is in the sub million. You know, you say you don’t care if they’re making a profit. Right. And, and worry about that when you get to Well, I’m being hyperbolic, but, yeah.

Yeah. Keep going. Keep, yeah. But, but, but, but I, I think it’s, I, I, I, I think. Because a fair number of listeners may have agencies, you know, near or below a million. I think that they need to understand you need to be profitable from the beginning because if you build unprofitable habits, they will stick with you and you, so you need to make sure that even in those earliest stages may not be as much profit as you’re making later.

Yeah. But you still have to be focused on profit. Otherwise, you’ve, you’ve built something that’s interesting, but maybe not scalable.

Ryan Watson: Yeah. Yeah, yeah, yeah. So I totally agree, by the way, and there’s lots of, like, you know, I’m not a, for larger agencies, I’m not a big proponent of this of, there’s a framework called Profit First.

I, I think at a, at a certain, at a certain size of or sophistication, I don’t think that’s, that’s very helpful for you. But I think for smaller agencies, that’s a decent framework to think about how do I make sure that I’m not you know, I’m running at a loss. I think my, I think my point is like if you’re an, if you’re sub a million dollar agency and you’re going out and you’re looking at reading these articles and you’re reading the benchmarks of like, I should be doing a 55% gross margin, I should be doing a 20% operating profit margin.

Chip Griffin: Just stop reading those benchmarks. Exactly. The benchmarks are stupid. I mean, if you look well and they’re list, they’re also, go ahead. Go ahead. If you look at the list of the largest PR agencies, for example, yeah. In the United States, and if you do the math, because they, they have, you know, how much how many employees and how much revenue.

And if you do the math, the revenue of per employee is all over the map for the lar. I mean, it’s all over the map. They’re, they’re very successful agencies. And, and some are as low as around a hundred, 110,000. Some are up north of 500,000. What does that, that doesn’t tell you anything. It tells you you need to have employees and you need to have revenue.

That’s what I’ve learned.

Ryan Watson: That’s, that’s totally right. So, so my, my point on the, I, I have a, a point on that and my. But, but before I leave it, the point on the small agency is just to say that like, it’s very, it’s very, even if, you know, let’s say for the type of agency and the way I, I go to market, I think I can eventually achieve, let’s say a 20 plus, 25% operating margin.

It’s gonna be very hard to do that sub a million dollars, right? Like there’s just some amount of fixed costs that you have to amortize over a revenue amount. And the larger that revenue goes, the easier it’s gonna be for you to achieve it. So, just to be clear, I’m not suggesting that you should go and like, Take a huge line of credit and run your agency at a loss.

Oh God no. I’ve seen that a bunch of times. Yes. Don’t do that. Right? Certainly don’t do that. I’m not suggesting, but you know, a lot of the conventional things like client concentration risks, like, hey, under a million, you’re gonna have client concentration risks as part of growing your agency. Don’t over-index on that worry.

Don’t over-index on the 20% profit margin. The most important thing is figuring out like, What is my unique reason to exist and how am I gonna acquire customers who wanna buy that? Right? But again, don’t do it like dramatically unprofitably. So let me just underscore that I, I’m, I’m, I’m talking relative to like, what is the target, but I think your your other point –

Chip Griffin: unfortunately, a lot of people are literalists when they, I know relative.

So I think it’s important for folks to understand that.

Ryan Watson: Good, good, good. Yeah. Yeah. Yeah. But your, your other point is so true too, because like, you know, again, you’ll go out and you’ll look at, and, and we even say these things sometimes. Oh yeah. Like rule of thumb on gross margin would be like north of 50. We like 55%, just give or take.

However, one of our, one of our best agencies is sub 50%, they’re like 45% gross margin and they do like a 35, 33% net margin. Right. They’re incredibly profitable. But they’re in the kind of business, they’re outsource marketing, and so their pricing power is a little bit lower. And so it’s just a different game.

Like it’s a scale game, it’s a repeatability game, and so gross margin’s gonna be a bit, little bit lower, but they can get operating expenses, opex to, to a pretty efficient level and generate an enormous amount of profit. And so, you know, where, where you have a kind of agency that is again, doesn’t have, isn’t highly specialized and doesn’t have a lot of pricing power.

It’s just gonna look a little different than the, the flip of that where you have a highly specialized, highly expertise kind of agency. You, you may be able to generate a higher gross margin, but the flip side is it may be harder to find, to get consistent utilization out of those people, right? Because the, the projects are premium and there are maybe a little bit more spaced out.

So, I think your point is valid, which is, and this is why we kind of rail against this like the, just the traditional, here’s the KPIs and here’s the benchmarks. And then what ultimately happens is people try to apply themselves to a one size fit all. They don’t fit, they feel like they’re doing a bad job.

Then they sort of like lose momentum, lose motivation, bury their head in the sand. They don’t even wanna think about finances cause they feel like they’re not living up to whatever blog they wrote. Right. And I think that’s mostly the, the other thing I’ll say is like the, there are the, you know, 20%, that’s the, that’s the, that’s what we would, you know, we would target for an agency in the, like, the 3 million plus range, but like the median is way lower than that, right?

So yeah, like the, what we actually see. It’s a lot worse. Right? Lot, lots of… business is hard and, and hitting the targets is not the, that’s not the average. That’s the aspirational.

Chip Griffin: Well, and here’s the thing too. Who, whose agency are you building? Are you building your own agency or are you building someone else’s?

Exactly. I mean exactly. The benchmarks are good if you wanna build someone else’s agency. That’s right. But, but my view is if you’re going to take all of the risk and stress of owning your own business, it needs to do what you want. In other words. Exactly. You need to be thinking about. Is it allowing you to do the kind of work that you want to do?

Is it giving you the flexibility to work when and how you want? Exactly. Is it making the money that you want to make? Forget about the team. Forget about what the business says. Are you making what you want to make as the owner? Because if you’re checking off all three of those boxes, the other benchmarks don’t really matter that much.

Ryan Watson: Who cares? Yeah, totally agree. Yeah. We have tons of agencies who have, have elected to drive their profit margin much further south than the target because they’ve got a team, they want to reward, they have incredibly generous profit sharing plans and that works for them. We’ve got agencies who absolutely could grow into the seven plus million dollar range and they just don’t want to, because they, they have seen the movie play out and they’re not interested in that.

And that’s, that’s fine. That’s all great. So I, I couldn’t agree more.

Chip Griffin: The, the one thing I will say is that if you are, if, if you are running it too close to the line because you’re getting exactly what you need, but you’re not, You’re not leaving yourself much wiggle room. You start to have challenges in times like these, which I think is a good segue to our final topic today. Oh, yeah. Good. It, you know, pe people are nervous. Mm-hmm. I, I, every week I’m getting people coming to me as they really have for years and years now, but it’s, it’s at a higher tempo now than, you know, so, you know, are, are we gonna have a recession? What does it mean, you know, and, and, Agencies are seeing in general that that sales cycles are elongating a little bit.

Yeah. Not, not as much as I’ve seen in past recessions, but, but there are slowdowns, the, the, the ticket sizes are, are decreasing a little bit. Yeah. You know, and, and, and maybe a shift a little bit more towards project revenue versus recurring revenue for new clients who just wanna, they wanna keep their flexibility open, so, yeah.

You know, what are you seeing and what are you advising agencies to do as they think about what might or might not be on the, the horizon economically?

Ryan Watson: So what am I seeing is it’s asymmetrical as it often is. Right? So we have agencies with a high degree of exposure to, like b2b, enterprise SAAS companies like Silicon Valley tech companies.

They’re, they’ve had a lot of like high profile layoffs and budget freezes. So those agencies are feeling a little bit more headwinds than some of the others. Yeah, I mean, look, my personal like my synthesis of what’s happening is just a function of, look, the last two years have probably been some of the, I’ll use the word easy, that’s maybe not the best word, but like we’ve been flush with government funded subsidies.

Via PPP and ERTC and like those things as they, as they sort of dry up, it’s, we’re feeling the bit of a hangover. That’s a, that’s just consistent with a return to what it used to feel like to, to run an agency back in 2018 or 2019. Right. Like, Nothing’s easy. Business is hard. Projects are hard to f are are hard fought.

Sales cycles are, you know, can be long, especially when you’re working with enterprise customers. So like, you know, if I zoom way out and I remember what it felt like in the mid, you know, whatever it is, 2016, it kind of feels like that, right? Again, it’s, it’s, it’s it is definitely asymmetrical. But I will tell you that like just, you know, anecdotally like, the new agencies coming to work with us have never, like our Q1 was the best we’ve ever had. We’ve never had more agencies wanting to spend a premium price on our kind of advisory. And, and so again, I think there’s more fear and uncertainty than there is like real – I mean, you’re seeing this in the market right now, like the earning season is happening right now and, and, and public companies are beating many of their estimates because there’s just a disconnect between what the media is foretelling and what’s actually happening.

And what’s actually happening is like, Yeah, some, some highs, some lows, but you know, like kind of mostly business as usual. However what I will, what we are telling our clients is, I mean, there’s a variety. We have this recession guide we can put in the show notes or something. I’m not gonna go through all that notes.

I’d say the most important thing is just preparation. Right? Which, by the way, none of the things we’re telling agencies are like situational to a recession. They’re all evergreen things. Exactly. They’re all stuff we should always be doing. Like this is all just normal stuff. Right. But it’s really important now.

But like, so, you know, having like a really good scenario plan. For if, for no other reason than just sleep at night factor, which is to say, okay, you know, look, in a normal year we’re, we’re gonna have our base case and we’re, we’re gonna sort of plan to it. But let’s, let’s take some more, let’s do a few more cycles to coming up.

Like, what’s our base case? What do we think this year’s gonna maybe look like? Let’s come up with our bad case. And let’s come up with our really bad case, right? Like let’s just, hey, if, if all of the media is accurate, and, and, you know, revenue declines by 50% or whatever the, whatever your versions of your base case, bad case and really bad case, let’s just throw that on a piece of paper, right?

And then let’s ask ourselves right now when things are not really bad, let’s ask ourselves right now. What are we going to do if that happens? Right? Yep. And, and again, very specifically, so not, oh yeah, we’re gonna cut costs by $20,000 a month. No, no, no, no. I mean, like, what kind of costs? Are those, are those individuals, if those are individuals, what are their roles or what are their names, right?

Like, be very specific. Create the plan, put it in your desk drawer, and then go about your life, right? So if that manifests, if that happens when now, now when you’re on tilt and emotionally you’re like, oh my gosh, things are really bad. You can defer to what your logical mind thought you should do when you weren’t on an emotional tilt, and you can just execute that playbook.

And that is absolutely what we’re telling clients. Some of our clients have pulled it out of the drawer and are, in their bad case, it’s, it’s more the exception than the rule. Yep. But that’s it. If you do nothing else, just have a plan. Put it aside, go about your business.

Chip Griffin: Yeah. I, I, I think you’ve made two great points there to, to end this episode on. The first one is that, that you really, the, the same management tactics that you would use outside of a recession are the ones you should be using if there is one.

Totally. And you’ve gotta have that cash cushion. You’ve gotta have the plan, you’ve gotta be looking at your resourcing and all that kind of stuff. But you should do that even when times are great. And you shouldn’t just ignore them because things are going well. The second piece that I think is absolutely critical is the asymmetrical nature of almost any economic downturn.

And I’ve been through slowdowns and great recession and Right, and even, even the, the, the sudden overnight economic impacts of Covid and also 9/11. And, and running of businesses during those things teaches you that no two businesses are the same. I mean, if you look back to March of 2020, some agencies started thriving immediately because they were in spaces where people needed help.

You know, maybe they were advising healthcare businesses who needed communications help right now, or someone was trying to get into the digital spaces who had been brick and mortar only, and so digital agencies did really well. Yeah. You need to know your own client base. You need to know the industries you serve, talk to them, understand what they’re doing.

That’s what matters, not what you see on the nightly news if you still watch that or you read on a website or something like that, it’s what your actual customers and prospects are saying, and more importantly, doing.

Ryan Watson: Yeah, I mean, if I add one thing, which is just to highlight a thing, you said – information is your friend, right?

So you should have open conversation, have budget, I mean, you know, it’s April, but like have budget conversations with all your clients, especially if you have any kind of client concentration risk, like if I’ve got large, systemically important… like I’m making that my number one priority. I’m joining those client meetings to a higher degree than maybe I used to, and I’m, I’m having open, honest conversations and at the first wind of sort of negative news coming from them, then I’m gonna work my way down my plan.

Right. But Right. You, you’re, like you said, it’s, it’s all about your situation and just get closer to it and get as much information as you can.

Chip Griffin: And stop telling me that you’ve got a contract so you don’t need to have those conversations. Because I don’t care if you’ve got a three year contract that you think is iron clad, don’t worry, it’s not, it is not worth the paper that it is printed on.

No. Yeah, it’s totally true. And, and if you weren’t in business in March of 2020, maybe you don’t know that, but if you were in business in March of 2020, you know that clients just pick up the phone and say, yeah, I ain’t paying you next month. Good luck.

Ryan Watson: Yeah, exactly.

Chip Griffin: And what are you gonna do about it? I mean, you can sit there and bang your fist on the table, but you know, Hopefully that makes you feel good for a few seconds.

That’s about it. It’s not, you can’t take it to your bank, so Totally. In any case, if someone would like to, to learn more about you or Upsourced and maybe get the, the recession guide, where should they go?

Ryan Watson: Yeah, totally. So best place is our website upsourcedaccounting.com. We also have a YouTube channel.

We put out content in these topics, which is @upsourced. So those are the best places to find us.

Chip Griffin: Excellent. We will include all of those in the show notes. I would encourage you to check them out. Ryan, this has been a fantastic conversation. We covered a lot of ground in a short period of time.

Hopefully listeners got some value out of it. I know that, that I enjoyed it and got value out of it myself, so that’s fun. Thank you for joining me. Thank you for listening everybody, and we’ll be back again with another episode very soon.

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