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Financial Clarity – How To Sleep At Night

So, what’s stopping you from sleeping soundly? I would say like a baby, but we all know they sleep terribly …

Lying awake at night, with a thousand thoughts racing around your mind is a horrible state to find yourself. It leaves you exhausted and cranky with anxiety slowly clawing at your thoughts.

This is no way to function at the best of times, let alone when you’re attempting to navigate your business through financial and politically tricky times. As a business owner there can be many reasons sleep evades you.

Common business concerns often include:

  • Loss of clients — are customers leaving your services, creating a financial deficit?
  • Stagnation — is your business struggling to grow or move forward in direction?
  • Denial — admit it, are you in full control of your accounts?
  • Overheads — can you cover your business overheads and reliably pay your staff?
  • Income — are you struggling to personally earn enough to live on?

How to start taking control of your business

If any of the above worries resonate, it’s not surprising you’re finding it tough to sleep at night. Any of these concerns are difficult to know how to overcome. It often feels like the wood and the trees are one, and the light is never going to show at the end of a dark tunnel.

However, there are pragmatic solutions. Try answering these simple questions:

  1. How much money do you want to take home each month after tax?
  2. Where do you want your business to head?
  3. How are you going to reach your goal?

Financial Planning and Modelling

Once you’ve answered the above, it’s time to work backwards! How are you going to achieve your objectives?

If you want to feel in control of your business and profit, you need to make informed decisions based from your financial data. A financial plan and model helps you work out how much money you need, your expenses and what sources of income are available. In other words: a financial model helps a business budget, forecast and plan. It keeps companies in control of their business and finances, so they know they’re on track. And if they’re not — why they’re not on track so they can fix that problem.

What is a financial model?

Essentially it involves creating a spreadsheet (don’t groan – they don’t have to be terrible!) to act as a representation of some, or all of your business operations.

  • A model can be used as a decision-making tool. It can assist in forecasting business decisions as you will better understand how much or how little money you have, or when more revenue will be coming in so you can invest, spend or save accordingly
  • Financial plans can be used in strategic planning, cash flow analysis, sensitivity analysis or appraisal
  • Models help estimate the value of your business
  • A model is useful if you are looking to compare yourself with competitors
  • They are very handy when it comes to selling a business

Considerations for a financial model

On a spreadsheet you need to add your business assumptions – these are educated guesses based from your historical data: numbers, trends, external conditions, industry and market. It’s important to consider situations or challenges that may arise and place these into your model to help plan for unforeseen eventualities.

Ideally you need to create a model which helps you understand how to plan for:

  • Working capital: How much revenue do you need to make to support your business after paying out for your direct costs and operation costs?
  • Revenue: Is the business continuing on the same trajectory as previous years? This helps plan when and how payments occur, whether prices are correct, how and when customers buy and areas of business stagnation
  • Financial statements: Forecasting of financial statements helps with talking to investors, banks, auditors etc
  • Growth margin: How much money goes towards delivering your product or service and how much is left over? This helps you plan to successfully develop your company
  • Increase in demand: Do you have the manpower or software capabilities to cope?
  • Operational expense: How much does it cost you to operate as a business? How much does each area cost e.g. admin, marketing, software etc?
  • Significant decline: Look at why a product or service is no longer popular and use this to make an informed decision to find a successful solution

We know it may seem a tad daunting, especially if you have a lot to focus on, but believe us when we say how important a great financial modelling plan is to a business.

If you don’t know where to start, or just want to talk things through, please give us a call.

As cloud-based bookkeepers, financial planning is just one of the many services we offer, so chat to us and we can help you get the sleep you dream of achieving.

Call 01206 700 252 or email hello@clouditbookkeeping.co.uk and take control of your business finances.

Great finances = great sleep!

3 Lessons Digital Agency Owners Can Learn from Nick Suckley?

The book “Start. Scale. Sell. 75 Lessons for Business Success” arrived on Friday morning and I have finished reading it by Sunday. The book just flows and is an easy read with concise lessons and examples. I believe any agency owner reading this would relate to most lessons Nick Suckley learned building and selling Media21 and Agenda21. I have picked out 3 that hit the cord the most with me being involved in helping digital agency owners manage and plan their financial side.

What can you, Digital Agency owner, learn from Nick Suckley’s experience?

  1. Measure your KPIs but don’t overcomplicate. Simplicity is key if you want to understand and use your numbers. The list of key performance indicators Nick uses is:
  • Pipeline – number and size of potential customers. If you do not have a sales strategy or there is no real sales pipeline, this will hurt the business most in the long run. You cannot leave new business to luck or referrals. This is unsustainable if you wish to grow. Imagine your best earning client decided to bring it all in-house or move the service you provide to another agency which usual mean you receive an email saying “we are bringing all our digital marketing under one roof and agency XYZ can do it all”. New business is the top 1 reason agency owners are stressed and anxious. Having data on sales pipeline will give you clarity and focus.
  • Pitch-to-win ratio – how many potential clients you converted via pitch or proposal. This is important as it will give you an understanding if your pitch material works and where you need to make changes. Correct positioning can help here too.
  • Billings per head – measure how productive your team is and if you are over or under servicing clients. The more efficient your team can be the more billings per head you can have.
  • Income-to-salary ratio – measure how profitable and productive the company is. If this ratio is too high you need to cut salary costs or increase your billings.
  • Gross profit margin – how good you are at charging clients.
  • Net profit margin – how profitable you are.
  1. Boost profitability – use the right tools. Nick calls this Profit Improvement Programme (PIP). You need to understand how each area of your business is generating income and what are the costs associated with it. Track each service you offer and associated team’s Profit and Loss (P&L). You might have media, paid search, SEO, social, affiliates and analytics services. You would match income with team costs for that service and any other associated expenditure. This will give you the profitability for each service area you provide. Nick has the Golden Rule which each team leader has to follow. This is – staff cost cannot be more than 50% of the income generated. If you follow this rule, you will have enough left for the general overheads and your own pay. Get this right and you will see great improvement in your net profit margin.
  2. Never make a loss. This is a tough but most important rule in my view. Nick Suckley argues that by not making a loss you do not lose control. Making decisions quickly when times are tough, cutting costs and staff will save your business. These are the toughest decisions for any owner but can mean survival or going under. That’s why having up-to-date and accurate financial information will make a difference and provide the data you need to make those vital decisions. You will have the gut feeling that things need to change, or things are not going quite right. Having your financial reports in good shape will help you understand the situation better.

What can you do right now to make a difference to your business?

Take these 3 steps today and you will be on the path to success:

  1. Measure, measure, measure. Decide on your KPIs, measure and report on them at least monthly. You will need to track staff hours spent on client work, service team P&L, sales pipeline and anything else you decide is vital in making business decisions. Start with simple Excel spreadsheet and build from there. You don’t need to overcomplicate it.
  2. Analyse your management reports monthly. Review your accounting function and make sure you have accurate data at least monthly. If you do not have management reports, then look at your P&L and Balance Sheet as a minimum.
  3. Set net profit percentage you want to achieve and maintain. Do everything you can to keep it above this level. Paying yourself is the number one priority.

If you are not sure where to start, we can help you get started and support your agency with providing accurate and up-to-date accounts information, reports and tracking. Get in touch with us today.