How Smarter Bookkeeping Helps Increase Agency Profitability
Are you doing your own bookkeeping? Are you paying too much for someone else to do it? You might be wasting valuable resources that could be focused on growing your agency and your profitability. In most cases, it’s not an agency owner’s area of expertise and CPA’s charge a ton for this service. It’s worth it to hire someone who understands the scope of what you do and how to keep your books. Today’s guest is an expert in accounting for agencies and his company, Agency Dad, helps agency owners forecast their finances and establish a strong fiscal foundation for their future.
Nate Jenson is a certified management accountant, internal auditor, and fraud examiner who founded Agency Dad, an accounting company that focuses on profitability for agencies. He offers bookkeeping services for agencies but their main focus is helping agencies understand financials and what’s driving profitability. Nate has been on the show before talking about the financial benchmarks and KPI’s that can help you plan for the future of your agency.
In this episode, we’ll discuss:
- Why you shouldn’t do your own bookkeeping.
- The high cost of bookkeeping mistakes.
- How tracking time will help you improve profitability.
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Why You Probably Should Not Be Doing Your Agency’s Bookkeeping
Bookkeeping is not the sexiest topic and most creatives are not interested in it. However, a lot of agency owners do their own bookkeeping, even when it typically isn’t their area of expertise. Nate advises against this for several reasons, although he admits there’s a point in your startup when it’s OK.
There is a situation where handling your own bookkeeping makes sense. If you’re just starting, have only a few clients, one invoice a month, and no employees, then it’s perfectly fine. It can also be the best for you as you try to scale your agency and need to keep costs low.
Once you start growing, the complexity of the data grows exponentially. You get to a point where maybe you just hired your first employee, have several clients, and diversify your service offering. Then tracking that data becomes more important and more difficult. And, knowing the data leads to making better decisions for future growth.
Finally, you should also consider opportunity cost. If you started an agency, maybe you’re an expert on SEO or getting clients. Imagine how much money you could be making if you focused on what you’re good at instead of bookkeeping, which is most likely not your greatest strength.
2 Reasons Not to Use Your CPA For Bookkeeping
A lot of people use their CPA for bookkeeping because they lump all the “financial stuff” in the same category. But a CPA and a bookkeeper are drastically different. And, Jason and Nate agree this does not provide the best results for your agency. This solution keeps your books clean and reconciled but Nate says there are several reasons he does not recommend it:
- It is the more expensive option. Most likely, you will overpay to have your accountant do your bookkeeping. However, more importantly —
- CPAs usually keep books based on their tax knowledge. There’s nothing inherently wrong with that, however, on the backend, it doesn’t help you make good decisions for running your business or to move forward.It all starts with the data entry and your vision for the agency.
If you want to make smart growth decisions you need a good bookkeeper to help you with the data. What do you need to know from the data to make good decisions? Can you hire a new employee? How much should you charge? Can you give your team a raise?
Imagine you want to sell your agency soon, you would probably have very specific questions about valuation and how the decisions you’re making right now will affect your business. When would you like to sell? In one year? Five years? In terms of the data, you have to know what you’re putting in and why so you can answer those questions in the backend.
If you are planning to sell and do not know this information it could be a red flag to potential buyers. You should know the financial outlook of your agency at any time. If you want to have an opportunity to sell you should have everything in order. And if you want to sell in the future, you want to know what you can do as of now to maximize your value.
The High Cost of Making Bookkeeping Mistakes
According to Nate, 96% of data analysis happens at your data entry. This means that if you don’t know how to properly enter the data you will run into trouble.
Overall, you want to do everything right in your bookkeeping from the beginning. Nate has been hired to “clean up books” and fix years of improperly kept data which sometimes takes months. If it’s too complex, he even prefers starting from scratch and rebuilding everything.
Having the right systems and the right processes in place can even help save money you’re already spending in bookkeeping. In one of the worst cases he’s ever seen, Nate rebuilt his client’s entire system and set up everything in a way so they were able to replace two full-time bookkeeping employees and replace their roles with one part-time employee.
The Importance of Tracking Time for Profitability
Based on experience, Nate says most agency owners are not tracking time with the data they measure. Usually, he gets some pushback when he mentioned it. However, most do admit they should be doing it, but their employees don’t want to.
An agency’s biggest overhead cost is your team’s time. If you don’t understand where people are spending the most time, you won’t be able to identify which client relationships are not profitable. Tracking time is a data entry task so if you have the systems in place where you can run payroll and track time, you can easily run reports that specify profitability per client. This way, you can identify which clients are using up most of your time.
Rarely does Nate find an agency that isn’t losing money on their engagements. What they need to do after they find this out is adjust and find out where they can raise prices or what things they need to stop doing. Sometimes you can even increase profits when you cut a service offering or stop making a specific product. Do less and make more money!
How To Handle The Shift to Tracking Time
It’s common for your employees to pushback when you start tracking time. Jason recommends being very honest with your team and clearly explaining the agency will suffer unless some things change. It’s also important to reassure that you will not be tracking the employees themselves, but rather collecting necessary information for the business to keep growing.
Make it mandatory, not optional and be ready to make non-compliance a reason for dismissal. Oftentimes, the employees who complain the most about necessary changes like these are not a good culture fit for the agency you’re trying to build. It will be the same with some clients and it’s ok if you decide to cut ties.
How to Find The Right Person for Your Agency Bookkeeping
Someone who is doing their own bookkeeping is also typically someone who is already overwhelmed. They have so much to do and they feel they can’t afford to hire someone else to help. With this mindset, it becomes difficult for them to see the benefits of making a change.
A good bookkeeper knows your industry, understands data analysis, and can put those numbers in front of you to help make decisions. They will be able to show where you are losing money and what can happen if you make some changes.
Of course, you also have to be careful. You can’t just hire anyone to do your bookkeeping. Some people ask their support staff, like a receptionist to do it. You may be freeing some time for yourself, but it will probably create problems further down the road.
Mistakes like incorrect invoicing can cost your agency thousands of dollars, so make sure to put in the effort and choose the right person for the job. It doesn’t have the most expensive solution, but it’s important to really understand the role and the difference between someone who understands accounting and someone who knows how to use Quickbooks.
Pro Tip: Nate’s suggests a quick test to determine if someone really knows about accounting is to ask them this quick question. “Does the debit increase or decrease my assets?” If they say increase right away, you’re good. If they hesitate, they’re not thinking like an accountant.
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Today’s episode is sponsored by Agency Dad. Agency Dad is an accounting solution focused on helping marketing agencies make better decisions based on their financials. Check out agencydad.money/freeaudit to get a phone call with Nate to assess your agency’s financial needs and how he can help you.