Mastering the 4 Key Areas to Build a Profitable Agency with Michael Wark

Hey everybody and welcome to this week's Agency Accelerator Podcast. I'm your host Rob DaCosta and I'm excited to welcome Michael Wark to the show. Now Michael is the founder and CEO of Timeline, an organization that helps agencies and e commerce sellers with their numbers, their strategy and ultimately their exit planning.

I'm Rob Da Costa and this is the Agency Accelerator Podcast. As someone who has stood in your shoes, having started, grown and sold my own agency, I, I know just how it feels in the ups and downs of agency life. So this podcast aims to ease your journey just a little by sharing mine and my guests experiences and advice as you navigate your way to growing a profitable, sustainable and enjoyable business.

As a chartered accountant and a virtual cfo, Michael helps agency owners focus on what really matters to grow a profitable and fulfilling business. So I'm excited to dig into today's topic with Michael drilling into the key steps that agencies need to take to scale their agencies in 2024. So Michael, welcome to the show and is there anything else you wanted to add from my intro?

Thanks for having me, Rob. Excited to be here? Yeah. Business name is Trimline and that's about having balance and momentum towards your goal. And I'm excited to get into it. Now. Let's, let's, let's dive in.

Fantastic. So in our pre kind of preparation for today's podcast, you mentioned to me that there are four key areas that agencies need to focus on if they want to grow a profitable, sustainable business and they are Mindse metrics, process and cash flow. So let's dig into each of those areas and let's start with the really important one which is mindset. So why is this so intrinsic to an agency's success?

There's, there's two aspects to this. The first one is being able to visualize the future and having the mindset to know where you want to go. So you know, it's a lot of coaching and I'm sure you have this with your clients. It's about defining what success looks like and, and then reverse engineering that future state and when, if the business owner doesn't have the mindset to think about what success looks like, then they're going to be lost and floundering and not really know what they're building towards. They'll be getting sucked down rabbit holes, not really moving the needle where they need to go. So having the mindset to really know what your North Star is the first point. But the second one is also having the mindset to know your value, know your true worth and be able to charge what you're worth to the market. I think a lot of business owners, and, you know, I'm not, you know, immune from this as well, we struggle with imposter syndrome at times, and not really pricing our kind of product correctly or being confident enough to really package it in a way that shows our true value is another thing that I think, you know, agency owners can. Can think about in this coming year. If they want to try and scale, they need to have the right margins built into their products and. And that means having the confidence to charge what you earth.

Yeah. Such a good one. And we could do a whole podcast episode on that whole charging what you're worth. And I've recorded podcasts before on imposter syndrome, and it's worth acknowledging that we all have imposter syndrome. It's the relationship we have with that that's really, really important. So I think that's really good. What would you say to somebody who says, oh, yeah, but, Michael, the economy is getting really tough. I can't put my prices up. I can't charge what I'm worth because I'll lose clients otherwise. What would you say?

Thinking I would say it's not as bad as you think. Anyone who does it, every client doesn't walk out the door. I think that's everyone's big core fear. But through helping assisting clients implement this on a, you know, multiple different clients across hundreds of their clients, it doesn't happen that way. Some people push back. There's a negotiation, and you don't do it as a blanket rule across all of the list. You target the ones that are the least profitable. You have a conversation with them first. You make them aware of it. So there's strategies you can do to increase your prices that lower the risk of everyone walking out the door. Because I've never seen the entire client list or portfolio leave. Everyone understands it's the nature of business, especially at the moment with inflation running really high. Everyone gets it. It becomes a negotiation.

Yeah. I always say when it comes to pricing, that 50% of your pricing strategy is your mindset, and 50% is actually implement strategy. Because if you don't believe you're worth what you charge, then you're never going to charge that value. And then you'll be, you know, being a busy fool or running a charity because you're not making any money. So what would you say to founders who kind of need to get out of their own way when it comes to mindset? Like, what got Them from where they were to where they are today isn't necessarily going to get them to where they want to go in the future. So what support and advice would you give around mindset when it comes to that?

Look, I usually I, because I'm a chartered accountant and I talk through the numbers to help people show what the numbers are telling them in their business. I run a really simple exercise and I ask them what they're paying themselves from their business today. And I would say what is an equivalent CEO of a similar business? What's the market based wage of that? And usually there's a discrepancy of what they're paying themselves and actually what the market value of what that role should be. And we say so you're underpaying yourself in your business and you think your business is profitable, but that's only because you're taking a huge discount on your wage. So you say, you tell me you're running 25% net profit, but your wage is half of what it should be, which indicates to me that you're not charging the right amount. So once we put in that full wage, I put change that number to what the market based wage for their role should be and they immediately go into break even negative and they're like, whoa, this is a broken business model. I didn't realize I've been lying to myself this whole time. And it makes that conversation about, you know what this is, this is not sustainable. The only reason I'm getting these clients, and they're probably the lower paying poor clients that you don't want is because I'm underpricing and you need to go up and up scale in order to get the better value. Clients who don't hassle you for every every dollar and it kind of becomes clear once they see the numbers. So that's a really common example I do to help people see that it's actually not sustainable. They don't have a sustainable business model.

Yeah, that's so true. And it's interesting that a lot of people have this notional point in the future when we get to this point, I'll be able to pay myself a fair wage, but until then I'm just going to be a lowly paid, underpaid employee, which is what, what they do. And I really like that idea of making comparison to what you would earn if you were taking a regular job somewhere else. So let's move on from the mindset conversation and just talk about the metrics because obviously that's something you dig into A lot with your clients being a virtual cfo. But it's also something that a lot of founders are not particularly good at. They either don't know what they should be measuring, they're measuring the wrong thing, or they're not measuring anything. So talk to us about what are the key metrics that we should be paying attention to that are going to help us build the kind of agency we want?

Absolutely. I think the first and most obvious is your net profit. How much cash is left over at the end of the month after you've collected all your revenue and paid all your expenses. That needs to be at least 10% or higher in order to generate enough cash for you to invest in the future growth of the business. So if you want to scale your agency next year or in the coming years, you need to have good enough margins because that cash, that cash that's left over in that profit margin is reinvested back in the business to help you grow. If you don't have the right margins, there's no leftover cash to help you invest in more marketing, to invest in future stuff. So, kind of what I was talking about with the broken business model in the mindset piece, the net profit becomes really important here that if you try and scale an unprofitable business with skinny margins, it becomes you run out of cash pretty quick. So that's by far, in a way the number one. That's the reason net profit is used as the multiple when they value businesses, because you know, that's, that's the critical one. And I'm sure your audience will already be probably looking at that. So that comes as no surprise. The next one is something specifically for agencies that I think is critical and I track with all of my clients and that's revenue per full time employee. So that is a benchmark that's really simple. You just work out how many full time equivalent employees you have in your shop and then you take the total revenue for your year or even for your month. I usually take a full calendar year and then divide it by the number of employees to give you a benchmark of where you should be and a rough benchmark in US dollars, you need to be about 150k to 200k of revenue per employee is a decent one to aim for as a baseline. Essentially, once you graph this out month to month over a period of time and show where they need to be, it clearly shows if they're too heavy in staff and if they're not efficient enough with the staff they have. So it begins a conversation of what's everyone doing? You've got too many people and you're not hitting that benchmark. And it gives people a real clear number to aim for.

Great. So let me just dig into a couple of those things. This is probably an unfair question, but what would you say a good and an average net profit number would be percentage wise?

A good one, 30%. I think a 30% and above is good. I think 10% or below is average. I think 5% is like break even. That's for me, anything below 5% or 5 is kind of just hanging in there. It needs to be 10% or above.

Yeah, absolutely. Okay, that's good. And the revenue per full time employee? I always used to give a down and dirty number to my clients, which is you need to be bringing in an employee needs to be bringing in three times their salary. And that probably aligns pretty much with what you just said, actually around 150 to 200k. That's my non financial advice to my clients.

Yeah, yeah. And those, those kind of rough rules of thumb are great. I've actually turned that rule of thirds. I do use that as well. I've turned that into a rule of fourths. I think it needs to be times four in the current market. I think costs are going up, overhead's going up and in order to cover everything, it's not really possible. And unless you times that by four. So yeah, both trying to get at the same kind of thing. What's your headcount, what's your wage bill and what's that in relation to the overall revenue?

So when it comes to measuring like diagnosing what the issue is when it with if you're looking at a full time employee and they're not hitting those percentages, what other data does an agency need to be able to accurately diagnose it rather than instinctively diagnose it like they're not working hard enough, which probably isn't what the issue is. It might be, probably isn't.

Yeah. So I'll look at revenue per full time employee. I'll also look at your overall staff cost as a percentage year for revenue that should be hopefully below 60% ideally. But then in terms of trying to move the needle and decouple your wage bill from your revenue growth, that becomes a really tricky challenge. And diagnosing if it's under pricing or if it's over servicing sometimes is trying to work out if they're time tracking or if they have any sort of data on metrics or success Metrics around the clients that they're delivering and time connected to that. You can get an understanding of how much time they're spending per client or per project and then try and work out where that time is going. But you mentioned the unscientific ones. Honestly, when I speak to founders, I'm like, give me a gut instinct, where's the time going? They know. They actually know. They know the painful clients that are costing them a lot of time and they have an understanding of actually where it's going. So the time tracking data is obviously better. We have hard data and evidence, but often the clients that come in the door will know where that over servicing is happening or where the prices need to go up.

Yeah, absolutely. And at the end of the day, I always say to my clients, there is no alternative way that I believe works well to diagnose this than time tracking. And that every agency needs to put some kind of time tracking in place and make sure they're culturally implementing it in the right way so that people understand this is to help us be more efficient and identify bottlenecks and capacity issues. Not to be big Brother and check up on you because I don't trust you.

Absolutely, yeah, yeah. It's trying to make their life easy for them. I spoke to an agency owner last week. They've implemented a nine day fortnight and the only way they can know that they're productive enough to offer their team a nine day fortnight. So every Friday, half the team get it off, then the following Friday the other half of the team get it off is because they know they're productive enough. And the only way they know they're productive enough is that they've got data on it and they know that they can still hit all those metrics to make the business function. And that requires that time tracking data.

Yeah, that's really interesting that the nine day fortnight is becoming quite a popular thing. I have a couple of people in my group that have implemented this and the efficiency kind of goes up, not down because people get more laser focused on getting the job done in a shorter period of time.

Absolutely. Yeah. I think it works and it's a lot less scary than the four day week. I think that's a really aggressive start. So it does make sense to me.

Yeah, I do a four day week because I have a project that I work on on a Friday that's not connected to my work. But I tell you what is, my days are intense. Monday to Thursday because I'm doing five days working four days Basically, anyway, let's move on to the third. The third of the four areas that you mentioned, which was all about process. So basically we're talking here, guys, about what do you need to focus on in 2024 to make sure you're building a profitable, scalable business. And we've talked about mindset, we've talked about metrics. Now we want to move on to Michael's third area, which is process. So what are the most important processes to put in place and the most important processes to monitoring measure?

You hinted at it right at the start, Rob, which is what got you here, won't get you there. And as I see businesses and help businesses grow and scale, they need to keep improving and reinventing their processes. It's a continuous cycle. There's no one size fits all, and there's no okay, that's done. And often people grow through fixing the immediate problem, but then causing a bigger one further down the line. So getting people to think bigger picture around the key process flows in their business and the best operating systems to kind of help manage that, and that infrastructure is really important. And just being clear on what those are and not getting too complex on all the other bells and whistles and just executing on those really well. And then once you get to the next revenue growth where you've kind of outgrown that system, reinventing it, not putting a band aid on it, and thinking what's best in class for our current size and where we want to be in three years time. So trying to think a few years ahead of the game and knowing what do we need to be doing to be a $5 million business, a $10 million business, what are those businesses doing that we're not? And thinking ahead of the game.

I think thinking ahead of the game is so important because none of us want to get to the point where everything starts falling apart and stops working because the process or the lack of process isn't fit for purpose. We much. We'd be much better off putting the right foundations in place to grow to the next stage of our business. It's like, you know, building an extension on your home. You don't want to build it with no foundations because it will ultimately fall down, even though it appears to work to start with. So what, what would you say the first. If I'm a growing agency and I'm going, you know, from literally shouting across the office to saying, this doesn't work anymore, what would you say the sort of first standard operating procedures or processes that we should look at to put in place.

So one that I really love and it's based in a book called Systemology. It's called the Critical Client Flow and it's mapping your client's experience from the beginning, all the way through to delivery and being a happy client. Mapping their journey through your business and the key deliverables at every point, from right at the start of them first learning about you, through the sale process, all the way to through to a happy delivery and ideally maybe monthly recurring revenue if you've got that, how you consistently deliver it. So it's called the Critical Client Flow from a book called Systemology. And having a really simple understanding of how that is for your clients is the first one I would, I would really focus on. And then obviously being the accountant and being the risk mitigator, I would say make sure you've got clear financial processes for making sure that you're paying people on time, that you're reducing the risk of fraud in your business. Money is often why businesses go broke. Businesses go broke because they ran out of cash. So make sure you've got some processes around tracking that as well.

Great ones. I always like it when a guest says exactly what I would say to a client. So because I would always say, like, map your client journey in your business. Have the documented process for winning clients, onboarding clients, servicing clients, exiting clients, and make sure that everybody understands that and is delivering it. So no matter which client you're working on or which person in the agency is working on that client, the client gets an consistent experience. How do we roll these? I don't know where you got thought on this, but how do we roll these processes out so that they are adopted and bought into by everybody? Because often you would work really hard on a process and then be really frustrated that people don't implement it or don't use it as you would want them to. A time recording being a good example of that. I think.

Yeah, culturally that's a tricky one with the time recording stuff. I see people have success by implementing it within one team, often one of the higher regarded teams in that business. And then once it's in that team, it's then rolled out amongst everyone else. So it's kind of like, well, they're already doing it, you now need to adopt it. So it's kind of like initial and then bigger picture. So that's the time tracking one for the rest of the month. So what was the question?

It was just like, how do we make sure that systems are universally adopted and delivered consistently, no matter who it is in the agency. And because it's one thing having a system, it's another thing getting people to actually use it.

Yeah, yeah. I've seen the most success. Written systems are great and I've helped build them for people and there's software you can put them in. But honestly, the simple screen share, video and recording, how the best person in your business currently does it and having that on hand for anyone else that comes into the role to look at is often the simplest and the quickest for people to learn that process. And that I feel like the visual aspect, you can speak over it as you record your screen is often the most effective way to show this process and then a simple way to track that critical client flow in order and the steps to do it. Honestly, that's the simplest and I think the most effective.

Yeah, I mean Loom is definitely your friend when it comes to doing that. I use that with my team and you know, for me it's much quicker to show somebody that it is to write it down in a detailed document. But I've also found the benefit of having documented standard operating procedures means that you care less about who's actually doing the work. You care, but you care more about the output and the outcome. So. And you can be confident that it's being delivered consistently because you've got, you know, really good detailed guides.

Yeah, yeah. And in terms of implementing the more official SOPs, and as you grow and develop as a proper business, you need to have them. That's part of your playbook and that, that absolutely needs to happen. Having the person do the initial recording and writing that and then having a second level reviewer to sense check it for understandability and then making sure it's referred to. And often it needs to be trained from the managers down. If a question's asked, a simple question is asked about something, you immediately say, have you checked the operating procedures? Please check there first before asking me. And if it's not in there, we can add it, but please check there first. So trying to funnel people towards your, your workshop or your bible is really where you need to go first.

Yeah, that's great. And that of course that creates the right behaviors in the agency and stops people just being lazy and deferring to you. I really, I'll put a link to the systemology book that you mentioned in the show notes because I really think that documenting that client journey across the agency is how you're going to retain and grow clients and have happy clients and happy staff as well. So that's great. So let's move on to the fourth of the four areas that you said are super important and that is cash flow. So tell us a little bit about what, what we need to be measuring, what the leading and lagging indicators are and everything else for good cash flow.

Yeah, yeah. So I mean this, this podcast is about how to grow and scale your agency. Growing and scaling a business, naturally it's hungry for cash and cash flow is going to be a factor whether you like it or not. The faster you grow, the more cash is required in order for you to scale. So that's just the laws of business. That's physics. No one can escape that. So before you scale, before you start that process and think about the plan ahead, why I started with margins at the top is that you need to have healthy enough margins that the business is producing enough cash for this journey, for this scaling journey. And then once you understand that that's in place, I would start forecasting. Forecasting ahead even. It's a really simple 13 week forecast or maybe two to three months ahead. Just getting an understanding or training yourself to try and predict. No one's perfect at this. No one gets it right. Everyone tries to get as close as possible, trying to predict what's coming ahead in terms of revenue coming in the business, expenses going out, and then comparing it to what actually happened and you'll learn from what you think happened to what actually happens and you start to learn what those variances are and you get better and better to forecasting and I mean key leading or lagging indicators for running out of cash and making sure that cash flow works. Age receivables is a huge1 or AI aging. So making sure that you're keeping on top of collecting off your clients. That's especially at the moment with there's a bit of economic headwinds in the market. At the moment. I'm seeing age receivables tick up. I'm seeing some clients wearing bad debts because people you know are struggling with cash flow themselves or going bust. So keeping on top of your age receivables is a key one for me. And also I try and think one step beyond that, which is have a look at what your cash conversion cycle is and for new clients coming in the door, how can you structure it so you get paid quicker? Can you charge upfront in advance? Can you charge on the first of the month? Can you progress bill, Think creatively around how you structure your entire engagements in order to get the cash in your bank quicker and you know, stop offering 30 day terms on your inverse invoice, maybe offer 12 days or, you know, seven days if you can. So there's different creative ways you can get that cash in your business. I see you nodding your head there, Rob.

Yeah, I just wanted to say that this is a conversation I've had quite a lot recently where clients are saying that cash flow is getting tight because people are paying later. And obviously the bigger the client, the worse they often are. And so they're asking me for like, what solutions? And that's one of the solutions I give to people. It's like, how can you structure your project so that you invoice the money right at the beginning and you're mitigating a bit of your risk, you're not just taking it all on yourself. So there are ways around this. And again, I want to bring this back to mindset because sometimes you suggest that to people and their immediate reaction is I'll know that you don't understand that client wouldn't accept that. And I'm, then I'm challenging their mindset because I'm sort of saying we all think we're unique, but we're not really. So you just have to apply some of these strategies and challenge your mindset to, you know, to, to manage this. So I think at the moment, obviously cash flow is so, so important and you just all need to be doing whatever you can to manage a positive cash flow.

Yeah, absolutely. And also what helps is having working capital in your business. So don't take it all out as dividends. Having two to three months worth of operating expenses in your business to help you weather those short term storms when the big end of town want to treat you like a bank and not pay you for a while. I see that so often as well, Rob, and it infuriates me that they treat the small players like banks and you know, even people managing their media spend for them, they want to delay that. Even though the, the ad spend has gone out last month. It's, it's, yeah, it's rife in the industry and is one of my pet peeves.

Yeah, absolutely. So a good piece of advice there for everybody is make sure that you are working towards having one month's operating expenses in your bank. And then when you got to one month, two, then two to three. And I always say like the ultimate would be six months money in your bank. So if you didn't earn any money for six months, could you pay all your bills? Could you keep functioning? And that should be a Very aspirational goal. But certainly getting towards two or three months is going to give you that cushion to cope with those things that you couldn't necessarily anticipate or you have no control over.

Yeah, yeah. And even if we take the more positive approach, which is this is a growing scaling agency, they've got a great nation, they're doing well this coming year, your profitability will still take a hit as you hire that next team member and you invest in the future of your business to deliver those additional services. You might go from 10 or 15% net profit down to 5% for a while whilst you're wearing that staff member's wage, whilst they're getting up to speed and before they become actually profitable in the business. So you need to have cash reserves and cash flow to help cover that drop in profitability before they start actually helping towards your top line. So there's all these big hires and big investments. Maybe it's a new office space that naturally will hit your profitability and when you start forecasting it out, have a conversation with your advisor or someone in your world that knows about forecasting, you'll be able to see those drops as you make those investments and then ideally it'll pick back up a few months later. But having those cash reserves help you with that kind of few months whilst it takes a bit of a dip. And it naturally takes a dip as you grow.

Yeah, absolutely. I think that's good advice and it kind of helps to sort of wrap this up, which is why you need to be focusing on these four areas that we've talked about today, so that you are, are focusing on the right things, you are monitoring and measuring the right things and you are reacting to, you know, to all this data. Have you got any final, sort of putting you on the spot here, but if you've got any final wrap up thoughts around anything else that agencies need to be focusing on to make sure they have a great year ahead, despite what will probably be a challenging economic environment.

I would say team, focus on your team. Make sure you've got the right people in the right seats and, and hire for the skills that you don't have. So be really honest with yourself about what you're good at. And all the best founders that I work with that have grown big businesses, they're very self aware and they know who they need to have in place. It's not what, it's who they need on the team or on the bus to help them get along that journey. And then they're not micromanaging that they're hiring the best possible people for those roles that they don't perform and trusting them to do their job. So if you're going to scale, you need a team. And being good at hiring and training and keeping key team employees is, I think that's a key missing piece of people's playbook that they really should focus on.

I agree. I think we need to hire the best we can afford, even if that really makes us feel uncomfortable because we're challenged. I think we need to work hard to make ourselves as dispensable as possible. Especially if you want to have an exit at some point in the future or you want to sell your business and you know, so team is completely going to enable you to do that. So listen, that's great advice and I, like I said, I'm very pleased to see that you're sharing very much the same sort of mindset and approach to this as I would with my clients. Let me ask you the sort of wrap up question, Michael. Now that if you could go back in time and give your younger self a piece of advice when you're just starting out in business, what would it be?

I, I think for me, for my situation, I would tell the younger Michael that networking is not a dirty word. It's not a waste of time. And everyone at networking events is not a sleazy salesperson trying to sell. And not every event will be a success. But it's like walking down a hallway knocking on a huge amount of doors. You don't know which one is going to lead to that conversation or that partnership that really opens up a whole new market for you. And you've got to knock on all those doors to find the right one. And you've got to kiss all the frogs to find the princess and partnerships or even like friendly competitors who you can share ideas with. It makes running a business a lot more fun. And I think I held back for a long time because I felt like those things were a waste of time when in fact I had the wrong mindset around it. So it goes back to our original point. I was approaching that with the wrong mindset. And now I just think about it as a game of business. Events are a bit of a game. They're a laugh. And if I meet someone, that's great, but if not, no problem. So yeah, networking would be the thing that I'd readjust my mindset on.

Good advice. Do you think your younger self would listen to you if you could go and say that?

Do you listen to anyone old when you're young. Not really. Right. You think you've got it all worked out even though you know 19 or 20.

It's my it's always the follow on question that I ask because invariably the answer is no, I wouldn't. But anyway, if people wanted to find out more about you Michael, where would be the best place for them to go?

They can find me on LinkedIn. So Michael walk. Or if they want to check out Trimline's website, you can go to Trimline. That's T R I M L I N E co.

Great. I was just furiously typing away there to make to make sure I've captured those links. So we will put those links into the show notes plus also the link to the book that Michael mentioned, Systemology and just want to say a big thank you for joining us today guys. This is super practical episode four key areas for you to focus on if you want to have a great year despite whatever the external environment might throw away. So thanks for joining us today.

No problems Rob, thanks for having me. Sa.