Building a financial budget for your agency

Setting your financial budget is one of the most important stages of the year in any business. I’ll also add that in my view delivering financial performance is the ultimate role of any managing director. There is no better measure of success than solid financials that meet the targets set at the start of the year.

I have a number of key clients with March year ends, so it’s been a common theme over the past few weeks to be sitting down and running through the process. As a definition, your budget is an estimate of your planned income, expenditure and resources which takes into account your business goals. 

An excellent starting point for this is to review the current year to date. If this is being done in month 10 you'll have a very good idea from your monthly management accounts how that has panned out. How are we doing against our current budget? What mistakes and failures have we had that we can learn from, what successes have we had that we repeat?

Once you understand your starting point you should be in a good position to build a realistic forecast for the coming year. It can be underpinned by many things and the goals for every business are different so I won’t dwell on this point too much - but when it comes to your own business you know better than anyone what the numbers need to be to result in the personal life that you strive for.

When it comes to padding out the detail, I always start with overheads. What are the underlying costs that the business has in order to deliver the service to your clients? Split them into categories on your P&L to keep things neat and then have the detail behind each on a separate sheet. Typical categories are Advertising & Marketing, IT & Software Costs, Office Costs, Professional Fees, General Expenses. You wouldn’t expect these to fluctuate too much over time, with the exception of possibly marketing where you may have a certain plan in place which you know is going to require additional costs to deliver.

Next up comes staff costs. Your starting point is nice and clear with the costs of the current team being known. Moving forward in the year becomes a little trickier as you look at new people who you’ll be hiring, whether it be to add capacity or to bring in certain skills or a certain role that you don’t currently have. If you have shareholders that deliver a role in the business and are remunerated via dividends it’s important to include those the P&L too, otherwise your costs and your resulting profit will be skewed.

Direct costs such as print and freelancers then have to be considered. Often they will have to be estimated at this stage and a provision put in, as in a project based business it can be difficult to predict what the requirement for these is going to be. A typical provision would be 10% of revenue to leave a 90% gross margin.

Finally, we get to the exciting part which is to budget your top line revenue. Because you’ve started the process by mapping out your cost base, you’ll be able to quickly see what the monthly revenue requirement is to both breakeven and then to make your desired profit margin on top. The thought process behind that revenue can then be quite significant. You’ll have it split between project and retainer as a starting point but it’s important to go deeper than that - what services are we delivering for what clients? What is our average project value? Does it fit in with the overarching goals of the business and where we want to be in 5 years? Does any of this then impact our cost base that we put together earlier?

The end result is an in depth, three way budget of your Profit & Loss, Balance Sheet and Cashflow which gives the guidance and accountability to keep things on track throughout the year. As a side point here we find that most agencies can grow organically without a requirement for external funding but it's your specific objectives and the resulting cashflow forecast that would demonstrate any potential funding requirements along the way.

When the budget is in place and agreed by the shareholders, your monthly process can then become very disciplined. First of all review the management accounts against the budget, highlighting any differences and learnings. Next up, review the live actual forecast for the coming months - also tracked against budget. This combination leaves you with clear visibility of what needs to be done and when in order to deliver the desired financial performance for your business - the ultimate role of any managing director.

At My Accountancy Place we only work with Digital Creative agencies that are looking to improve their business. For more insights and proven strategies we would love you to download our free ebook here.