Did your business have a good month?

If it’s hard to tell then that’s something we need to fix.

Let’s look at Agency X (strong name, not affiliated with the social media platform).

You can scale the story up or down in your head because this happens at every level unless you get your analysis right.

Here’s their shape and size:

  • Boutique agency
  • 6 employees and some freelance friends to call on.
  • 6 active projects, a mix of time and materials and fixed price.
  • Their fixed costs are about £52k including the founder’s take home

The month

Here’s the story of a common month where they won some work, kicked off a new project, finished an existing one and did some other work in-between

New projects

  • They won a big exciting new project and got paid a deposit. It’s time and materials, they have deep pockets and lots to do 👍
  • The team were so utilised they dipped into their pool of freelancers to kick off a new project

Ongoing

  • They were halfway through a couple of projects and these continued as normal
  • They had 2 retainers carried on as usual with no drama

Finished

  • They finally finished and got paid for a painful fixed price project where that client who took an age to sign things off and kept asking for more

Let’s use round numbers to keep it simple.

Here’s their Revenue:

Invoicing is up this month, the deposit and the final payment made it a bumper month of nearly £80k.

In 30 days’ time when these are paid the bank account is going to look a lot better.

Plus the team is busy and this big new project has got people thinking about hiring.

Let’s see how much they made:

A margin of 23 and a bit percent. Nice.

The founder is sitting back and thinking…

You know what?

It’s been a good month.

But has it?

This is the kind of month that looks great in cash terms. But when you look at accrual - recognising revenue when it’s earned not when it’s invoiced, you see a different story.

Here’s the three realities the above numbers don’t show:

If you were Agency X here’s what you’d need to be told.

Big new project

This Big new project money hasn’t been earned yet.

Deposits are good and the money is maybe even in your account but by declaring this as revenue in this month you are skewing things. You might have invoiced, but you haven’t delivered anything yet and that means you are in a kind of debt. Next month, you’ll need to use your team and if your team is working on things already billed, they’re not available to be billed on something else.

So accounting this way makes the months where you do the work look worse. But those are the months you are actually making money. That’s off.

Troublesome client that took an age to sign things off

But this was fixed price and they kept asking for more. You managed to negotiate some more money but some of the issues they claimed were bugs or things you said you would do (and 🤫 they had a point).

This scope creep meant you put in way more time than planned. You over-delivered just to get it done.

This final invoice isn’t just covering this month’s work, it’s been 2 and a bit months since the last invoice and you need to spread this across those. In fact you want to spread all the money from the project across all the time used, hold your nose and work out what rate you actually did this project for.

The team were so utilised you dipped into your pool of freelancers

I didn’t mention this before, for narrative effect but you discounted your rate to get this project signed. Not by a crazy amount, everyone discounts, but by a bit because you sensed an opportunity with this one.

Because the team was tied up finishing that overrun project, to start this new one on time and make a good impression you had to bring in a freelancer at the last minute.

Well let’s hope that opportunity is good because once you subtract the extra cost, there’s barely any profit left on this one.

The mini-lesson here is to know your costsbeforeyou price.

How you should look at that money

The type of accounting this agency is doing is useful for tracking cash. Combined with things that don’t make it onto the P&L like tax and you will be able to forecast your cashflow (if you allow for payment time).

What it’s not useful for is asking the question: “Was it a good month?”

Let’s correct their figures by deferring the deposit and spreading the final invoice:

Hmmm, now we scroll nervously down the P&L…

A loss. Not a terrible one, but those adjustments were all it took

Better to see a loss now and fix it, than kid yourself until you’re too big to adjust.

There’s work to do…

The more important question

That’s the financial correction but let’s get to the business lesson.

As founders we sometimes just want to know the headlines: was it good? Are we doing ok?

You need to know the right answer to that, firstly for peace of mind but secondly because it means we get the right answer to the follow up question: the more important question…

“Why?”

Here’s the why that agency X should have seen:

We allowed scope creep and needed to switch in an expensive freelancer without planning it. We need to stop that.

But they never asked why because they saw:

We are really busy and winning work, we should think about hiring.

They were busy but their recoverability was poor. Hiring isn’t off the table, but if you grow without understanding performance, your numbers will tell even bigger porkies

Hiring off the back of momentum can feel like growth. But if that momentum came from underpricing or over-delivering, you’re scaling a problem.

And that can put the business at real risk.

📐 If you aren’t modelling correctly you won’t see what you need to fix