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Agency Finance is Broken, Here’s How to Fix It with Andrey Baskov – Episode 59.




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Last updated Nov 23, 2023


Agency Finance is Broken, Here’s How to Fix It with Andrey Baskov – Episode 59.

Last updated Nov 23, 2023 | 0 comments



This week, we have the pleasure of talking to the founder of Metric.ai, Andrey Baskov, about the importance of having a solid financial system in place. You see, Andrey and his team connect time-tracking, resource planning, and CRM software – while creating an automated system that tracks and forecasts your revenue, cost, profit, utilization, and other metrics critical for agency success – all in real-time. If that sounds good (and it should), do read on!

About Andrey Baskov:

Andrey and his team at Metric.ai have been busy building software to analyze and plan financials for agencies and consultancies. Simply put; they take the weight of data management off your shoulders, so you focus on actual planning and decision making.

In the business of saving clients literally tens of thousands of dollars in manual management labor costs, Metric.ai gives you tools to increase your profit margin and utilization, potentially recovering hundreds of thousands of dollars of missing profit.

When Andrey isn’t saving clients potentially millions of dollars, he’s an avid skydiver (specifically a wingsuit enthusiast), plus he’s on the path to becoming a private pilot.

Points of Interest…

  • Benefits of Properly Structured Financials 2:29
  • Defining The Differences Between Cash and Accrual Accounting 4:39
  • Fidelity for Financials 6:44
  • Employee Growth Inflection Points 10:15
  • Building Blocks For Optimum Accrual Accounting 12:26
  • Key Takeaway – The Power of Accrual Accounting Metrics 16:17

Benefits of Properly Structured Financials

Fun fact: myself and Andrey kicked off our problem-solving journey around the same time. Our respective aim? To find solutions to Agency Financials, KPI, CRM, and all the other fun stuff. There are SO few people in this industry that I can go full-on bore nerd with regarding this topic and Andrey is one of them. Therefore, it is such a privilege to bring him on to the show so he can share his expertise with you.

Now that you have a grasp of what Metric.ai does in the realm of Financial Management Platforms, what was Andrey’s motivation behind setting it up?

“It’s been driven by my past experience running agencies; I’ve made a lot of mistakes! So, hopefully, other people will not have to go through that.”

So, what are some of the more important insights agencies can glean from having good, properly structured financials in place? Well, given most people go into business to make a profit, you need structured financial solutions to fully comprehend just how much profit you are making. Additionally, if you decide to sell your business, its valuation will be based on your financials to date.

“You need to have a proper system that would allow you to not just measure – that’s just step one – but also to be able to fix, improve, and debug the financials. You need to get down to the nitty-gritty little details on each scenario and how it will impact across the board. These are really important insights to grow as a business.”

Defining The Differences Between Cash and Accrual Accounting

Another fiercely important insight is discerning the fundamental differences between cash and accrual accounting. For example; did you know that (theoretically) Accrual Accounting is the appropriate accounting method for a service business?

According to Andrey, a good indicator of whether cash or accrual is preferable is the length of a customer contract. If your contract is merely going to take two weeks, there isn’t a huge amount of difference between cash and accrual. The reality is, most agencies/businesses likely have multi-year deals, all comprising of different payment terms. Andrey breaks it down thusly…

“You have an annual deal for one year and you’re getting 20% upfront. You’re now three months in on this contract. How much profit do you think you’ve made? Is it that 20% minus your cost, or is it something different? It’s really not that easy an answer – and that’s where Accrual Accounting comes in… “

Being able to answer such questions in the middle of a project allows you to understand the amount of profit made so far, plus how much you are going to make in the future.

Fidelity for Financials

At this point, let’s highlight the right level of fidelity for financials with regards growth, i.e. a ten-person agency is going to have wildly different needs than a hundred or thousand-person agency. Based on what Andrey’s observed throughout his career, I ask him to highlight some of the major inflection points, whereby you’ve got a transition, either from cash to accrual, or you have to start really tightening up the fidelity of your financials.

“There are a number of inflection points. One is definitely around 10, 12 employees; before you get to that, you can do whatever. I would actually advise you to do whatever… Then, once you get closer to 25, you need to start prepping further. You may be able to continue running some things manually, but you need to start preparing for future growth because you don’t want to end up in a situation where you have 50 employees and still don’t have any systems in place. Now you have to set them up, but you have a whole bunch of other issues to deal with, right?”

Indeed, there are. Picture it, you’ve got 50+ employees, an emerging layer of middle management, and an increasing amount of decisions to deal with. At this point, it really all boils down to the numbers. You can “what if” and hypothesize about preferred clients and the resulting potential profitability all you want, but it must come down to the numbers. That’s when you have to have some software already in place.

As for the Number One rule of obtaining such software? Do NOT build it in-house. It may seem like the natural progression, but that’s not necessarily the case long-term – especially if you plan to scale. Andrey has seen clients who have 300 employees, plus internal software, and therefore must hire a team of engineers to maintain it.

You may have business lines, different departments, or offices across various territories, and find yourself requiring some numbers instantly; if you can’t get these figures within minutes, you are going to be behind the curve.

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:

Employee Growth Inflection Points

It’s worth noting that Andrey’s inflection points essentially correlate to when agency owners add a layer of people between them and the hands-on business work. If you weren’t already aware, it can be roughly laid out as follows…

  • 10-12 Employees: You’re probably hiring your first project manager as you’re not interfacing directly as frequently.
  • 25 Employees: Now you’re either working towards or have your first level of management.
  • Approximately 50 Employees: This is roughly where you start building out your C-Suite levels; CEO, COO, CFO, etc.
  • 100+ Employees: In reality, you’re probably finding it tricky to recall everyone’s name plus their job descriptions.

At this point, you’re effectively running your business from insights, from metrics, from information you’re getting from management.

“If your managers don’t understand how your financials work, how do you expect them to make a profit on projects? Even if they have direct access to that real-time data, they will not be able to make decisions. They also cannot rely on you.”

So, imagine a manager approaching you to request more resources? How can you make that decision without the correct financials, which are only possible with a reliable system/software in place… Are you noticing a theme yet?

Building Blocks For Optimum Accrual Accounting

For those starting out/currently at the smaller end of the spectrum, what can you put in place to make this transition less painful? Nobody wants a situation whereby you’re tearing your existing systems apart to reach new goals, so firstly…

  • Don’t be afraid to open a dialogue with a CFO, or another agency founder, to gauge how things are usually done.
  • Even at the smaller scale, you must have processes in place to measure things accurately.
  • If possible, don’t start with Cash Accounting; it’s “the road to nowhere.” Best to start things properly from the offset.
  • Evolve your systems, because – at some point – it’s going to be imperative to have the correct historical data.

Again, the entire point here is avoiding reaching the goal of 25-50 employees and you’re just starting to implement solid financial structures. Paying attention to how you set up all your tooling, plus how you structure your data in said tools, can save you so much trouble in the long run, even if it’s for non financial KPIs.

**Andrey discusses whether software or a new hire is the better option at the 14:01 mark. Sometimes, depending on the nature of your business or its size, a CFO might be the way to go…**

Key Takeaway… The Power of Accrual Accounting Metrics

You can try to use some business intelligence tools with fancy dashboards – however – these tools don’t know much about the intrinsics of finance. It’s just a stylish mapping solution to bring up your charts based on the existing data. The problem is, it’s unlikely to deliver the data in a cohesive and intelligent way.

Therefore, the best thing you can do for your future self is to sit down and actually think about how you’re setting up these tools. Ensure you’re not adding too much/often unnecessary complexity, or leaving large blank voids in your data that are going to be useful when it comes time to ask questions – such as those discussed in this podcast.

The bottom line is; at the very least talk to someone about best practices on managing agency financials, even if you are “sure” you have it under control. It never hurts to double-check. In the end, everything will depend on the health of your financials and the data around it.

Spreadsheets are OK and a great place to start if you are under 12 employees. However, once you are close to 25 employees and above, without an automated financial system, it will be akin to steering a rocket into Outerspace – by hand.

Need more Andrey in your life? Check out…

Did you learn anything new from this episode? Let us know in the comments below! Our next installment of #APP, on May 5th, will see us chat with Mike Reid. Our previous blog with Zach Brego is here…

Agency Profitability Tool Kit

If you’re looking for more resources to help you improve your agency’s profitability, 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 profitability by over 100% – in under 60 days.

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