Why Profitable Agencies Still Struggle With Cash Flow

0:00John Jantsch:You know, a lot of marketing agencies can look profitable on every report the owner reads and still scramble to cover payroll by, I don't know, the third week of the month. That gap between profit on paper and cash in the bank comes down to one habit that we're going to learn about today.

0:26John Jantsch:Hello and welcome to another episode of the Duct Tape Marketing Podcast. This is Jon Jantz and my guest today is Jody Glumpin. He's a partner and virtual CFO, practice leader at Anders CPAs and Advisors. He's co-founded Summit CPA Group in 2002, built one of the first fully remote accounting firms in the country and move clients off hourly billing and on a weekly subscription billing. Years before that, Ida became Chinese. He's a Forbes Finance Council member and should talk about when an agency actually needs a fractional CFO. So, Jody, welcome to the show. Yeah, John. Thanks for having me. so we were talking a little bit before we got recording and we've both been doing this for a long time what was sort of the genesis of you saying you know i need to do this virtually or i'm going to do this virtually and people are going to accept it even though it's an odd model to them you know back 20 years ago no great question so we started out as a traditional cpa firm for about the first couple years and it was just something that i knew that hey, this wasn't me.

1:33I didn't enjoy doing it. It wasn't fun. Building a business was a lot of fun, but the work I just didn't enjoy. And so I was trying to think, hey, how can we actually do this? And I get some enjoyment, but the client gets a lot more satisfaction than just simply looking at a financial statement. And so that's when we created this virtual CFO model where we were actually working alongside, answering questions, meeting on a regular basis, creating a cool dynamic forecast, doing some really cool stuff with clients from cashflow, you name it. At that point, it was in person. So we were meeting with people right in person.

2:05We're bringing our computer out to their place, you know, location. It was just, it was really burdensome. It was one of those things that I knew that, hey, if we kept doing it this way, there's no way we can scale this because I had to be out there. I couldn't train people because they weren't on the call with me. It was just really difficult. And so that was one of the things that we decided, you know, hey, we're going to create this CFO model that we can actually, you know, work with clients all across the United States. And so it was a great idea, but nobody was doing it back, you know, in 2004, you know, and it just happened that we had a client respond to one of our, one of our, at that point it was Google and we were doing Google ads.

2:42We weren't, we were trying to get out of the yellow pages. If you remember yellow pages, all that kind of stuff. And this, this person called me from Rhode Island and I, at that time I lived in Indiana and called and said, Hey, I love your website. It looks super great. Very progressive forward, you know, forward thinking. It was a marketing agency. And they're like, you know, Hey. hey, would you be interested in being our CFO? And at that point, I'm like, well, yeah, of course, I would love to be your CFO. And then it's going through my head, how am I going to actually do this? And they're like, hey, do you need, and then they ask, do you need to actually meet with us in person?

3:12And I ask the question, I go, well, do you need me to meet with you in person? They're like, well, no. And I go, well, of course, I don't have to meet with you in person. And I was like, that was the very first client that I actually had. And it was kind of cool because from there, I learned a ton about marketing agencies. But in the same regard, I learned a ton on how to deliver a service virtually. And man, they loved it. They loved it so much. They're recommending their, basically their competitors to us. You know, because marketing agencies hang out with each other all the time, if you know.

3:38John Jantsch:You know, all these events. Every industry does that, right. Yeah. Well, not every industry.

3:45Accountants have a hard time sharing information with each other. But that's how it really started. It started with, you know, with, hey, just taking a risk and just reaching out there and then figuring it out. once I had the opportunity to figure out how to really make it work well. And then from there, you know, we decided, hey, we're not going to hire another client that's in Fort Wayne, Indiana. And that's where we actually started it. And we're not going to hire another employee because we started to figure out how we can do this and actually, you know, work without having an employee in-house, which was a big thing.

4:15And we basically from there just kind of spread out and just grew up.

4:18John Jantsch:And you work primarily with the creatives and marketing agencies. Is there any, is there, are there certain things that were good? Do you have like an aha moment where you said, no, they have different problems than all of our other clients. And, you know, nobody's addressing that. I mean, is there something about the accounting from a marketing agency that is unique? Well, I would say a lot of times profit used to be a bad word. You know, I'd go to these conferences and speak and talk about how, you know, you had this certain profit margin in order to, you know, for the world to go around. and they looked at me and said, hey, you know, profit's not what we're looking for.

4:54And in reality, in order to grow, you need profit. And so, you know, just kind of directing traffic and kind of determining, hey, how much profit is enough profit in order to grow? I think that was the big part about it. It's just kind of the education part. And we, and, you know, as you probably know, you want to at least have a 10 % bottom line in order to even make cash flow work. And so, you know, that was our bare minimum saying, hey, we have to build up, we had to build your metrics in order to get that 10%. And then 25 % was kind of like, you know, Hey, if you're hitting 25%, a cash is going to be really good for you.

5:27And so that's where that really kind of started out. And then the second question was as well, you know, Hey, we always heard the slogan. Yeah. You never, you don't have too much cash in your business because you're going to pay taxes and all this kind of stuff. And that, that's completely wrong. You know, cash is kind of your biggest KPI. The more cash you have in the business means that you're doing things right. And you know, you're building cash. Now, obviously you want to figure out how to manage your tax situation so you're not paying too much taxes. The cash isn't the KPI. So we told clients that you want to have at least 10 % of your annualized revenue in the bank at all times.

5:58And so if you're a million-dollar marketing agency, you want to have about$100 ,000 accessible at any point in time. Don't drain it out of the company thinking that, hey, if I need it, I'll put it back in because that never happens. Once it's out of the company, especially if you have a significant other there, good luck on explaining to that significant other why you're putting money back in the company. And it could be just for simple cash flow issues. And so that 10 % is really the big thing. So profit margin, about 25 % is golden. But 10 % is minimum on a profit margin. And then I would say at least 10 % of your annual is revenue, which equates to about two months of expenses, if you kind of back into it.

6:38If you want to have close to that 30%, be more conservative, risk adverse, then you're looking at more of a 30 % margin. So a million-dollar company have about$300 ,000 cash availability.

6:48John Jantsch:so what do you tell people when you know you're talking about some of these topics and they're like oh we have a bookkeeper you know we've had a book the same person for 10 years and they do stuff for us i mean what would a cfo or typically you probably don't want to do bookkeeping maybe you have that as a service but but typically what would adding a virtual cfo or service like yours be how would that be different than just hey i got my you know my bank reconciled and you know Yeah, that's a great question. And you're right. You know, we obviously don't want to do the bookkeeping. We'll do it if we have to.

7:21If it's one of those things where it's a cost thing, you know, we'll take over that bookkeeping function. But we'd rather have the bookkeeping in-house. And then, you know, from there, when those books are finally closed and they look good, what a CFO does, takes that information and really helps you make decisions. You know, helps you create a dynamic forecast. When I talk about forecasting, a lot of folks are, what does that really mean? Does that mean putting a budget together and then looking at it and comparing it? No, that's not what that means. What that means is that you create a dynamic forecast based on your non-financial information, the number of employees you have, hours that's being worked, utilization rates, average bill rates, all these different factors that go into it.

8:00And you build the revenue side based on your current team. What's your team capable of doing? And so what's your team capable of doing each month? because every month's going to be different because you have multiple days in one month, not as many days, holidays in one month. And so you really build it out, you know, and based on, you know, hey, where are you at? And then the key to that is that once you have that information, the CFO can guide the story. You know, hey, here's what you're supposed to be doing this month. Maybe it's, you know,$50 ,000 a month or maybe it's a$70 ,000 or maybe it's a$100 ,000 a month.

8:30Why didn't you hit that? You only had, you know,$80 ,000. You're supposed to hit$100 ,000. And it's like, well, because of X, Y, Z, you hear all the stories on why they did hit it. And so, okay, great. Is that, you know, are we going to hit it next month? Yeah, we'll definitely hit it next month. And you look at it next month. It's like, why didn't we hit it again? You know, again, the same story. So should we adjust the forecast down? So instead of, you know, maybe that million dollar trend that we're doing, or maybe it's a$2 million,$3 million,$50 million, however big the company is, it doesn't make any difference.

8:59You know, whatever it is, maybe we have to lower expectations a little bit. And so what that benefits for is that benefits because now we can see the cash position and we can see, you know, hey, based on hitting these numbers, we know that in November, you know, maybe here, maybe we're looking at this in March. In November, we're looking at it and we're saying, you know what, looks like we're at the bar on the line of credit. Oops, we don't have a big enough line of credit. Let's build that line of credit now because we know we're going to hit on it for various reasons. Or it might say, you know, hey, we're going to be negative cash then.

9:27What do we need to do in order to make sure we're not negative cash? Let's build it now. So that never happens. And so we're always at a positive. And so that's what the CFO does. CFO takes the information, the accounting information. It really helps the business owner make the decisions that are going to get them to where they ultimately want to go.

9:44John Jantsch:You know, a lot of, I mean, we all spare the CPA jokes. Yeah, yeah. I hear them all the time. But, you know, a lot of those, you know, I still, I've been in business 30 years and I still couldn't really tell you what my balance sheet is for. But, you know, a lot of the reporting and things that we get, you know, are kind of like rear view mirror stuff. It's like, well, yeah, that's what happened. Too late to do anything about it, but that's what happened. You know, how do you actually come into a business and give it like KPIs that they need to be tracking maybe weekly, you know, during the month as opposed to waiting till the books are closed, you know, or whatever it is?

10:20John Jantsch:And what are the simple things they should be tracking that maybe they're not because they're just used to Gap accounting? Yeah, great question. So, and you're 100 % right. Traditionally, that's what a CPA did. A CPA looked backwards all the time. And then explain what you did wrong. And like you said, John, it was too late. They can't help you make the decision because you already made it, good or bad. It was already done. And so, as a CFO, what they'll do is they'll take those non-financial indicators that we're talking about. So if you're an agency and you bill by the hour, the CFO is going to want to know how many production employees that you have.

10:57How many hours are they expected to bill per month, per week, whatever that might be. They're going to break it down by what is the average bill rate of your clients. Not the standard bill rate, what you're actually charging on the quote, but what you're actually getting. Meaning that are you writing stuff up, writing things down because you went over on time? or you went under on time, but you were able to build out. Those are great situations. So all that kind of plays into it. And so those are the indicators that a businessman really needs to follow as they're going through in creating that forecast.

11:30Because that's what's going to really cause, it's basically the cause and effect. That's the cause and the effect is no cash or a lot of cash, no profit, a lot of profit. And so we've got to look at those on a regular basis. And whether that's on a monthly basis, a weekly basis, it really makes no difference. It just has to be consistently done. And consistently is the key. It can't be done, you know, when things are going really bad or it can't be done only when things are going great. Now we're going to gloat about it and think we're great. It's got to be done on a consistent basis, good or bad, every week, every month, whatever that cadence is.

12:02And that's really the key. And that's really what a CFO does. It's like if you ever have a gym membership, you know, if you have a personal trainer, you meet that personal trainer, you're there all the time. If you don't, a lot of times excuses get in the way and you keep pushing it off of why I need to go to the gym. I've got this great gym membership. I never use it. Well, I have a personal trainer. I know that person is going to be there. I spent the money for it. And that's really kind of the same situation that a good CFO is going to be. They're going to be able to hold you accountable and be that consistency factor.

12:32John Jantsch:So I know your model is to kind of get out of the hourly rut and to actually have a subscription. We have for many years, at least 20 years, operated that way. We're basically my, I'll tell you my methodology. We charge one fee, a set fee to do strategy first. And that's the only thing I could start with. And they pay that fee and 99 % of them say, this is awesome. We do it all for us. And so then that moves to a retainer. And the way we factor retainers is the scientific method. I figure out how much I think they can pay me the rest of their life every month. and then we are in charge of the scope for what they're going to get that month.

13:16John Jantsch:Some months it works, some months it doesn't work. I know we've left money on the table because we don't say, oh, well, we can do that, but it's going to be 50 ,000 more. But we just kind of say, hey, we'll work that in the retainer and here's what we can get done this month or this quarter. And one of the things that I believe, just looking at industry trends, we keep our clients for years, which is not the case in a lot of packages. package, you know, product agencies. And so tell me about, you know, that first off, tell me if my model is stupid, but then also if you're seeing more of a trend towards that in the agency world or where the gotchas are, you know, in that.

13:57Yeah. So our model is very similar to what you're, what you're saying. And how we do our model is that, you know, everything is done weekly. And so So we have our cadence is weekly, meaning that we zap your account every Monday at the same time, until really perpetually until you end the service, that type of thing. Average client stays with us for about five years. So again, it gives you that longevity factor there. And so how we decided to break it down is that we looked into three different tiers. And so our tiers were what we call transactional service, which is if they require to do specific things, here's what we're going to do.

14:36Maybe it's paying somebody's bills or, you know, doing something like that. And then we have what we call controller level service. We actually named them controller level where that we're doing the accounting looking backward, like we were talking about earlier. And then we had the virtual CFO looking forward. So we created three different levels of services that a client could actually pick. And then we created an a la carte feature below and said, you know, hey, because not every client wanted us to pay their bills. Some of them wanted to keep in and out. Some of them wanted us to do the payroll.

15:02Some didn't. Originally, we charged one fee and it was like, well, then we were like, well, hey, we're not doing this. Can you like cut our fee down? Or it was like, well, I didn't want to negotiate anything. I didn't want to actually I just wanted to present it and allow them to pick and choose their a la carte. And so I a la carted it. And so I said, you know, hey, if you want to have us, you know, do your forecasting, click the button here. boom here's how much it costs now on a weekly basis to do that you know it just went you know forward so every if they want us to do taxes for instance we could do that we didn't have to do taxes we could just work along the tax provider here's what it's going to cost for there and so we made it so that the client picked their own adventure which clients love that because they have full control now and we never got the hey can you discount our fee anymore we can i get that maybe once every couple years i mean it doesn't happen very often because what we do is we allow the client, hey, if you want a lower fee, here's the service that you're going to get for that lower fee.

15:54And they're like, hey, that's great. Can I add later? And probably along with yours, we say, yeah, absolutely. You can change your scope anytime you want. And then the scope changes, you know, they say, hey, let's do this. The scope changes the very next week. So it's, the weekly cadence works great because we don't have to worry about fractions of a month or anything like that. We can just start right away on the following Monday, which worked out really well. It works so well that, you know, clients love it because we took the risk from them saying no right off the bat, you know, because the risk is, Hey, if it's going to be an$80 ,000 engagement, for instance, or a$50 ,000 engagement, they're not signing up for a$50 ,000 engagement.

16:29They're signing up for 1800 bucks a week or 1200 bucks a week or whatever that weekly fee comes out to be, knowing that if they're not happy with it, they can cancel any time. And so that was the biggest barrier there. And that's what that did increase our win ratio to about, well, actually originally it was about 80%. We were getting a lot of wins, which was not a good thing. And so we had to actually increase prices and fluctuate it around to determine, you know, hey, here's what the going rate is for because supply and demand, you know, hey, are they, you know, is the closing ratio going down or is it going up?

16:59And so that's how we regulated our pricing to be able to do that. And then what we did from there, we had to make sure that our team was focusing on that pricing and was able to actually make changes as they go. So I made all my CFOs, they make the adjustments as they go forward. once the deal is closed, we allow the CFOs to make any kind of adjustments. So again, it's not a timing issue. It's not, Hey, let's go back and get this out of this black box thing and figure out how much it's going to be because you're a bazillion dollar company or whatever. The other thing we thought is, is that we, what one of the big holes that we found is that it was flat.

17:34There was no, we didn't take into consideration the size of the company, which was a big mistake because what we found was that a$30 million company is going to be a lot more intensive. We're going to be doing a lot more things for them than maybe a million dollar company. And so we had to then scale it based on size. And so that's what we did. We scaled our fee based on the size of the company. And so then when we were going through the quotes, we're saying, hey, million dollar company, here's what your fee is today. And hey, when you get to that$3 million mark, boom, here's what your fee will be when you get to that$3 million.

18:07So we actually show them exactly how it scales. And so there's no surprises at all as we do our price increases every year and we tell them right off the bat also that we have a five percent you know price increase every year it's about five percent and we'll let you know in january and then if you then you know it'll take an effect in march and we tell them that right up front so that was the other thing too is that we didn't want to get stuck in an old pricing structure with a client that's been with us for you know forever where we're actually starting losing money as we're with the client and so we built that in there so those were the the big traps that we had was one was the scaling based on size.

18:41And that was a big factor for us, especially agencies. We could easily do that. The other factor was the fee increases. And then we took out the monthly bill or the billing and arrears and just simply did it the very first day of every month. Every week is the day we zap their accounts. And we get zero pushback, which is great. Clients love it. They don't have to worry about it.

19:04John Jantsch:I'm curious, as I listen to your methodology, I mean, you're talking profitability, you're talking sales pipeline, you're talking about things that maybe start to venture outside of the traditional accounting world. You know, we see it all the time. It's like, we're doing an amazing job generating leads and they're walking out the back door because your customer service is terrible. So we have to get into their customer service, right? I mean, or otherwise we're going to get fired. And so I'm curious, how do you handle that? Because some of what you're telling people is their marketing is terrible, right?

19:35John Jantsch:Do you tell them you need to go hire this or you need to get an agency or do you actually have partners that you work with? Well, it's kind of funny because you work with agencies, right? And so to tell an agency that their marketing is terrible is kind of a tough one. But what we do get into is the sales outlook part. And we say, hey, we built this great forecast for you. And that forecast says you're going to pick up this many clients and your churn is going to be really low, whatever that might be. but when we look at it, we build that forecast based on the capacity of the team and then the last step is taking that sales outlook, whether they're using HubSpot or whatever, we come up with a good methodology to determine really, is that forecast realistic?

20:15Because they're not getting as many opportunities as what they say to be able to afford the people that they have. Or maybe they're getting many more opportunities and because of that, their team isn't big enough. So that's where that sales outlook is at, that fourth part of the puzzle that we have to look at it and say, you know, hey, you need to generate more revenue. How are you going to do it? And then that conversation comes about, you know, hey, well, you know, and it's just simply a conversation at that point. You know, we can't run their business for them by any means. But maybe it's like, you know, hey, what are you doing with, you know, what are you doing with the paid media?

20:46Or what are you doing with, you know, SEO or whatever that might be? And then we start getting into that conversation. And that's where they, you know, maybe the light bulb might go off and say, you know, hey, we're the cobbler shoe type of thing where we probably should outsource our own marketing versus bringing it in-house.