I seem to be in a perpetual state of heightened enthusiasm for my guests of late – and understandably so! This week, I’m exceptionally excited to bring you someone whose podcasts I’ve been listening to for the longest time. Now he’s here to discuss how best to make a profit AND scale your firm – so we’re experiencing some Inception levels of meta right now.
Drew McLellan has spent over 30 years in the realms of marketing and advertising, over 25 years running his own firm, and almost 10 years being head honcho at the Agency Management Institute, helping hundreds of firms run a better business.
The host of one of the top podcasts in our space, Build a Better Agency, Drew has been featured among the 10 Bloggers Every Business Owner Should Read, as chronicled by the Wall Street Journal.
When he’s not helping his clients, you can find him combing over baseball stats in De Moines, Iowa.
Points of Interest…
- Common challenges Drew has seen Agencies encounter 5:17
- Why AGI is so Fundamental for Profit 7:10
- Tracking Metrics for Profit 10:57
- Price Hikes Don’t Convert to Profit 17:42
- The Importance of Tools to Drive Profit 22:14
Common Challenges Agencies Encounter
Serving approximately 250 agencies a year, Drew and his team are in the underbelly of each business, particularly when it comes to their financials. Having dealt with a couple of thousand agencies over the last decade, and witnessed a strong sample of what this market looks like over a prolonged period, Drew is something of a soothsayer when it comes to the repeated pitfalls made by companies.
What are some of the most common mistakes and challenges that he’s seen his clients continuously struggle with? Drew’s answer may surprise and delight you…
“I think the biggest barrier for agency owners is that none of us went to school – most of us, anyway – and get an MBA in finance. Our advisors have been generalists. They’re general lawyers, their general CPA’s, and agency math is different. Agency metrics are different. And so most agency owners are in essence, running their agency blind until they really understand how the agency math works and the metrics and the KPIs that matter.”
For example, one of the biggest repeat offenders hindering agencies is giving weight or gravitas to what Drew refers to as “the vanity number” AKA Gross Billings. The number that should be considered, however, is your Adjusted Gross Income. How do you calculate that? Get your Gross Billings, minus your cost of goods (including your contractors; anybody who does not get a regular paycheck from you should be considered cost of goods), and what’s left is your AGI.
And that’s the magic number that you have to know every month in order to run your business profitably!
Why AGI is so Fundamental for Profit
So, why is this AGI number so fundamental for profit, and how do you go about using it? Drew digs into all of that around the 7:10 mark, but it can be summarised thusly…
“AGI is the money that comes into the agency that the agency owner gets to keep and spend how he or she sees fit…”
If you don’t understand what that number is, then you can’t properly understand how much you can afford in terms of a) how many employees, b) what can you afford to pay them, c) what level of overhead can you sustain in terms of office space, or travel or whatever it may be. If you don’t have the AGI, then you can’t run any of the calculations.
The ratio for AGI, in its simplest terms, is 55, 25 20. A well-run agency will spend 55% of its adjusted, gross income on loaded salaries – so that’s benefits, health insurance, whatever you give yourself and your team. Then it’s 25% for overheads. So that’s everything from rent, car allowances, cell phones, lawyers, etc. Finally, 20% should be profit before taxes.
Tracking Metrics for Profit
What are some of the additional metrics that Drew often asks his clients to track to help them stay profitable and scalable? Another large mistake agency owners often make is overstaffing their agencies – because the agency owner does not have an objective way of knowing if they should hire another person.
If an agency is bleeding anywhere, it’s out of the 55 number. When we start working with agencies, a lot of times that 55 number is – after we calculate it – at 82% or 77%, and they wonder why they’re not making any money. So, one of the key metrics is you should have $150,000 of AGI for every full-time equivalent, including you, the owner.
In other words; you must have $1.5 million of AGI to have 10 employees. You’ve got to make sure that your AGI per FTE, and your AGI per salary, is in line with that 55% – otherwise, you can wave bye-bye to profit. That’s a really simple way to gauge if you’re earning your revenue efficiently enough as a business – and a good forcing function for you to figure out ways to either adjust your pricing or adjust your process.
Drew discusses this more in-depth around the 12:54 mark.
Price Hikes Don’t Convert to Profit…
A lot of folks in the industry say, “Just raise your prices and all your problems will go away!” If only it were that easy. You’re actually just masking another problem. More often than not, the most precarious time for an agency is when they’re financially fat. You can become complacent about the mechanics and, in short, not paying attention to efficiency. That’s when things start to break down.
One of the solutions may be raising your prices in the short term, but it won’t solve your underlying issue indefinitely. It will bubble up and blister in other places – and impact long-term your profitability.
You should focus more on fixing and building on your operational processes – your data – which are all pretty much built on your ability to accurately estimate client work, resource planning, capacity management, forecasting, and profitability.
Side note: our Agency Profit Toolkit is a one stop shop for you to be able to outline some of these crucial profitability numbers to a potential buyer. Spreadsheets, templates and training videos, you name it, it’s all in the toolkit. Grab yours free at the link below:
According to Drew, it’s less about money and more about inflection points within your company…
“There are what I call ‘breakpoints’. So, if your agency is at 12 people, every system and process that got them to 12 people is now broken – if they want to get to 20 people. 25 to 30 people is another inflection point, where everything that got you there is broken and must be reinvented. If you don’t have the data to know which systems are broken, then you get stuck where you are. It has nothing to do with money. But it will, eventually.”
The Importance of Tools to Drive Profit
So, we’re back to the mantra of historical data being key to the growth of your business. By way of example, when we’re asked to estimate the number of hours required to undertake a task or a project, it always, and I mean ALWAYS, will be under what you’ve estimated for your client.
“If people don’t use a tool, you have to assume your estimates are wrong and you have to assume that you’re going to be under. You have to fix that before you open your mouth to the client, or send the proposal because then there’s no going back on it anymore.”
Data is king, as it shows you – from past experience – how long a certain task should take. That’s why free software tools, like the resources we have here at Parakeeto, or what Drew offers via the Agency Management Institute is a quick, easy, and super-efficient way of keeping tabs on all your data modeling and set you on the path to making your agency more profitable.
if you haven’t started looking into this stuff yet, right. Do yourself a favor and just try it for a couple months. And I promise you, you will get punched in the face with some very helpful reality, very early on in that process.
Don’t get me wrong, it’s very unnerving to fully realize that your presumed “tight ship” has been springing leaks all over the place, but it’s necessary for growth. The good news is, it’s all fixable!
Want to see more from Drew? You can do that via…
- Agency Management Institute
- Build a Better Agency Podcast
- Agency Summit 2021
Did you learn anything new from this episode? Let us know in the comments below – feedback is king! Our next installment of #APP, on December 23rd, will see us chat with Vince D’Eletto. While our previous blog with Chris Evans is over here…
Agency Profitability Tool Kit
If you’re looking for more resources to help you improve your agency’s profitability, then check out the Agency Profitability Tool Kit – it’s full of the same templates and checklists we’ve used with consulting clients to help them improve their profitability by over 100% in under 60 days.