Digital marketing agencies can refer to different kinds of businesses, including design-dev agencies, advertising agencies, SEO-ppc agencies, as well as product-only.

Usually founded by people with creative and technical expertise, these marketing businesses often grow out of a partnership, with one business owner leading the development efforts and the other in charge of sales.

However, this division of labor leaves an important role vacant: finance.

As David C. Baker, author and agency advisor, explains on an episode of the Creative Agency Success Show, “At least one of the partners has to think that their one of their primary jobs is to understand and impact the financial performance of the firm. That's job one. That's even more important than culture. It's more important than new business. Once you get that done — and you may need some help with that — then you can move on to those other things.”

“But if the firm isn't performing,” he cautions, “It doesn't matter how good your new business plan is. You won't need one.” 

Why Do Marketing Firms Need Accounting Services?

In the early days of an agency’s life, it’s possible to increase profitability through hard work and talent. Your “finance team” might include a bookkeeper and outsourced tax services.

However, when the agency reaches a certain size, business growth tends to stagnate. Even as accounts receivable trend upwards, so do accounts payable. Cash flow management becomes more of a struggle. Networking just isn’t enough to fill the pipeline.

When a small business reaches this stage, they need something more than simple tax filing and bookkeeping services or a subscription to some accounting software like Quickbooks, but aren’t ready to invest in a full-time in-house accountant, CPA or CFO.

When this happens — usually around the $3 million revenue mark — agencies should consider outsourced accounting services. These services can range from transactional (filing tax returns, invoicing, and financial reporting) to strategic (tax planning, dynamic forecasting, and more) — essentially a financial planning and analysis (FP&A) position.

Both the strategic and the transactional can be covered by a virtual or fractional CFO who possesses both the accounting knowhow and the high-level expertise in helping creative agencies grow by developing and tracking key performance indicators.

How Do Marketing Firms Benefit from Specialized Accounting Services?

Working with an outsourced accounting firm means bringing financial expertise onto your team — but along with that, it can be helpful to work with a firm that specializes in digital advertising agencies. A CFO with industry knowledge, including a deep understanding of the most important kpis for marketing firms, will have a wide range of experience in solving common challenges agencies face, for example around marketing their own services, setting competitive pricing, and making budgeting decisions.

Many of these challenges are financial, for example, how to build up a cash reserve that allows the agency to weather tough financial times.

However, a virtual CFO also addresses the business from a 10,000-foot view. As Adam Hale, Partner at Anders CPA + Advisors and Virtual CFO practice leader explains:

“We do finance, but we have a finance lens over the entire side of the business. We want to hear about what's going on in the marketing, we want to hear what's going on operations, because that helps us craft the plan in that way, so whenever they come up with an idea, and we need to flesh it out, we can say, ‘Wait a minute isn't that contrary to what we were saying over here and what we're trying to do?’”

In order to have that level of understanding of the business, an outsourced advisor should meet regularly with the leadership team, ideally every week.

KPIs for Marketing Firms

A successful marketing firm needs to track these four main areas:

• Cash: 10-30% of annual revenue in the bank, in addition to a tax reserve (40% of forecasted net income). The cash metric starts with an assessment of your agency’s risk – and comfort level. That will allow you to set a target – a percentage of your annual revenue – and work to achieve it.

• Financials: Net income should be around 15-20%, when you take into account gross profit minus production and overhead (admin, sales and marketing, facility, owner’s compensation). Financials to be consistent and prepared on the accrual basis. (Of course you pay taxes on the cash basis, but we need accrual to see where things are headed.) 

  With clean financials, you know where you stand – in terms of your own performance and compared to your peers. Your top line revenue could have more zeros in it than you can count, but what is your net profit? And how does it compare to your peers?

• Production: Is your agency busy enough? Too busy? Can you achieve your goals as things stand today? These numbers show you the upper limits on potential revenue, unless you make more hires or add efficiencies to your process. Production metrics are closely related to pipeline metrics, as we will discuss below.

• Pipeline: Do you want to know how busy your team will be for the rest of the year? The pipeline metric is the closest you can get to a crystal ball. The pipeline metric will allow you to determine if you need to make new hires in order to grow or if you need to boost your marketing efforts to get enough new clients to keep your team busy.

A skilled advisor can help keep an eye on these metrics, making improvements as necessary, allowing you to take calculated risks in good times and to stay afloat during tough times by making data-driven business decisions in real time. When you review financial statements together, they won’t just report on your businesses’ history. They help you react to the present and plan for the future.

Budgeting + Forecasting = Business Growth

Marketing companies are a highly dynamic business. Clients come and go. Projects balloon in size. Overhead increases. To stay ahead of the constant curveballs, agencies benefit from having both a budget and a forecast that they can use to set a plan of expected revenue and expenses and adjust it in real time, based on actual performance.

With the help of a Virtual CFO, agencies can create a comprehensive financial strategy. The budget sets the financial goals and provides a roadmap, while the forecast allows for adjustments and real-time tracking of progress towards those goals. This dynamic approach helps businesses stay on track, make informed decisions, and adapt to changing conditions, ultimately driving growth.

Considering outsourcing your accounting services? Schedule a complementary consultation with our Virtual CFOs.