It’s not just agency owners who need to understand the financial mechanics of their businesses. Employees can perform better if they understand how agencies really make money — and what it takes to be successful.
In this webinar, Chip Griffin shares with employees some of the overlooked items that can make a big difference to their own satisfaction, as well as the financial performance of the agencies where they work.
Basic business finance terms and concepts will be explained, along with concrete examples of how it impacts on individual account executives and managers.
The following is a computer-generated transcript. Please listen to the audio to confirm accuracy.
Welcome to everybody who has joined us today for our webinar on Agency Financial Basics for Employees. I’m looking forward to a good discussion today and I’ll, I’ll talk in a minute about the things that we’re going to go over, but just at a very high level, what we’re going to be covering are basics that are explained in non-financial terms. I’m not a CPA. I’m not an accountant. I’m not a bookkeeper. I don’t, I don’t have any particular training in it other than I’ve been an employee and an owner of agencies, and so there’s a lot of things that. I’ve had to work with over the course of the last 30 years in that world, and I’m going to try to simplify a lot of those concepts and make them accessible for you so that you can understand them and how they may apply to your individual role within the agency.
So let’s go ahead and first talk about what the agenda is for the conversation, and we’re gonna talk about why these financials matter. In other words, Why should you care as an employee about the financials? Isn’t that something that just the owners should have to worry about? We’ll talk about some of the basic terms that you may hear thrown around so that you understand what they are and also understand what they’re not.
And we’ll kind of walk through some of those at a high level. We’ll talk about the fundamental business model of agencies, how agencies make money, and how they frankly lose money because those impact you as an employee and the more that you’re able to contribute. To it, the better of an experience that you will have in whatever agency you work in.
We’ll talk about how project management, which many of you are doing, either as account executives or as client leads are doing, how that impacts finances and how you can be better informed about how your agency is doing things so that you can incorporate. Into your own processes and workflow. And then finally we’ll talk about something that I get asked a lot about by agency employees, which is how come there’s doesn’t seem to be any relationship between what the agency bills my time out at and what I get paid?
And we’ll walk through some of the specifics of that so that you understand how that works and places where perhaps it is working to the agency’s benefit and, and perhaps there are, there are cases where they’re not even charging enough to cover the total cost. So those are the things that we’ll be talking about.
The presentation portion of this will last about 30 minutes or so. And then we’ll move into Q&A from there. Before we dive into the meat of this conversation, just a few housekeeping items that I like to cover at the start of webinars. First of all, the recording deck will be made available to everybody who is here today.
The full webinar replay is available to Saga Pro members on the Saga website. You can use the Q&A function that should be at the bottom of your screen to ask questions, feel free to submit them at any time, but I probably will cover them all at the end in a consolidated Q&A session. If you want to reach out to me directly after this webinar, feel free to email me at firstname.lastname@example.org.
If you want to tweet about this or talk about it on other social networks, please use the hashtag agencyleadership. And finally, if you’d like to learn more about SAGA and some of the resources we have available for employees of small PR and marketing agencies, just go to small agency growth.com. But I suspect most of you already know that.
Because I think that’s probably where most of you found this to sign up. All right, so with that, let’s talk about the, the big question. Why should you even care about agency finances and all of this stuff? Because you probably didn’t go to school learning this stuff. I know I didn’t, and it’s probably not the most interesting thing for you, but it does impact the, the quality of life that you have within your agency, and it certainly impacts the results that you’re producing.
For your clients as well as for the agency itself. And the first thing I would say is that, you know, numbers are, they’re a necessary evil, but they don’t have to be scary and they’re really not that evil because so much of this is actually going to be done for you. And this information should be being shared with you by the leadership of your agency.
And as you get that inforation from them. This will simply help you to understand them. So I don’t expect anyone’s going to listen to this presentation and go out and start doing finances for your own agency, but I do expect that if you start hearing some of these terms and you get shared some of this information, you’ll be able to put it into better context and it matters because, If you know the finances of your particular agency and the projects that you’re working on, it allows you to make much more intelligent decisions about how you service those clients and how you avoid things like scope creep, which I’m sure you’ve heard about and probably your bosses complain about all the time.
Scope creep matters, and it matters because if it’s pinching the profitability of the agency, that tends to be where agency leaders turn to employees and ask you to do more work and put in extra hours because they’re effectively balancing the books on your backs, and you don’t want that. And the reason why that happens is it’s a mix of things.
It might be pricing isn’t done correctly, and we’ll talk about that a little bit more later because as day to day employees, as account executives, account managers, client leads, we have a role to play in helping our agencies price services better. And that’s by helping them to understand what the true cost of servicing a client is.
And if we do that, we can get that better pricing, which helps us to avoid the scope creep that can lead to problems and cause us to have to overwork. So if you understand the finances and if you help row in the same direction as your colleagues and, and as the owner of your firm to get there, it will help you to be in a better place so that you’re not having to overwork in order to make ends meet. From a budgetary perspective, it also helps you to understand your client challenges more effectively. Many, if not, most of you are working with clients who have their own budgets and their own financial things that they have to report to, whether it’s a departmental budget or you’re working for a small business and they have their own finances that they have to worry about.
If you understand how they’re thinking and the terminology that they’re using and the results that they’re trying to get from your agency. You’ll be in a better position to provide for them the results that they’re looking for. And finally, by understanding finances, you put yourself in a position where you start to educate yourself and you can be better suited to serve in management roles should you so choose down the road.
So this is all designed to give you that kind of foundational background that will help you to advance your career in addition to improving your day to day today. So let’s take a look at some of the basic terms that you may hear, and I’m gonna explain these in as much as possible layman’s terms. So if you do happen to have some sort of an accounting or bookkeeping background, don’t get upset if I don’t explain it exactly the same way you would.
I’m trying to put it in the context that’s useful to most employees in most agencies, and so probably the term that you will hear the most is profit and loss statement, or sometimes abbreviated as p and l. And there are profit and loss statements for the entire agency business, but there are also profit and loss statements that can be done at the individual department level within your agency if you’re a little bit larger or within individual clients and projects.
So a profit and loss statement does sort of exactly what it sounds like. It tries to figure out how much money you’re making – profit – or how much loss you’re taking on a particular piece of business. And so that looks at the total fees paid and the total amount that you spend. And when you’re thinking about that in agency terms, we’ll talk a little bit about how the p and l for most agencies tends to break out and, and what goes into the different buckets that exist.
But the, the key thing for you to understand about a profit and loss statement is it’s really just you total up all the money that’s coming in and all the money that’s going out, and hopefully there’s a surplus of the money coming in because that’s what allows the agency to be stable and continue to grow and obviously continue to invest in the team.
So that’s probably the most common thing that you will hear and the thing that most agency owners and executives are focused on. Now, when we’re talking about a p and l, there’s a few things that go into it, and the first thing is gross income. And gross income is basically just the, the total amount of money that’s being paid into the agency.
Depending on the kind of agency that you work for, you may have a lot of income that’s coming in that is not, that doesn’t count the same effectively. So let’s say that you’re an advertising agency. Typically advertising agencies will be paid a total amount from a client and a portion of that will be to pay for the actual advertising.
Now the agency may charge a management fee for that or something on top of whatever is going to be passed on or passed through to Google or a magazine or newspaper, whomever you’re doing the advertising with. So gross income is everything. But then we would talk about fee income, and I have that term a little bit later on this list.
But fee income is the money that you are being paid as an agency for the work you’re doing. So it would exclude those pass through expenses like advertising, like sponsorships, like influencer fees, because those are not things that are sitting for any period of time on the agency’s books, they’re just moving right on through.
That’s why they’re called pass through expenses. And once you take that fee income and you subtract your actual expenses from it, that’s where you get your gross margin or gross profit. And profit and margin are used sort of interchangeably. Margin tends to be expressed as a percent, and profit tends to be expressed in dollars or whatever your local currency may be. And so that’s the, that gross profit, that’s the, the big number that most agencies are focused. Another term I don’t have on here, but you may hear from time to time. Is EBITDA, that’s earnings before interest, taxes, depreciation, and amortization. For the most part, that’s the same thing as your net profit.
And so net profit is the next term that we’ll talk about. Net profit is you take your gross profit and then you take out some of the additional expenses that you have as a firm. So net profit, that’s really what the, the owners have to split up amongst themselves or put in the bank for a rainy day or hold onto for future investments.
It’s after you take out all of the expenses that you have for running the business, the all of your, what are called overhead expenses, which is the next term on the list. So overhead are things like your office leases, your computers you know, your internet access, the software subscriptions that you use to host email or.
Analytical tools are all those kinds of things. Things that are not specific to the client work that you’re doing because the client work, those expenses are what help you get to the gross profit number. Your net profit number takes that overhead expense out, and that’s really the number that I think most of us would use in common discussion if we were running our own small business.
The net profit is the money that we have left over at the end of the year to do something with whatever that. , there’s also something called the balance sheet. You probably won’t hear that much about that. That tends to come up more in the case of you know, larger business discussions. But I want you to be aware of it.
The balance sheet basically just is a total of all of the assets and liabilities that the agency has. So it would be the, the total value of all bank accounts, whether that’s savings or checking or investment accounts. It would be the total value of, of accounts receiv. And we’ll talk about that in a minute, but accounts receivable, basically the money that you’re owed.
In other words, if I put out an invoice and someone hasn’t paid it yet, that’s considered to be accounts receivable. And so the balance sheet totals all those things up. It totals up the liabilities. In other words, bills that are sitting on my desk that I haven’t paid, any credit cards that I might have in the business name, any loans or lines of credit that I might have for the agency to help smooth out the, the financial picture of the business and make sure that I can meet payroll and, and pay vendors and those kinds of things, even if a client is late in paying. All of those things go into the balance sheet. It’s primarily used for big business discussions.
You know, conversations about getting additional lines of credit for the business, conversations about mergers and acquisitions, potentially selling the business. So for the most part, If you’re an account manager, account executive, you’re probably not going to be talking too much about the balance sheet either for your own business or even for your clients.
Now, capital expenses or sometimes abbreviated is CapEx. That’s something else that you may hear talked about. That’s usually the equipment that you’re buying, and for most agencies about the only CapEx equipment these days tends to be computers and related items. There’s not a whole lot of capital expenditures for most agencies.
If you have a, a large office, you might have some, some large expenses there, but it’s basically large fixed assets, things like computers, furniture, other kinds of equipment. But again, in the agency world today, particularly where so many of us are working remotely, it tends to be mostly computers and, and there’s not a huge capital expenditure requirement for most agencies.
Obviously, there are exceptions if you’re doing video production or something like that. All of the camera gear will tend to be considered to be a capital expenditure. It only matters because it’s treated differently from a tax perspective, and so it means that the decision making of your agency leaders may be different for purchasing a capital expenditure versus purchasing a piece of software.
So just be aware of that if you hear that term. Now let’s dig into some of the nitty gritty terms, things that you do here a lot. And you probably have managers who may be talking to you about them. One is utilization rate, and so many of you may have had conversations with managers who say, Hey, you know, I, I need to make sure that you’re at least 85% billable.
what does that mean? That’s your utilization rate. In other words, if you’re 85% billable, you would also say that you have an 85% utilization rate, which really just means that you’re spending 85% of your time servicing clients. and some of you may work in agencies where you bill by the hour. Some of you may work in agencies where there’s a different kind of fee structure.
It doesn’t really matter when you’re talking utilization rate. It’s really just the percentage of time that you spend on client work versus the amount of time that you may spend on business development or administrative or professional development, or just internal administration talking to bosses, team meetings, that kind of stuff.
And so that leads to an overall agency number of billing efficiency. In other words, if you’ve got five employees and they can each work 40 hours a week. You’ve got 200 available hours. Your billing efficiency is the percentage of that time that gets spent that actually gets charged to clients. And so that’s something that, that you’re probably having your agency leaders paying a lot of attention to.
Sometimes I would argue probably a little bit too much, but I’ll talk to them about that in a different session. Utilization rates are something that you just need to be aware of because it’s always desirable to have as much of your time as possible spent on client work, at least from the perspective of driving profits.
There are other terms that I’ve sort of touched on a little bit here and, and want to drive into a little bit billable hour. If you are a billable hour type agency. In other words, if you do five hours of work for an agency, you send them an invoice for five times, whatever the hourly rate is, that’s one model that exists.
A lot of you may not be doing that. A lot of you may have a flat fee that is charged to a client every month. And so then you end up with what’s called an effective rate. And so the effective rate means that, let’s say that you and the team members that you work with spent a total of 20 hours working for a client.
If they paid the agency $2,000 in the month, then your effective hourly rate. Would be $100. Now there’s 20 times 100 equals 2000. So the effective rate is something that a lot of times agencies will look at when they’re trying to gauge how well they’re managing their time resource. And as we’ll talk about later, agencies fundamentally exist to sell time.
And when you’re doing that, you need to really focus in on these hours and how the time is spent. It’s why time sheets are another necessary evil in agencies. I didn’t love filling them out. I still don’t love filling them out, but they’re important because they help to understand how things fit into the big picture and how much time you’re servicing a client helps you to inform what prices you’re charging, what kind of resources the owners can invest in other words, more staff to help you to relieve your.
And then finally, the, the other term in this category that I’d like to talk about is blended rate. Blended rate is when you charge a client based on the average cost of a bunch of different employees. So let’s say that you’re doing work for a client, I’m doing work for a client, and your owner is doing work for, for a client, instead of trying to break it.
And charge them three different rates. What you can do is you can say, okay, if I blend these rates together, I end up with a certain number and it’s, it’s lower than the highest person and it’s higher than the lowest person. So maybe it’s not quite an average, but it’s something that generally represents it.
And most agencies that bill by the hour use some form of a blended rate because it simplifies things from a billing perspective and just makes it a lot easier. So if you hear the term blended rate, it’s sort of like an average rate except not mathematically derived. You’d simply sort of try to figure out how that works out.
And you tend to weight it. So if most of the work is done by a junior person but a senior person is sometimes involved, it will tend to, probably the blended rate will tend to be closer. So the junior person’s hourly rate as opposed to the senior person or vice versa. Accounts receivable, I mentioned that before.
This is incredibly important to most agencies and it’s historically a challenge that many agencies have in getting paid in a timely fashion by clients. And we just saw an article, I think it was in AdWeek this week, about how one agency was being asked to take a, a 360 day payment term from a client and what that means is that if I send an invoice today for December’s work, I wouldn’t get paid until next November, which is just crazy. And it causes a lot of cash flow problems, which is another term that you may hear. And cash flow means basically looking at your actual bank account. What you basically do in, in your own personal life, you’ve got a checking account.
Money comes in and you look and you’ve gotta pay bills out. And so, If you don’t have that, that money in the bank account, that cash flow, you can’t pay your bills. Agencies are the same way. And so if agencies are in a position where they have a lot of invoices outstanding that clients aren’t paying, in other words, they have a lot of accounts receivable that can create problems, so it’s why sometimes you may be asked to prod a client if you’re the lead on a particular account, to get them to get their accounting department to actually pay you because it really matters. And it it means that if you don’t have the cash in the bank, it makes it harder for your owners to feel safe in investing in additional team members, for example.
And I don’t think I’ve ever worked in an agency where I didn’t feel like we could use more people to help us out and relieve the burden and decrease the amount of overwork. So thinking about accounts receivable, thinking about collections is something that is really a team effort in many agencies to make sure that things are being handled in a timely fashion.
I’ve already talked about pass through expenses, but one additional concept related to that is markups. And it’s something that’s not used as much in the agency world today. It used to be very common. If I bought something to use at a, an event for a client, I would mark it up by a certain percentage, whether that’s, you know, 10, 15, 20%, something like that.
Nowadays, most people just roll all of that, that management activity into a broader fee. But there are still some agencies and some of you may work for agencies where there is some kind of a markup on those pass through expenses. And so just be aware if you hear those terms, what they mean. And finally we talked about fee, fee income, but I really do just want to drive home the point fee income is, it’s really what most agencies need to concern themselves most with.
If you’re getting a lot of this pass through income, whether it’s for advertising influencers, et cetera, it can certainly help the agencies. appearance be larger because you can talk about all of that as part of your total revenue. But at the end of the day, when you’re making management decisions about how to run the business and how your team operates, it’s really gonna be based on the fee income.
So hopefully that gives you a, a, a good foundation of some of the basic terms that are helpful to know. So now we’ve got those, those terms, and a little bit on those concepts. But at the end of the day, it comes down to how we actually make money as an agency. Because if the agency makes money, that’s good for everybody.
It means that the year end bonuses are probably pretty healthy. It means that maybe you can invest in some additional team so that you have a more manageable workload, a better work life balance for the whole team. And so we need to think about what the agency model is. And the agency model is effectively about serving a client and, and you are the agent of the client. It’s where the word comes from. And so if I’m the agent of the client, if I’m servicing the client, what I’m fundamentally selling is my labor hours, the time and talent of my team. And of course, when you actually go out and sell to a client, you don’t say, Hey, I’m going to sell you a certain number of labor hours.
So this is, this is more the mechanics of the business as opposed to how do you position it. I wouldn’t encourage you to go out and say to Coke or Pepsi, Hey, we’d like to do some work for you and I can sell you a thousand hours. That’s not what they’re ultimately looking for, they’re looking for the result of the work that you’re doing.
But from a business standpoint, what you’re doing is you’re trying to make sure that the amount of hours that you’re spending servicing a client, and the amount of money that that costs you as an agency owner is less than what you’re charging the client. That difference is how you make money. And so it’s why it’s so important to understand the financials as an employee because we are big drivers of that.
When we’re employees, we have a real impact on the amount of time that we’re spending on individual clients because most of the time, the owners, the executives, the senior managers, They’re not involved in the day to day. And so it tends to be the account managers, the account executives who are working day to day on client things and, and we’re making a lot of little decisions on our own about how much time to spend on something or whether to say yes or no to individual little requests that don’t bubble up to the level that we have to pass up the chain.
But those decisions have a real meaningful impact. On the financial health of the business, and we want healthy financial businesses because it’s good for us as employees, both because of the compensation we can get because of it, and also because of the investments that the, the senior team can make in growing the business.
And labor as we’ll see in just a moment. On the next slide, labor’s the biggest driver of agency expenses and it makes sense if the business model is that you’re selling labor hours to your clients, labor’s gonna be the, the most expensive portion of the business, and it’s even more than most employees understand. And finally, all of this comes together because of pricing. And many small agencies, even some large agencies, do a very poor job of pricing. And in part because it’s because not everybody’s on the same page. So owners need to be sharing more financial information with team members. And team members need to be more informed through forums like this so that you can really meaningfully contribute to the relationships that you have with your clients and how that all translates into better pricing, more profitable pricing.
For your business going forward. And so let’s take a look at how typical agency expenses break down. And so it’s really just three different buckets that that account for almost all of the expenses, at least as it relates to the fee income for an agency. And again, a reminder, the fee income is excludes the pass through.
So the, the pass through would be on a different chart than this. This is, this does not include the advertising or influencer fees or that kind of stuff. This is really just the actual expenses going into the service portion of the business. And so the, the blue slice, that’s about 60%. That’s the labor.
That means, and that’s everything related to an employee’s expense, and we’ll talk about this in a minute, but your actual expense as an employee is not just the salary that you make. There are a lot of other things that go along with it. Some of them may be obvious to you, some of them may be a little bit less obvious.
And, and when we get to the last portion of this presentation, we’ll cover that piece of it, how your salary relates to the cost and therefore the, the billable hour that is assessed to clients. But so the labor expense about 60%. It can be as low as, say, 50 or so. It generally won’t go much higher than 60 to 65 for even the, the most expensive labor agencies.
Your other two pieces of the pie here the, the, orange piece is your overhead expenses, so things I’ve talked about before in that overhead bucket office leases, computers. Software subscriptions, all of the, the kind of general running of the business type things. But it also includes things like if you’re, if you’re, even if you’re an entirely remote agency, if you bring the whole team together for a retreat on a periodic basis, that would go into that overhead bucket because it’s something that’s not charged directly to a client.
It’s something just to keep the lights on in the business if you will. And then green, the best agencies have about 20% that is part of the overall profit margin of the business. It can be lower than that. There are some agencies who maybe only five or 10%, but 20 is really the, the target that most healthy agencies should be seeking.
And the, the profit you have to keep in mind is not all necessarily something that goes into an owner’s pocket, although in small agencies it often is. That profit is also using to build up cash reserves for the business so that if they’re, if you lose a client for example, you have some sort of a cushion as an owner to make sure that you can continue to pay the bills.
So profit is is important and it’s not just about enriching the owner, it’s also about making sure that you’re building a healthy business. It’s something that you might be able to set aside to make future investments, whether that’s hiring a team member to expand the business before you actually have the revenue to justify it.
It might be to help acquire a smaller agency. For example. There’s a lot of things you can do with profit beyond simply taking it home as the owner. All right, so project management, many of you I’m sure are involved in day to day project management, and so agency financials are closely related to it, but frankly, a lot of agencies don’t do enough to share the information with project managers that, that would be helpful to you all in order to be better at your job.
And the first thing, and, and the most important thing I think, I always encourage agencies to do this, is to have specific budgets for each client and. That you work on, and the reason why you want to have these budgets is because you’re effectively saying when you price something for a client, we we’re guessing that this is the amount of time and money it’s going to take in order to service this account.
And so you want to have a budget at the start of the project that lays all of that out. It’s helpful to do that during the business development stage because it allows you to estimate that and then charge an appropriate fee based on the work that you’re doing. But by setting it out at the start of the project and sharing it with you as a project manager, it allows you as the project manager to understand what the expectations are and how much time it’s going to take to do it.
Because a lot of times project managers only hear we’ve just brought this new client on, this is what we’re generally going to do, and this is what they would like to see for results. But if there’s not an understanding of how much time it’s supposed to take and how much you’re supposed to invest in it, then you may not be able to make as intelligent a decision.
So I would encourage you, if you’re not already getting budgets from your owners or executives, ask for them and it will really help you be more effective at the work that you’re doing. If you’re gonna have a budget, you also need to track against that budget. And that comes down to tracking. And, and I talk a lot on SAGA about how important time tracking is.
I’ve mentioned it already today, but time tracking really does help you as an employee, even though it’s not fun. If you do it and your owners are paying attention to it, it allows you to, to figure out the amount of time you’re actually investing in clients, which improves future pricing. It helps your executives and your bosses understand how they should be investing more, or perhaps even helping you to reduce your workload by saying, Hey, this is something you shouldn’t be working on.
This is outside the scope of what we’re supposed to be doing for the client. And that scope is something that you really need to understand too as project manager. So make sure that you’re, you understand what the client specifically has been promised because you have, being at the tip of the spear being on the front line, it’s your job to help control that scope creep. You’re not necessarily the person who needs to say no to the client on a day to day basis, but you at least need to flag it for your bosses so that they can decide whether or not. They’re going to take on some additional piece of work that’s outside of that original scope because every little thing that you do outside of that, that eats into that green pie slice that we looked at before.
And the thinner the profit margin for an agency gets the more pressure that goes on employees to put in extra hours and perform, because that’s how the balance, how the budget ends up getting balanced. So as we, as we think about that, we also want to be careful about just saying when, when a client calls up and asks for something, well sure we can do that.
That’s just, that’s just a little something extra. Just take me 15 minutes, just take me 20 minutes, just take me an hour. And pretty soon those things add up. And as a good project manager, if you’ve got the budget, you’re doing accurate tracking, you start to see how that can make a difference.
Let’s say for example, that you have a client that you’re supposed to spend 20 hours a month on. If you spend just an extra 30 minutes or an hour every week working on it, you’ve now substantially reduced that profit margin, because those 20 hours now have become 24. And so that means that you’ve spent 20% more on that project than was originally anticipated. And so, so an hour at a time doesn’t sound like a lot, but when you add it up, it can be a lot, particularly if you’ve got multiple team members who are working on a project. So understanding all of that as the project manager, you are the one who has the highest level of control and can do the most to reign that in and help get the results for your business, your for your agency as possible.
And the other reason why as a project manager, all of this matters is because it can help you spot upsell opportunities. In other words, opportunities to expand the scope and get additional fee revenue from a client, and that can help you. Perhaps it’s finding something that would be interesting for you to work on.
Perhaps it’s something where you spot an opportunity with the client and you know you could produce better overall results if they added this particular service or this particular project. As a project manager, as you understand what the scope is, it helps you identify those things that you can perhaps pitch as additional business, which is good for everybody.
All right. Now let’s, as, as the final bit here before we get to the, the Q&A. And I would encourage you, if you’ve got questions, feel free to submit them through the Q&A function in the, the webinar, and I’ll try to field as many of them as I can here at the end, but a lot of you may be here because you want to understand how is it possible that I’m getting paid $50,000 a year and I am getting billed out at 100, 150, $200 an hour. Well, the, the reason why your salary and hourly rate don’t match, there’s many different components to it, but one of them is something I talked about earlier, the idea of a blended rate. So a lot of times if you are billing by the hour as an agency, you just pick a number that you know is going to cover your expenses.
So that goes in there. Part of it is because of this scope creep concept though, because you don’t end up billing for all your time, even if you’re actually billing by the hour. A lot of agencies will say, well, we spent, you know, 15 hours on this. We’re only on a bill for 10. Because that was the client’s expectation.
In fact, when I was a junior account executive back many years ago, about 30 years ago now, I was in a position where we were told how much we were supposed to bill a particular large client, and it was, we were billing them by the hour, but we had a cap on the number of hours that we could bill, and so most months we hit that cap, but we kept working past that.
Now, ownership was aware to some degree that we were going over that number. But that means that even though we were billing them at a certain amount per hour, the total amount that the agency collected was different because the number of hours that we billed was less than the number of hours we actually spent.
And so that can help lead to that disconnect between the salary that you or your, your fellow employees are paid, and how much you bill out. But the other reason why there’s a big difference is because your total cost as an employee is very different from your salary. And what do I mean by that? So obviously you know that you get paid a certain amount and you can see from your paycheck that you don’t get that full amount. And I, I know that that I was always frustrated by that when I used to collect a paycheck and, you know, I, I knew my salary was X and, and all of a sudden a whole percentage got taken out for, you know, taxes and other things. And, and so, There is this difference, but there is, there are also expenses that get added to the employer’s share that you don’t even see.
And so for example, the employer has to pay things like payroll taxes that don’t show up on your actual pay stub. So that gets into the mix. But there are also other things. There are the benefits that are involved. So you know that you probably get health insurance, maybe you pay for part of it and your employer pays for part of it.
There’s that expense. There are different kinds of insurance that your employer is probably paying for that you’re not even seeing. Things like liability insurance or unemployment insurance, those kinds of things that the agency is having to pay because they have employees, and that cost will go up as you add additional employees, and particularly as agencies have a lot of remote workers that can add some additional cost to the overall insurance footprint that an agency has.
There’s the cost of managing employees, there’s the cost of computers and telephone and email and all those other, those licenses that go along with employees. Obviously your salary, your base salary is the biggest driver of it. Second would be health insurance and everything else sort of falls in line after that.
But there are all these additional expenses that you don’t even see that go into the total cost of an employee. And it’s one of the reasons why agencies tend to be very slow to hire because they want to look and they want to understand what is my total expense. You also have to look at the fact. If you have an employee that you, that is not a hundred percent billable and almost no employee is a hundred percent billable, most of you have to spend some time on at least team meetings and other administrative functions, and so that means that the fee that you bill out has to account for not just the time that you’re spending working for clients, but all of the other time as well. So that will also increase what that hourly rate is that that most employees are billed out at. And by the way, this isn’t just for junior employees, mid-level employees. Owners, if they’re not, they should be doing the same thing with their own target compensation and making sure that they are charging more per hour to clients to make sure that they’re covering all of the additional costs just of, of their own existence within the business. And so as you look at all of these things together, that helps explain why.
There is this apparent discrepancy, and I know when I was a junior employee, I was always flabbergasted at the differential between what my salary was and what my time was billed out to at a client. And I remember at one point in my agency career saying, Hey, You know, if we’re charging this client this much per month, why can’t I just service that client and, and take all that revenue myself?
I’m doing 80, 90% of the work anyway. Obviously a piece of that is that I didn’t understand the total expenses that were involved. And of course the other piece of that is that there’s, it’s less likely that a lot of those clients would hire me as an individual back then to do that kind of work versus hiring the agency and all that that brought along with it as far as experience, stability and also the senior people who even though they may not have been involved on a day to day basis, still contributed substantially to it. Alright, so that helps explain that, that big picture of how agency financials work, why it matters to you. We went through some of the basic terminology.
And so as we tie this up in a bow, I, I would just encourage all of you to ask a lot of questions, and I’ll probably get heck from this, for those of you who, who may be working with with some of the clients that I coach or advise on a one-on-one basis. But ask them questions. Try to understand the business model of the agency that you work in.
Try to understand more about the things that are most important to your agency business and how you can be a better contributor because the, the more of a contributor that you can be, the better it makes your own life because you can have a, a better work life balance. You can do more interesting projects, you can have a higher year end bonus.
So really try to get informed, really try to ask questions and frankly, Offer your own ideas and input because as someone who is on the front lines and doing day to day client service work, you are in a position to really fundamentally alter the profitability of that agency. You’re in a position to contribute more substantially to the overall business and its success.
So I would encourage you all to do those things and hopefully I’ve given you a, a good foundation of that. And so we will now move into, The Q&A portion of this. And so let’s see here. Let me get over to this. And then of course, as I said, if, if you have a question, for example, that you don’t want to ask to the group that you would like to ask me directly, feel free just to email me directly at email@example.com.
In the meantime, I will do my best here to try to bring up the Q and A box. Let’s see, I lost it on my screen here. Let me see if I can rediscover it. All right. All right, so here’s the first question that I have today. Can you explain more about how budgets are created? Is it based on past experiences or specific numbers?
Percentages used? Sometimes it seems like making an educated guess so. Sure. So there, there’s a couple of different ways that agency budgets are put together and project budgets are put together. And so the, the first is looking at historical, Numbers. So if you’re doing a project budget, you might look at a similar project and see how much time did it take, how much did we have for expenses?
What kinds of products or services did we have to invest in in order to service that client at an agency level? If you’re part of an annual budget making process that I know many agencies are going through right now, for 2023, a lot of that is looking at what were your actual expenses from 2022 or 2021, and building upon that and trying to say, okay.
Should we spend more or less? And so you want to use that historical data. And I guess, I guess that leads to this, the educated guess portion of the, the question there is a, a certain element of educated guess, but I think that the, the key thing with budgets, whether you’re talking at the agency level or the project level, is to continue to look at those and track against reality.
And so look at the data as it comes in so that you are able to make some intelligent and informed decisions for the future. I don’t expect that every project budget or every agency budget is going to be accurate. In fact, I don’t think I’ve ever seen a, a project or agency budget that’s been a hundred percent spot on without any deviation from what was estimated at the start.
It’s almost impossible to do that, but what you want to do is you want to get closer and. closer to the, the true number when you’re doing these estimates, and you do that by informing yourself from that behavior and, and how much you miss by. So if I, if I have a project budget and I wildly under or overestimate the amount of work, I really want to pay attention to that, understand why, and, and try to, to get better at it.
Part of that is making sure that, that you all, as account executives, account managers, you understand these things and you’re able to contribute meaningfully in saying, look, it’s really gonna take us more time to actually achieve that result, to produce those press releases, to design that website, to manage that ad spend, whatever it is.
And you are in the position to offer insight to your bosses, the agency owners and executives so that they can make smarter decisions. So, Good budgets are collaborative. Good budgets involve looking at past performances, but good budgets also need to be tracked and analyzed over time so that you can learn valuable lessons from them.
All right. I’m gonna grab a sip of water here, and it looks like I’ve got some other questions here, so we’ll handle at least a few more.
All right. Any concrete ideas for how to raise my utilization rate? It feels like there’s a lot of mandatory meetings I have to sit through. Yes. So first of all, when I talk with agency owners, I always tell them that they, they shouldn’t get too hung up on utilization rates. So I, I think it’s something that’s, it’s useful to be aware of and, and it’s something that if you’re doing accurate time tracking as an agency, you can certainly understand that.
I don’t like when an employee is told you need to be 85% billable. Because if you get, if you get too hung up on utilization rates and there’s too much concern about trying to hit them, then you end up in a situation where bad decisions get made. Those bad decisions can show up in the form of fibbing on your time tracking.
Something that I was guilty of when I was a junior account executive and had to fill out time sheets if I was told I’m only supposed to spend 10 hours a week on this. My time sheet almost always said 10 hours or less. Sometimes I spent more time on it because I was in a situation where I was either gonna get yelled at by the client for not doing what they asked, or I was gonna get yelled at by my boss for not putting in the correct time on the time sheet because the boss wanted all of the work done for the client that they asked for.
So as a, as a junior employee or a mid-level employee, you can be in a difficult position there. And I don’t want, I encourage agency owners not to put their employees in the position of. being forced to fib or being forced into a difficult conversation, that’s really not necessary. I prefer accurate reporting and so you might have a general target for utilization rate, but I wouldn’t make it something that is something that, that you need to change your behavior as an employee in order to simply hit that magic metric.
Now, separate question or portion of that question that I think is, is important is getting stuck in pointless meetings. We all get stuck in a lot of meetings that probably don’t make a lot of sense. If you’re doing good time tracking as an agency, it helps you identify those things and it identifies opportunities for meetings that can be shortened or meetings that can be eliminated as an account executive.
As an account manager, if you are running meetings yourself, try to think about how you can turn a 60 minute meeting into a 30 minute. Think about, do you need the frequency that you currently have? A lot of times we end up on autopilot. Sometimes we may come into a situation where we’re inheriting a client from someone else and they always had twice a week meetings, so we have twice a week meetings.
Do we need to? I don’t know. I mean, it’s, it’s one of those things where you need to, to think critically. And offer your own input and try to figure out how you can become more efficient. Obviously as a a junior or mid-level employee, you’re gonna be attending a lot of meetings that you don’t have a choice over.
So some of that may be when you’re having one-on-ones with, with your boss offering the feedback, geez, I’m not sure that this meeting really needs to be this long, or if it’s adding the value. And so that might help save them. But the other thing I would suggest to you is if you are in these meetings, try to figure out how to make them as useful as possible. So sometimes it’s a, it’s difficult as an AE or an AM to, to go in there and get the meeting knocked off the calendar. So instead, try to figure out how you can get the highest value out of that. And, and it may be making sure that you’re, you’re leveraging it to get the decisions or guidance that you need from seniors, from clients or whatever.
It may be that it gives you an opportunity to learn, it may be an opportunity to make deeper connections with others within your agency or at the client. So think about how you can leverage those meetings to get higher value out of them if you’re going to be stuck in them anyway. Alright. Is there any particular time tracking system you recommend?
I personally am a big fan of Harvest. At the end of the day, what I always tell people about time tracking or any other kind of software, There’s lots of good solutions out there. I don’t worry too much about what they are as long as they’re actually being used. I mean, if you do time tracking on pen and paper or a napkin, if you’re doing it consistently and it’s accurate, doesn’t matter.
The, I think a lot of times we all get hung up too much on. Looking at, at different pieces of software, getting too hung up on the different features and functionality and the cool demo videos and the sales rep pitter patter. Ultimately use what you think is something that, that you and, and the rest of your team will use.
But, you know, harvest would be my personal choice. I’ve used it for many years. I like it. It’s simple to use, easy to use, and and you know, it’s as unobtrusive as time tracking can possibly. Do I recommend hourly billing or project based billing? So, you know, obviously this is something, you know, probably that, that most of you as employees aren’t gonna have to, to deal with directly on your own.
Let me just take a moment to talk about the, the differences between the two from a, an employee standpoint. So, When you’re, if your agency is, has chosen hourly billing, then obviously your time tracking becomes much more important. And I don’t know agencies that go to the same level as lawyers where you’re billing in six minute increments, but agencies that are billing by the hour do have to be much more accurate in what they’re reporting because if you’re actually charging a client for something, then you need to make sure that it actually reflects what you’ve done for.
Because if, if not, then you’re essentially engaging in fraud, and so you wanna make sure that it’s particularly accurate in those cases. I would say most agencies today are moving away from the billable hour if they haven’t already. There are certainly some particularly older agencies in public relations and, and some fields like that, that, that do still rely on the billable hour more so than not.
But I would say most agencies that are doing any kind of hourly billing are less likely to, to do it in that lawyer fashion where we spend three hours, we bill you three hours, it tends to be more in terms of we’ll spend up to 10 hours or up to 20 hours a month working on this particular project for this client.
And so it’s, it’s more of that bucket of hours concept that’s related, but not quite there. But I would say the vast majority of agencies today just use fixed fees of some sort, whether that’s project fee, monthly fee. It’s designed to encompass a whole scope of work if you’re able to do it more efficiently one month you have a higher profit margin. If you do it less efficiently, you have a lower profit margin. So there’s risk on both sides when you do fixed fees. But I would say it’s where most of the industry has gone in the last 10 or 15 years, and I expect that it will continue to go in that direction as an employee.
If you’re, if you’re not billing by the hour, it’s still important to understand how much time you’re spending servicing a client, because it really is something that will help drive that profitability and it will help your managers to make those better decisions about resource investments as well as pricing going forward.
So either way, it’s something you need to be concerned about, but the, the level of accuracy probably needs to be a bit higher if you’re truly by the hour. So it’s important for you to understand the business model that your agency is using. Let’s see. I think we’ll try to grab one more question here before we wrap up here.
What kinds of upsell opportunities should I be looking for? So, Look, this is something that is a worthwhile conversation to be having with whomever in your agency is working on business development in, in most small agencies, which I suspect are, are most of you who are out there listening to me today, most small agencies that’s going to be the owner or partners in the agency, and so, Having conversations with them and understanding what kinds of new business are they looking for, and making sure that you are having, particularly if you’re the client lead, you’re having regular conversations with your owner and with the client about what their needs are.
So since we’re doing this webinar at the end of a year, It’s an ideal time to be having a conversation with a client to talk about the year ahead, not just in terms of what we as an agency are doing with them, but what their broader plans are, and I think a lot of times, We tend to look at our relationships with clients as the most important thing, and for us, it is for them, it may only be a small percentage of their day or week that they’re devoting to thinking about the work that we are doing.
And so the more that that we understand and that you as a client lead, or even just, you know, one of several members on a, a client team, the more you understand about how they’re doing things, what they’re thinking about, what their other priorities are, the better you can find ways to fit into that either with your existing work.
Or with these upsell opportunities, these new opportunities that you may develop. But it’s important that you are having conversations with your managers, your owners, whoever is involved in that business development process, so that the things that you’re thinking about are good fits for what you can do as an agency.
Because you never want to be in a position where you are having a conversation with a contact at the client and you say, Hey, it would be great if we did this or that. And then find out from your bosses subsequently that that’s, that’s not something that fits with what the agency is trying to do. And you always want to make sure that as an agency you’re taking on things that you know you can be successful at.
Because if you’re, if you start spreading yourself too thin and taking on things, I mean, let’s say for example that I’m a web development agency and I know nothing about buying Facebook ads, but I say, Hey, you know, you should run Facebook ads. We’ll do it. If we have no knowledge about that going in, that’s a much higher risk thing and it could jeopardize the core portion of the relationship in addition to the other work that we’ve, just pitched.
So make sure that you’re really being thoughtful about the fit. Have those conversations. Frankly, if you’re having conversations with managers and owners about business development, they’re gonna love that because I talk to a lot of owners every week and most of. Are dying for help from their team on business development.
So if you’re looking for ways to advance your career to get ahead within the agency that you’re at, take an interest in business development. It doesn’t mean you’re turning into a salesperson or anything like that. You don’t have to love sales even. But just being able to have that mindset that you want to think about how to grow an account.
Talking to your ownership about the financial things that you’ve learned about today, the concepts, and, and saying How can I help us be more profitably? Because I recognize that that’s good for both of us. That’s the kind of thing that can open up the doors to new opportunities for you. So I would encourage you all to do that.
I would encourage you all to be curious. Ask questions. Ask questions of me, ask questions of your own agency. Use resources online. If there are things that you want to learn more about, dig into it because I, I will tell you that probably one of the, the best skills that you can have if you want to advance your career and have a good time and enjoy the work that you do is curiosity.
Learn about things and, and dive deep into them where it makes sense, so that you become more informed and, and decide how you can contribute best and frankly, how you would like to spend the rest of your career. So I think that’s a good place to, to wind this conversation up. I thank you all for joining the conversation today.
I hope that you have gotten a lot out of it. Again, if you’d like to learn more about SAGA, just go to small agency growth.com for more of our resources. And of course, if you have a question that you would like to ask me, perhaps one of the ones that I didn’t get into here from the, the Q&A feel free to just email me, firstname.lastname@example.org.
So with that, thank you all and have a good rest of your week.