Why your digital agency is hard to scale
Agency and service-based business models don’t scale like software or product-based business do. But why is that?
Well, there are a few reasons, actually. The most obvious being that your ability to grow revenue is capped by the amount of people you have in the business.
You want to double your revenue in the next 12 months? It’s likely you’ll have to more than double your headcount to service that new revenue. But you also may need to hire non-revenue generating staff – and that hurts. Middle management, account managers, admin support… you name it, you’ll probably need it.
The impact of this can actually erode your profitability, rather than grow it. But there is good news.
Yes, scaling your agency is hard, but it is possible. You just need to pay strict attention to your numbers. In this article, we look at a few reasons why agencies are hard to scale and how to overcome them.
In this article:
- Your clients are sucking you dry
- You aren’t charging enough
- You don’t have the resources to scale
Your clients are sucking you dry
When you start your agency, you’ll take on close to any work. You might discount services so you’ve got work to showcase, and to provide capabilities. But at some point, this mentality of “win work at any cost” has to stop. At some point, you’re going to want to lose your bad clients – the ones that aren’t paying the right amount for the services they are receiving, and the ones that aren’t paying on time.
Consider this permission to cut the difficult clients that cost more to service than they are willing to pay for. It might be OK to have the odd one of these, but if you attract and keep more and more of them, you’ll be fighting to break even.
If you keep timesheets, it will be easy enough to analyse this. How much time are your clients paying for, versus how much time your team is spending on them?
If you don’t keep timesheets, well, you should. But you can also estimate the time spent and compare it to what they’re paying.
Once you’ve got a list of victims, give them the option to pay for what you’re doing, or cease using your service.
Here’s a neat little email we’ve drafted.
And what about clients that pay enough but don’t pay on time? Well, ultimately it’s up to you, but every day that your clients don’t pay within the allocated credit period, you’re losing money. You need good clients that pay for the time you spend on them and pay on time.
You’re not charging enough
Another relic of your startup days is the charge-out rate of your services. You might start low to secure clients and prove yourself, but at some point you need to ensure you’re covering your costs and including a profit margin.
As a general rule, your employees should be returning 2x to 3x their salaries to ensure your operating costs are covered and a profit margin is included. You could potentially just triple their hourly rate and call that your charge-out rate, but you miss a few things with this approach – like the fact that they’re not charged out 40 hours a week, or the overheads their services also need to cover, like Karen in admin, the cleaner on Thursday and that dreaded rent bill.
So here’s how to calculate the financial ROI on your employees to ensure you’re maximising profitability.
You don’t have the resources to scale
I said earlier that your ability to grow revenue is capped by the amount of people you have in the business. It follows, then, that knowing when to pull the trigger on hiring is key to scaling at a rate that is still profitable for your business.
Hiring too soon can erode your profit, but hiring too late can mean dissatisfaction of new clients, churning staff, and losing the ability to grow or scale at all. You need to make sure you have enough work to justify a new hire and enough cash in the bank to cover their salary in case cash flow takes a while to be realised. We’ve put together a guide to help you decide when it’s time to hire your next team member here.
As a chartered accountant and financial advisor to many agencies, I can guarantee that 80 per cent of all your financial challenges in growing your business can be attributed to the three issues above. And hey, my accounting business is not dissimilar to yours. All of the tactics above are practiced and preached in our very own business.
Identify the issues early, rectify them in real time, and reap the benefits as you scale your agency.
If you want more customised advice and analysis of your business, get in touch.
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