What would I change if I were to open an agency again?

Hi, I’m Daniel, co-founder of Fintellect.

Before hopping into startup life, I was a co-owner of the marketing agency Syntropy. My partner and I were hustling on it for five years. We were like an outsourced marketing department, like navy seals of marketing.

In 2020, we closed the agency. The reasons were different, first of all — finance. We had a persistent feeling that freelance would give twice as many dividends with less effort and risk.

Risk and reward are like cough syrup and candy — the ratio should be such that you are constantly ready to drink the syrup, knowing you will get the candy later.

It is necessary to pay attention to this from day one because partners in the agency are multifunctional. They are project managers, designers, strategists, or copywriters, and at the same time, they are responsible for EVERYTHING — the good and the bad. Employees can leave the agency anytime, but the owners can’t — because they have obligations. So dividends must be commensurate with risks and liabilities.

This has only sometimes happened in our history.

What we did

As I said, we were an outsourced marketing department. We did research, built a strategy, and implemented it. Our team consisted of project managers, strategists, copywriters, designers, and several dozen other beautiful and intelligent people.

Therefore, one client that appeared in our funnel bought various services. We were selling a set of services that started with research and strategy and continued with what is actually part of the strategy: ads, content, operations, etc.

The approach has worked for a couple of years. We worked with clients side-by-side for a year+, managing to grow the main business metrics — money. Some of them grew 4–5 times during our partnership — and we had a great time working with them. Some of them grew, but there were not much dividends and excitement for us. And, of course, there were companies that did not succeed, did not give dividends, and were a pain in the ass.

What went wrong

This text is not an attempt to justify failures but to understand cause and effect in my head and turn them into valuable lessons. I don’t know if you will like it or not, but I hope it will at least be interesting.

Let’s start with a list of false judgments that led, respectively, to shitty results:

1. The primary agency objective is to provide the best services.
2. Experience in marketing will allow us to build a successful agency.
3. Product is more important than sales and finance.
4. Rapid growth in turnover is good.
5. Fix-price is a good pricing model for scaling.
6. There is no need to calculate precise rates.
7. The best sales are founders.
8. It’s too early to hire a CFO.

Which of these impacted our results the most? I think all at once. All the false judgments are like spoiled chicken legs in a KFC bucket. You can eat one. Two or three will hurt you. But if you eat them all, it’s better for the crowd to leave because they will never forget this sick performance.

What should we have done differently?

✅ Analyze the agency business model first

The essence of the agency’s business model is to sell hours. Not to provide servcies. Not to win Cannes Lions. And not to have the best YouTube channel or, god forbid podcast. This applies to marketing agencies, IT outsourcing, design bureaus, recruitment teams — basically everyone who sells professional services.

This applies to marketing agencies, IT outsourcing, design bureaus, recruiting teams — everyone who sells professional services. Of course, you should provide excellent service and try to be the best at your job. But still, there are thousands of people like you whose business balance is not well, even if that business is one freelancer and a cat. Financial management is not about your professional skills but about business model understanding.

💡 Specific advice 01

Consult with people who have been in this business for a long time and who — you should know for sure — are financially successful.

💡 Specific advice 02

We have an article about the agency’s business model, check it:

✅ Deal with finances first

Entrepreneurs who create their own agencies have one thing in common — love for Excel and intuition. They focus on doing the work, not the money they should make. The truth is that financial management is a basis for you to do creative or tech work. We used to put the service pricing away and think about it after we sold the service, which is wrong. We should start by calculating the service economy and only then sell it properly.

Service pricing consists of several blocks:

Block 1 🧩: Team cost

A mistake many founders make is not considering themselves as a team and not selling the hours. For your project finance to be correct, you should add all the jobs there is: dealing with documents and accounts, project management, traffic management, and communication with the client.

The second mistake is not selling projects based on rate, thinking it’s to complicated for a small team. But it’s simple: it starts with a formula: salary/hours of work = basic rate. Then you add overheads on top of it to calculate the internal rate.

Block 2 🧩: Overheads

What are overheads? These are expenses necessary to enable your work: office, Figma, coffee, French croissants, food for the cat that lives in the office, keeping the normal psychological state of the team. Overheads are shared costs, so they don’t relate to some specific projects but to the company as a whole.

☝🏻 Comment 1

Management is also overhead. If you, as a manager, participate in all projects, your salary is part of the overhead.

☝🏻 Comment 2

You have to pay yourself a salary, even if your agency is one week old and you have a year’s worth of money to operate. If you don’t pay yourself, your business model is wrong. After all, when you replace yourself with a third-party CEO, you will have to pay a lot. His salary will grow commercial rate, so this position needs to be a part of the economy from the top.

How to calculate internal rates with overheads? Divide them by total number of team hours, and add the figure to your basic rate. Now you’re getting close to project breakeven numbers.

Block 3 🧩: Project costs and contractors

These are all the costs you have inside the project: design mockups, contractors, commute & travel, keynotes, sales, etc. You’re not paying for it, so include it in the project.

Block 4 🧩: Your profit, taxes and commissions

After adding rates, overheads, and project costs, you get the project cost. Now it’s time to make money, so you add the desired margin. Then — add taxes and commissions.

This calculation gives you the true cost of your work.

If you have never gone deep into your finances, calculate this in a spreadsheet or on your notepad to see if you sell your services properly. Some time ago, I was this founder who calculated everything and realized that I needed to sell services for a twice higher price. It was harsh. Then we closed the agency.

Do you get the hint?

✅ Do not grow the team and overhead

Thinking about COVID and war times, I understand that big overheads killed hundreds of companies. If revenue drops to zero and the ongoing expenses remain in place, every small business finds itself on the verge of an abyss.

The correct strategy for that spring of 2020 was to change the business model to project-based remote.

So the correct tactic then was to change the work model to project remote. This would have forced us to fire some people, but it ended that way anyway. So, changing the business model would have us working with freelancers, which was good because there are a lot of strong performers working as individual entrepreneurs. Companies won’t pay them as much as they can earn, but freelance clients will. So it was worth working with such people rather than growing an internal team.

✅ Build a sales department

There are two most effective salespeople — a founder passionate about what he does and a professional salesman with a % of the project with a big check. Who’s more effective? I am inclined to say the second one.

Young agency founders try to be salespersons all the time. Is this possible? Absolutely. Is it optimal? No. Every person has it’s job. So, as soon as the budget allows, it is worth building a sales funnel: hire a person, collect a portfolio, draw promotional materials, look for good opportunities for PR — do everything so that the funnel of your leads never dries up.

☝🏻 Why is the funnel important?

Because such events like COVID can reduse the number of your leads from 10 to 1. Or even to zero. And no matter how smart you are, or how cool you manage your work, reality doesn’t care. Your job is to build processes that will help you not fall under reality. A top of the sales funnel with hot leads is one of the primary helpers to stand against it.

✅ Automate accounting

The founder’s biggest sin is busyness. The concept of free time disappears as quickly as the markup in fix price projects. According to our observations, one of the tasks that can take 20–40 hours a month is cashflow management. The founder of a small agency most often does it manually with the help of intuition and Excel, which we have already mentioned.

“Monster_Spreadsheet.xls,” in which the founder records all operations and calculates balances, comes into play. This solution works but has several weaknesses:

• Human factor. If people did everything perfectly, many startups would not become unicorns. But it is not so. We will make a mistake if there is a possibility of making it because we are people.
• Time. Filling in the tables takes many hours. If you are a founder, the main thing you lack is time.
• 2023. Just use the tools, there are plenty of them.

Relying on the fact that you can add up all expenses once a week and not lose anything is not worth it:

• You may not have time, forget or make a mistake.
• The balance will not come together.
• There will be mistakes in paying taxes.
• The cost amounts will not correspond to the real ones.

These things happen, so automate your finances.

✅ Build a project economy

Essentially, the economy of the agency is the sum of the economies of the projects.

So if you have a super-profitable project, and there is a project that you are just sorry to abandon because you have known the client for a long time, but it no longer brings money — you are killing not one project but two.

Before moving forward, you need to learn how to calculate project economics and answer the following questions:

1. How do you calculate the price?
2. What pricing models do you use?
3. How can you reduce project costs?
4. What has the most significant negative impact on your margins?
5. How can you change your business model to make more profit?
6. How will you sell it to the customer?

With these answers, you can test new approaches and pricing models; if it works — great; if not — you can try some more. It’s a business, after all, not an expensive hobby. Making money is the point of it.

What’s next 🍰

There will be a lot of other content on finance, so stay tuned. Also, we are working on an app for financial management and analytics for agencies, IT outsourcing, bureaus, and other service teams.

Our product is in beta test but will be live soon. It will help you to make more money. Contact us if you want to hop into the beta: golota@fintellect.pro

Cheers!