Creating a Cost-effective Agency Model with Paul Seaton

One of the objectives of a CFO is to turn data into decisions and some of those decisions tend to be a lot harder than others. Especially for agency owners and service providers, it's so important to understand how your costs and decisions relate to your bottom line.

Paul Seaton is a CPA and founder of AgencyCFO, a virtual CFO firm dedicated to helping digital & creative agencies develop and maintain a world-class financial infrastructure. While working at a Big 4 firm early in his career, Paul started a bookkeeping side hustle dedicated to serving marketing agencies.

Through this experience, Paul’s discovered that many agency owners & founders need more than just bookkeeping help - they need a dedicated financial partner that can guide them practically toward achieving their business and financial goals.

We'll be diving into how to run a cost-effective agency and how to control costs, especially when most of your costs are related to employees! We're not going on and on about jargon and metrics, we're chatting about real-life scenarios that will help you understand your business finances.

"To be successful, align your team's performance goals with your agency's profit goals and incentivize them to do good work to drive revenue." - Paul Seaton, Founder of Agency CFO

In this episode, you will learn the following:

1. How Can Service Businesses Control Labor Costs to Ensure Profitability?
2. What Strategies Can Agency Owners Utilize to Motivate Their Team and Improve Performance?
3. How Can Businesses Use Third Party Compensation Studies to Remain Competitive in the Labor Market? 

What you'll hear in this episode:

• When do you expect people to start seeking help with their financials in their business?
• How do you know if you’re bringing in the right person?
• The importance of revenue sharing with your team.
• How to drive your team to achieve your goals.
• The first thing you need to look at is your gross margin.
• Do agency owners pay their staff hourly salary or do they also recommend tracking time regardless?
• How to keep at least 50 cents of every dollar after the labor cost. 

Here are some brief snippets from this episode:

[00:00:50]
Paul Seaton is the founder of Agency CFO, a virtual CFO firm dedicated to helping digital and creative agencies develop and maintain a world class financial infrastructure. We'll talk about how to create a profitable and scalable agency, but also cost effective.

[00:02:53]
A lot of people hesitate to hire a CFO or to dive deep into the financial side of their business. When do you expect people to start seeking help with their financials in their business?

[00:04:47]
Labor cost is the number one driver of costs, and yet can also be a driver of revenue. One of the first things that I advise clients to do is set up a 13 week or a 90 day cash flow model. Another thing is to review your sales pipeline frequently.

[00:07:52]
The rule of thumb should be your team should be at least 75% billable across the board. Get a third party comp study done to see whether or not you are competitive in what you're paying people. Use revenue sharing to motivate deliver value for the clients.

[00:15:10]
Is it like a use it or lose it stipend for personal development or education? Yes, every twelve months. If you can have the discipline to implement them, not only will your team be happier, but I think you will find that it's easier to recruit and retain talent.

[00:16:22]
When you need to reduce headcount, sometimes the best thing to do is cut costs. I went through a little bit of a restructuring recently with one of my new clients. It can be something that's just very tough to do. People have families and livelihoods that are on the line.

[00:17:24]
One of the first things that I look at for agencies is their gross margin. Whatever drives revenue, if that is nowhere close to 50%, then that is the first indication that something needs to change. There are still a lot of agencies and service providers that are sitting on pandemic era money.

[00:19:47]
As an agency or service provider, you are literally selling people's time. What you should look at is how utilizes your team. When you have someone like a fractional CFO come in and who can objectively measure this data, it makes the decisions a whole lot easier.

[00:20:57]
Most agency owners are paying their people on a salary. Do you see agency owners paying their staff hourly salary? Both, and then or do you also recommend tracking time regardless?

[00:21:58]
In the agency space, people use freelance talent a lot to supplement gaps in their ability to service clients. I have found that the markups on outside work are nowhere near where they need to be to support bottom line profitability. It's a challenge as you are scaling and growing and adding team members.

[00:27:34]
One of the things that I do is building out a budget and a forecast for clients. Going through this exercise can be really helpful to creating realistic sales goals. And I like to call it a bottoms up approach because it involves everyone from your team.

[00:29:19]
You could be missing out on massive tax savings that you get from making the escort tax election. I put together a completely free calculator and questionnaire to see if this tax election may be a good fit for your business. Click on the link in the Show Notes to find out more and compute your estimated tax savings.

Related episodes:

176. When Should You Hire a Fractional CFO?

193. How to Read a Profit & Loss Statement

194. How to Read a Balance Sheet

Resources:

Connect with Paul on Twitter @agency_cfo

Learn more on the Agency CFO website: https://www.agencycfo.co/

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The information contained in this podcast is intended for educational purposes only and is not individual tax advice. Please consult a qualified professional before implementing anything you learn.