Accounting for marketing agencies: budgeting, KPIs and freeing up time for creativity

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Marketing agencies rely on freedom of imagination to provide the services they’re selling but, at the same time, need to be more disciplined in managing their accounts, budgets and cashflow than many other types of business.

The obvious solution is to hand all that process and paperwork over to an accountant – someone like me who’s not only good at it but enjoys it – so you can focus on building brands and campaigns.

To soften that hard sell, it goes both ways: when I launched Alchemy and I needed branding, web design and copywriting, I didn’t do it myself.

I can appreciate good visuals and writing but it’s not where my strengths lie. So obviously I got help from a marketing agency.

It’s a question of efficiency, really – if a professional can do a perfect job in two hours, why waste six hours of your time to do it half as well? This is something I’ve been thinking about a lot lately as I work with more and more creative businesses.

By way of more food for thought, here are some aspects of accounting for marketing agencies you should be aware of, and which any good accountant will provide for their clients in the advertising, branding and marketing sectors.

Budgeting for marketing agencies

When you operate in a world of projects and contracts, bidding for campaigns and pitching prospects, keeping a firm grip on budgets can be a challenge.

If there’s any kind of subscription or retainer strand to your marketing business, you’ll have a slight advantage – a reliable revenue stream provides a useful safety net if there’s a gap between projects. Most agencies don’t have that luxury, though, and those I work with tell me they’re often either too busy to cope, or anxiously chasing contracts.

Budget planning and forecasting can help smooth things out and provide a way of health-checking throughout the year. It’s about using all the business data you’ve got at hand, along with your own experience and knowledge, to make reasonable predictions about what might be ahead.

The trick is to prepare for the absolute worst-case scenario, even if you’re hoping for, and expecting, a bumper year.

What if you suddenly have to find new premises, for example, or important equipment fails? If your creative director leaves, can you cover the cost of the recruitment process?

It forces you to think hard about the steps you could take if you had to, in an emergency, and to shake out any inefficiencies. For example, this is typically when agency owners decide to cancel unused software subscriptions, for example, or interrogate freelance budgets.

But budget preparation shouldn’t just happen at the start of the year and then get forgotten about – it’s a process that keeps rolling throughout the year, providing the tools you need to know whether you’re on track, falling behind or (fingers crossed) in a position to invest in staff, equipment or facilities.

Best practice, and the process we follow, is to review quarterly or monthly reports from your management accounts so you’ll always know where you are and can adjust your spending plans accordingly.

Performance indicators for marketing businesses

I recently wrote about the power and benefits of management accounting to small and medium-sized businesses and everything I said there applies to marketing agencies.

To recap briefly, though, management accounts are a scaled- down, real-time version of your final accounts, issued during the accounting period, not after year-end.

They’re typically used by management teams and company boards to assess performance and make strategic decisions. In marketing in particular, they tend to be used to calculate key performance indicators (KPIs) such as:

  • EBITDA – earnings before interest, taxes, depreciation and amortization
  • MRR – monthly recurring revenue
  • Client lifetime value (CLV)

It also supports techniques such as variance analysis which help to identify and head off issues such as under-performing staff or lower than projected demand for specific marketing services.

If your agency doesn’t have its own finance director – smaller agencies tend not to – then that’s a role your accountant can fulfil, either by attending board meetings as a ‘virtual FD’ or by providing briefing and reports to your directors.

KPI reporting based on detailed, thorough management accounts, are a key persuader when it comes to convincing banks to lend or extend credit, and investors to invest.

They can even help convince potential marketing clients some of whom (especially government bodies or larger organisations) will want to see evidence that your business is stable, well managed and has the liquidity to deliver the work contracted.

Getting the basics done

Another challenge for small agencies in particular can be the functional stuff such as payroll and bookkeeping.

Unless you’ve got an in-house finance team or finance administrator, you’ll either have to handle that work yourself, or outsource it.

If you’re reasonably tech savvy, it’s easier now to do it yourself than it’s ever been, thanks to cloud accounting software like FreeAgent and Xero.

But because marketing agencies tend to rely on freelancers, temporary staff and outside talent on a project-by-project, campaign-by-campaign basis, it often makes sense for them to outsource completely.

The dream, for me, is to handle bookkeeping, payroll, management accounts and tax returns for each client. There are obvious efficiencies to be squeezed out there and knowing how your agency operates, from top to bottom, means we really can spot every opportunity to save on tax and support your growth.

Marketing agencies and cashflow

Finally, there’s the basic question of cashflow: where software like Xero really does come into its own is in tracking invoices and payments.

There’s no good having work booked in to Christmas if you’re still waiting to be paid for projects you completed last August and don’t have the funds at hand to keep the office lights on.

Get in touch to talk about accountancy services for creative agencies.

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