9 Metrics to Jump Start a Metrics-Driven Agency

June 23rd, 2016

My buddy who owns a digital agency wanted to jump start a metrics-driven culture but wasn’t sure where to start. We sat down over some good Scotch and cigars to chat about it. Here are the 9 metrics that I’ve suggested as an easy place to start and covers all 3 aspects of an agency infrastructure.

Sales & Marketing

1. How many people know us?
Most agency owners are familiar with the various forms this metric comes in; it could be page views, visitors, or likes. This is the top of our funnel – they know us, but we don’t know them.

2. How many conversations are we having for agency new business?
Here’s a metric that we can control 50% of the time – so our prospects know us and we know them, but how many of them actually need what we sell and do we do a good job of conversing with them? This is the end of our marketing efforts and the beginning of our sales efforts.

3. How many actual new business are we closing each month?
This is the output metric of our entire sales & marketing effort – where the rubber meets the road. Depending on where your agency is at – this could come in the form of number of new clients (growing market share) or $ of new revenue (growing revenue.)

Operations

4. Time spent by team members
I can hear the scream of disapproval from time-sheet trasher whom many are my friends. Hear me out – time is a constraint that is created equal for everyone. By peeking into the efforts, we can often identify the tell-tale sign of why something isn’t working. As one of my mentor once told me, “Don’t tell me your strategy. Show me your calendar and I’ll tell you what your strategy is.”

5. Project milestones and On-or-Before Ratio (OOB)
This is a super cool metric that we use often among agency clients. The idea is that our clients don’t care how long something takes you (what timesheet tracks) but they do care about the duration it took (deadline.) Track all the tasks in your projects that are completed on-or-before the due date, and you can see your top performers from the guys who need coaching. As a bonus, charge more for things that are done faster (think next-day shipping vs. 10-day shipping.)

6. Labor Effectiveness Ratio (LER)
LER is one of our favorite metric – it measures the dollar of margin we bring in per dollar of salary we spend. Most agencies measure their employee productivity using timesheet which have been proven to be inaccurate AND ineffective (not to mention demoralizing.) This is a different and much more telling metric to see how we can improve.

Financial

7. Profit over “X”
Rule number 1 for being a business is to be a business – and you are not a business if you don’t make a profit. Profit / “X” is an easy way to try and identify the different issues and/or opportunities to work on in your agency. If you have absolutely no clue where to start – profit / “revenue” is always a great place. 10% is the minimum you should be aiming for after agency owner’s salary have been accounted for.

8. Deposits vs. Receivable Balance
9 out of 10 agencies we come across have issues with their deposits and receivables. Not your fault – it is because most accounting software absolutely suck at tracking it, and agency bookkeepers always botch it up because they don’t know the accounting beyond the clicks. If you don’t have an absolute understanding of how much $ each of your client owes you vs. how much deposits are on hand – get help. We’ve seen agencies overstate their revenue, delete invoices where they shouldn’t have, and issue credit refunds to clients where it isn’t due.

9. Next 30 Days Cashflow Projection
Revenue is vanity, profit is reality, and cash is king. Time and time again I’ve seen profitable agencies grow themselves out of business because they don’t have enough cash to fund their operations. Get your accountant to spreadsheet the cash you have on hand + expected cash inflow from sales or debt – expected cash outflow from bills that are due. It doesn’t have to be hard, it just have to be done.

There you have it. It doesn’t take much to get started with a metric-driven agency and we’ve already seen how by diving into the numbers, we are able to achieve amazing growth. These 9 metrics should be readily available to you with little to no extra efforts and they should be able to help you establish a baseline that we can then adjust from. Remember, modification is always easier than creation. And if you ever need help with any of this – we are just an email or call away.

Input Metrics vs. Output Metrics

June 15th, 2016

metrics

There are two types of metrics, input metrics (behaviors) and output metrics (results.) By understanding their differences and being able to identify them in our day to day activity, we can significantly increase our effectiveness in achieving our goals.

Output Metrics (Results)

Goals. Most of our goals are set around output metrics: $5 million in sales, $500k in profit, customer NPS score at 10, etc. Furthermore, our entire financial statements are completed with output metrics (revenue, expenses, cash, all of it.) Output metrics are fantastic at measuring where we are, getting a baseline of our reality, and allowing us to set goals against. What it doesn’t do; however, is help us with our day-to-day behaviors.

Input Metrics (Behaviors)

Input metrics are the less popular brother of output metrics. Some input metrics are: number of phone calls made, number of blog posts written, and number of hours spent. A good way to look at input metrics are behaviors that you have 100% control over. Since input metrics are 100% dependent on us, these are great metrics to focus on when attempting to move the needles of our output metrics. (ie. We can wake up in the morning and set a goal to make 5 phone calls (input / behavior) and the only factor between achieving it or not is ourselves. As opposed to waking up and setting a goal of closing 1 sale (output / result,) which is dependent on a whole lot more: making the phone call, someone else actually picking up, listening, then agreeing to buy.

Bonus: Drivers

Drivers are exactly what the name suggests: they either cause or influence another metric. Being able to identify drivers is probably the most important technique to learn when deciding what to measure and what to focus on. When we set goals we want to accomplish, we want to identify its drivers down to the smallest actionable increment. By doing so, we will be able to make small behavior changes and see big impact.

In practice:

We were working with a customer on their profit goals and came up with the following (super simplified):

Goal: increase profit by 500k
>>Driver: Revenue / at 30% profit margin, we needed roughtly $1.6m in new revenue
>>>>Driver: Sales Won / at avg. ticket of 50k, we needed 32 new clients
>>>>>>Driver: Sales Conversation / at close rate of 1 in 5, we needed 160 conversations
>>>>>>>>Driver: Web Visits /1% visit turns into conversation, we needed 16,000 visits
>>>>>>>>>>Driver: # of Blogs Written /we didn’t actually have a metric to know how our posts drives visits, but it didn’t matter at the moment

After we were able to identify the life cycle and the relevant metrics for each stage. We chose to focused our efforts on the conversion between number of sales conversation and number of sales won. Because we found out we WERE having >160 conversations but they weren’t converting 1 in 5. So the company decided to focus effort on sales training. We set a budget, metrics to measure, timeframe, and now we are monitoring this new behavior and trying to see its impact.

What do you think? Do you have similar use case in your business where you can hone in on where you can spend your time and money on? What was the result of it?

Update 6/16/2016: Interestingly, here’s an awesome blog by Pipedrive about activity based selling that touches on the same general idea of input metrics.

How a CEO Grew his Revenue 45000% by Digging Deep into his Key Metrics

June 1st, 2016

Three years ago my buddy with an already successful company wanted to start a new e-commerce business. He shared the thought in our CEO group but it wasn’t well received. After all, at $400 in monthly revenue, the new idea appeared to be little more than a distraction from his “real” company. Fast forward to today where this new “distraction” consistently shattered their six-figure monthly sales figures – I caught up with him last week and asked him how he grew his company using metrics.

We talked about how everything is about building systems, measuring its performance, and then making necessary changes based off of the information we have. We talked about sales and revenue metrics in specific. He started out with top line (revenue) – a financial metric that should be readily available to any serious CEOs. His goal was to grow it – so they back tracked it to the number of sales and set a goal against it. The goal was 200 orders in a given month.

Funny how if you set a clear goal and get your entire team to buy in to it – you end up hitting it. He didn’t stop at 200 orders though. He dove deeper into the data and discovered something interesting; while their total order numbers increased, most of it were coming from repeat orders and not new customers. In fact, they were losing new sales to competitors! (Things weren’t as rosy as it appeared.) So they honed in their focus on getting new customers and aligned their efforts on that – promotions that targeted first time buyers, internal celebrations built around new acquisition metrics, the whole nine yard. Two months later, while they grew their revenue from new customers, they also blew their original goal of 200 orders per month completely out of the water.

Here are my takeaways:
1. Start at the top – you want to start measuring and hacking your business? Just pick an output metric that’s already available to you, see how you’ve been doing, then set a goal against it. Don’t overthink.
2. Identify the drivers to your output metrics – in our case, the number of orders was what drove our revenue. Set a goal there then align the team behind it. Make it a theme, create a strategy, turn it into a game – you’d be surprised how your team can help drive their inputs if you just show them how. If they know how they can succeed, they will do it.
3. Dig deeper. Now that you have a good handle from the 10,000-feet view – what else is interesting? Ask the right questions (new order vs. old order) and see what else we can hack to move the needle. Set goals, measure, act, then iterate as needed.

What do you think? Is there an output metric that you’d like to drive? What other tips have you found to be helpful in your business to move the needle. Let us know in the comments below.

What Can You Expect from Your Bookkeeper?

May 16th, 2016

A friend running an agency reached out to me and was beating herself up for missing a 40% spend increase in one of her department. Like many agencies, she had an one-person bookkeeping team who she relied on to keep her books, pay the bills, and she wasn’t quite sure what her expectations should be.

“What can I expect from my bookkeeper?” She asked me on the phone, “Is it simply data entry? Or can I expect them to point out anomalies like these?”

My answer: this was simply too much to ask from a bookkeeper. Here’s a break down of what your expectations could be for the following accounting roles:

Expectations for a Bookkeeper

A bookkeeper records events that have already happened. They are after-the-fact historians who focuses primarily on data entry. Budget for bookkeeping starts as little as $500 / mo. for a $1mm company. Don’t expect too much from these guys as they may not even know what’s going on from an accounting, let alone the business, perspective.

Expectations for an Accountant

An accountant actively participates in some of your business processes; unlike a bookkeeper who simply “records what had happened,” they actually help create some of these events. For example, an accountant creates bills to be paid, routes them for approval and payments, generates invoices, records payments, etc. A good accountant is who you can expect to be noticing issues on a transaction level. They should be letting someone know if we’ve double paid, missed a payment, or are not collecting fast enough.

Expectations for a Controller

A controller or accounting manager makes sure your accounting team is doing things correctly and, more importantly, prepares your financial reports. An average controller does the reports according to accounting standards and leaves you to figure shit out yourself. A GREAT controller presents numbers in a way that make sense to you, notices anomalies on a business level (like trends that are not immediately obvious,) and sits down with their CEOs at least once a month to set the records straight. “Is the business operating the way the CEO ‘feels’ like it is?” or “I’ve noticed X and Y, does it make sense to you (CEO)?”

Expectations for a CPA

Tax accountants are usually 3rd party firms that help the company take their operations (hopefully accrual based) books and get it ready for tax reporting. These are the typical “CPAs” people talk about. You shouldn’t really expect much of business metrics, strategy, or analysis from these guys because they don’t know it. What you should expect is conservative tax preparation and (for the better guys) sound tax planning.

What do you think? Have you hired the right role for the job that needed to be done at your agency? Or perhaps you have a different experience on what you can expect from your bookkeeper? Share with us below.

Why One Person Accounting Team Never Works in Agency

July 2nd, 2014

When an agency gets past $1 million in revenue, it gets harder for agency owners to ignore some of the back office operations that are starting to come apart. The agency’s accounting bookkeeping operations is among the first to go and probably the least favorite problem for entrepreneurs to deal with – clients fighting about credit balances, your tax CPA giving you a hard time about your books every April, and you aren’t quite sure if you are enjoying the growth or if the growth is secretly killing you.

So an agency owner do what all entrepreneurs would do – hire someone to help – but the problem doesn’t go away, it gets managed, pushed around, and worsen over time.

That’s because an effective accounting operation often consist of four general roles that fall on different areas of the skill curve. A bit of a generalization here, but in my experience working with agencies between $1 million to $20 million in revenue, here’s a rough break down of the skills and efforts required:

A CFO a couple of hours a quarter, a controller a day or two a month, an accounting manager a day a week, and an accountant one to few days a week depending on operations. Each role delivering its skill sets to the agency at the frequency it is required. Which is exactly not what an agency typically does.

A typical entrepreneur turns to a single individual who is (best case scenario) costing the agency unnecessary payroll delivering his skill set as a CFO / controller 10% of the time and working down value 90% of the time. Worse, (and typically what we see) the person brought on board is priced like an accountant but work as a bookkeeper; failing to work up the skill curve because they simply lack the knowledge to do so. Costing the agency owners unnecessary grief, time, and money along the way.

All hope is not lost though. The outsourced accounting industry had matured a lot since we started five years ago and there are options in building your all-star accounting team:

  1. If you are adamant about hiring someone in-house and can only afford one, hire the best person you can afford one year from now. An overqualified person working down the skill curve is always going to cost you less than a person failing to work up.
  2. Outsource the entire accounting team (not just the bookkeeping.) There are a ton of outsourced “bookkeeping” firms out there and without the top down direction / strategy of accounting – they are practically worthless. You are better off getting help from your tax CPA for now and save up for the right solution later. If you don’t understand the difference between accounting and bookkeeping – we need to solve that first.
  3. A hybrid approach where you bring on board a firm to help you set up your own team over time and cover the basis right now. The goal of this approach is to “lease” the expertise you need to help build up the machine your team can run. Always communicate this up front so both you and the experts you bring on board have a clear understanding of where things are going. Avoid any firms that do consulting only who will not eat their own dog food by operating what they’ve built. Most things are easier said (designed) than done.

What do you think? How are you tackling your financial issues and what are your results?

DeepSky is the Entrepreneur’s Accounting Department – helping agency entrepreneurs turn goals into numbers so we may track our progress and improve accordingly. While we actually run 95% of the accounting systems we built – we’d be more than happy to chat with you to help you figure out how to move forward from where you are at. We’d love to help you get a strong accounting team in place, even if the solution doesn’t involve us.

3 Ways to Spring Clean Your Accounting – Purge Your Chart of Accounts (Part 2)

June 18th, 2014

Purge Your Chart of Accounts.

Think of your chart of accounts as the backbone of your entire accounting infrastructure. If your millions of financial transactions are like printed photos, your chart of accounts are the photo albums that keep things organized.

90% of the chart of accounts I see are both too generic (resulted from the template chart of accounts provided by the company’s first accounting software) and over-complicated (resulted from after-thoughts and nice-to-have accounts that were never part of a bigger vision.) An easy way to keep things under wrap without a major overhaul is the annual purge of accounts that helps keep the structure clean, lean, and mean. Here’s a few step to get started:

1. Print out your profit & loss statement for on a monthly basis for the last 12 months. If your company does less than $10 million in revenue last year and your top level profit & loss statement is longer than 1 page long – it’s a good sign that accounts need to be purged.

2. Look across the entire sheet – are there any lines that are just straight 0s across the last 12 months? That means you haven’t used that account at all over the past year. Get rid of them.

3. Now look down the column that shows your last 12 months total. Are there any line on this sheet with an amount less than $1000? Yes? Is there a specific reason why you need to see this number by itself at this level? If this number changes between $1 to $1000 -> would you do anything differently in your business? No? Purge.

4. By now, you should have really leaned out your chart of accounts and the reports are starting to clean up a lot. 2 more steps until we are done. Step 4 -> if your chart of accounts have sub-accounts, you shouldn’t go past 2 level deep. Yes, it’s possible, so don’t let your accountants tell you otherwise.
Example:
Cleanest Travel
Clean Travel -> Travel – Lodging
Too Complex Travel -> Travel – Lodging -> Travel – Lodging – SPG Hotels

5. Finally, print out your newly modified better version of chart of accounts and read through each account name. Identify everything that you either don’t understand what it means (dues & subscription,) sounds similar (travel – hotel vs. lodging,) or does not apply to your business (advertising accounting when you don’t do any advertising.) Work on grouping related accounts and merging similar accounts to avoid confusion. Purge any accounts that don’t belong.

There you have it. You now have a clean and mean chart of account that’s better than 90% of the accounts I see out there with agencies. Don’t worry about the newer and cleaner version – we can always add more later if needed. But if you keep a good habit of reviewing your accounts on an annual basis – it’ll really help keep you focused on the metrics that really matters.

DeepSky works with entrepreneurs who own digital agencies or law firms to keep their chart of accounts clean and aligned with their business operations and goals all the time. Give us a shout if you have any questions.

See part 1 of our 2014 Accounting Spring Clean series where we talk about measuring what you want done in accounting

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3 Ways to Spring Clean Your Accounting – Part 1

April 22nd, 2014

Measure what you want done.

It is no surprise that whenever we focus on an aspect of our business, it tends to get better. Accounting needs to be the tool that enables you to do that. Start from your top level business goals for the year then work your way back down to the exact line item (metric) on your financial reports that you need to focus on.

Keep it simple, 3 to 5 metrics is plenty and should drive the entire direction of your accounting efforts this year.

Focusing on growth? Be more specific.

Growth in what?

Top line? Focus on revenue. Bottom line? Focus on profit percentage. Number of clients? Focus on number of new clients each month. Size of projects? Focus on average invoiced amount per project. These are your “results” metrics – they tell you how well you’ve performed in the last week, month, quarter.

Once you’ve identified your “results” metrics – you’ll need to work with your team to drill down further to identify your “driver” metrics. If your goal is to increase $500k in revenue, how many new clients is that? How many proposals do we need to do to close that many new clients? How many people do we need to chat with each day to hit that number?

Sounds simple, and it works.

This year, know exactly how well we are performing around every corner and stop “finding out” how we’ve fared from our tax CPA 4 months after the year has ended.

See part 2 of our Spring Clean Your Accounting series this year where we talk about purging your chart of accounts to keep your accounting aligned with your agency operations.

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Using Credit Cards to Finance Your Agency

January 14th, 2014

Credit CardsCredit cards are a necessary evil, especially when used to invest in your business.

We all have them, sometimes in multitudes, and use them on a regular basis. But they cause deep trouble in the way of  D E B T at high interest rates (anywhere between 12% to an obnoxious 41% APR) when used irresponsibly.

What’s an entrepreneur to do when you  needs cash and can’t get a loan? You figure out a way to play the system to your benefits.

By carefully managing 0% APR and bonus point offers, I’ve seen entrepreneurs finance up to $200,000+ through multiple credit cards without losing their shirts. But be careful! Because if you aren’t numbers- savvy, you can go bankrupt by using credit cards to finance your business.

Here are a few tips:

  • Do your research. Make sure you can get enough money from the credit card to really help your business. How much money you garner from credit cards ties directly to your credit standing and income.
  • 0% credit cards always go up. Take advantage of the time period that the discounted APR is offered, and then either pay off or transfer your debt before the regular interest rate kicks in. Make sure you know when the 0% offer ends!
  • YES! to bonus points. Credit card companies send out special offers to entice you all the time. 50,000 bonus point can equal $500 in cash back, or an upgrade business class ticket that’s worth $3000.
  • Late fees can really hurt. Make sure you stay on-time with paying your credit card bill or all the benefits can go up into smoke. Remember, credit cards are meant to be short-term debts, not long-term. Once you are incurring a high interest – you are losing the game.
  • Pay credit cards first. If income doesn’t allow you to meet your expenses, choose who to pay first carefully. You are better off paying down the highest interest rate (usually credit cards) first.
  • Keep everything organized. The extreme example that I’ve mentioned above required a complex spreadsheet system to make sure the company stayed up-to-date on each card’s status. You have to decide if the benefit is greater than the work required to pull this off.

Using credit cards can increase your credit score, an advantage when seeking additional funding in the future, but they also leave you personally liable for debt, regardless whether you got a card via personal or professional means. Whatever you decide to do, go in with your eyes open.

The Entrepreneur's Accountant

Best Advice for 2014: Leave the Trash at the Curb and Clean Up Your P&L

January 7th, 2014

Retreats_2It takes me about 30 seconds to judge the quality of accounting work being done by a company by looking at their latest financial reports.

Just a few weeks ago, I was chatting with a buddy of mine who runs a $2.3 million business and wasn’t feeling it. We sat down and the first thing I noticed is while he was making $2.3 million. He was also spending $2.3 million – and didn’t realize it.

His question was: “What am I spending the money on?” Sadly, his profit & loss couldn’t muster up the answer. He had $300,000 sitting in an “ask my accountant” bucket and another $80,000 in various miscellaneous accounts. About $600,000 in cost of goods sold which was glaringly under-stated if you’d simply understand his business model.

The financial report was useless and not worth the paper it was printed on.

Like the chart of accounts, your profit and loss statement needs to be organized, consistent, and contain all (and only) pertinent information.) Here are some steps to help your P&L statement sing:

  1. Be consistent. Ensuring you have the appropriate categories and consistent account numbers makes your P&L statement easier to read and find out what you need to know.
  2. Make it Relevant – Including accounts that make you scratch your head or have less than $1000, or negative balances in them, is a waste of time. Keep only important information in the profit & loss statement.
  3. Keep it Clean – Double accounts, accounts that are more than three levels deeps, numbers in “host” accounts, negative numbers, miscellaneous, and ask my account buckets need to be removed or cleaned out on a regular basis.

Remember, a profit & loss statement gives you a clear picture of what operations look like over a period of time, tying revenue and expenses to help you understand how the business makes money. If yours doesn’t do that – it’s time to get help.

DeepSky hosts occasional Scotch & Numbers around the world where we sit down with entrepreneurs to tear apart go over their profit & loss statements and decipher hidden issues where we can improve on – all for just the price of a nice glass of scotch and good company. Give us a shout to find out if we’d be around your town soon.

Read our Spring Clean series following this post to learn how to measure what you want done and purge your chart of accounts.

3 Steps to Organizing Your Chart of Accounts

December 31st, 2013

If you don’t have good bones, everything collapses.

Accounting T-Rex Skeleton

Huh?

I’m talking about your chart of accounts.

The chart of accounts is the skeleton of your agency and can provide either very meaningful numbers or numbers that really don’t tell you anything.

For those of you scratching your heads, a chart of accounts is a listing of all the accounts in the accounting system where you post revenue and expenses. It consists of ledger account names and numbers showing classifications and sub classifications.

Accountants almost never think strategically about the chart of accounts, yet it is the most important thing in your accounting infrastructure.

Tools such as QuickBooks are great, but using them out of the box doesn’t help your books tell the story you need. How can you expect to have an effective accounting effort when the basis of everything is built in an ad-hoc manner without truly looking at the unique needs of the business? To organize your chart of accounts you need to follow three steps:

  1. Think strategically – what do you want your chart of accounts to do? Talk to your accountant and include only relevant and scalable data.
  2. Keep it simple – One page is all you want to look at to see the relevant information.
  3. Purge – Don’t keep accounts that you don’t understand, accounts that haven’t been used or have less than $1,000 in them.

This might seem like a tall task, especially if you’ve been in business for a while, but it will help you get the real story from your numbers, at a glance.