Agency or service-based businesses commonly struggle with leaky profitability. These issues are eminently fixable and don’t need to spell bankruptcy.
This article series examines five mistakes I see 95% of agency-type businesses make in their accounting. (Links to other parts in this series are at the end of this article.) You want to be able to slice and dice your numbers to see where you are losing money — or not making what you could.
In this article, we cover the crucial process of billing. Hands down, this is what brings in the bucks. You can do all the top-notch work you like, but if you can’t bill efficiently, you’ve got problems.
1. Troubles with T&E Reports
Let’s say you’re trying to get an invoice out to a customer. One of the challenges in tracking and billing for time, as you may well know, is receiving people’s time and expense reports — on time and done correctly. The key troubles we run into here are embedded in the organizational culture. That is, the company discipline (or lack thereof) in turning expense reports in.
A number of consulting firms we work with travel out to a client site. There’s planes, hotels, meals, but they don’t hand in expense reports. Tracking those down and attaching the right expense report to the right project is important.
Another challenging issue comes with sorting out the different roles that trigger expenses and getting those expenses into the right buckets in your accounting system. For instance, you might have consultants going out to sell the deal. That expense report goes to selling expense. Then they start working on the project, and the next expense report becomes a project expense. Unfortunately, many firms book the whole enchilada to a general travel account and don’t separate the travel for selling from the travel that’s for the project.
When you don’t separate selling and project costs, you have a much more difficult time drilling into the detail as to the cost components of your business. We are working with an agency that was celebrating wrapping up a massive client project, yet we also knew that the project costs so much to “get sold” that we actually did not accomplish what we wanted to as a business. The project team deserved to celebrate, but it was definitely a learning event for the company.
Reimbursables. Some project costs should be paid back by the customer, so you need a reimbursable expenses account and the discipline to use it. Sometimes costs are supposed to be billed back, but get forgotten. That can become a huge drain on your profitability and cash flow.
It’s possible to establish simple control mechanisms to make sure you catch that stuff. When you set yourself up to get reports in on time and book expenses properly, you can see the effects of these losses at the granular level. And you can plug those leaks.
I want to convey that all these things are very trackable, very doable. You’re truly in control here, and able to decide what you want to see. And once you set it up, you’re good for a while.
2. Escrow and Cost-type Challenges
Two more common challenges we see too much of are issues with hard costs reconciliations and escrow or draw accounts. As with T&E reports, you want to have your accounting systems ready to easily track what you need to track and feed it into your billing systems.
Escrow Account Billing. One of our clients is an ad agency that buys advertising for their clients all month. They say, “Hey client, give me $100,000 on the first day of every month and I will continue to buy what you need.” Then they have to reconcile that ad spend and tell their client: “Here’s what we bought with your money. We used $80K, and you need to top that back up next month, so I’m sending you an invoice.” When they got their accounting set up properly, this process became a breeze.
Billing Many Cost Types. For an interior design client, they were (for example) buying wallpaper and couches and paying contractors. There are different ways that supplies like wallpaper may be billed back to the original customer. Sometimes a designer will mark that work or wallpaper up because they’re managing it and need to be compensated. How that markup happens, how the bill-through happens and getting that charge to the right customer or project can often be a challenge accounting-wise.
This agency has time and expense reports and hard costs all going against, say, the Johnson household. They’re trying to get an invoice out at the end of the month so the Johnsons know how much their project is costing and for the designer to let them know everything is on track.
Getting all that information together is part of the accounting challenge. And establishing some consistent rules for how your company works is also a challenge. Again, much of this comes down to setting business rules and culture. Change involves communicating with employees and creating deadlines and cutoffs. You can say, “We need to get invoices up by this day and therefore we need the information by that date.”
Part of this challenge can be answered with systems and tools. We’ve worked with companies that say, “Hey, if I can do this expense report on my phone, I’ll get it in on time.” So there’s some options there.
3. Over-offering Complexity
Another opportunity I see for our agency or service-based clients is in reducing the number of options — I call them flavors — that they offer in their business model. Imagine a consulting firm whose new customer says, “I want to work with you, but I want to be billed this way.” And they say, “Wow, we’ve never done that, but yes we can do it.” The next thing you know, they’re serving “32 flavors of ice cream”. And at the end of the month, they’ve got to figure out how to get 32 flavors of invoices out the door quickly and efficiently.
The better opportunity is to say, “We offer chocolate, vanilla and strawberry. I know that doesn’t match exactly what you wanted, but could you work within this flavor? We do it this way for this reason, and it works well for us.” Being disciplined around that practice is very helpful.
A consulting firm might say, “We either work in time and materials or we work in quarterly milestone payments, that’s it. We don’t do quarterly payments, we don’t do milestone billing.” Then it’s up to the client to say, “You know what, I only work in milestone.”
Yes, it’s a tough business decision to say, “That’s not how we work, that’s not our history, and this is why we don’t want to do that.” Accounting can get anything done, of course, but there’s definitely a business cost to offering that flexibility. I prefer being disciplined about how you’re going to bill. Contracts can get infinitely complex, and that’s just money out the window for you if it’s unnecessary. Keep your billing simple.
An exception: One AVL client is in healthcare and it seems like every provider they go to wants to be billed in a different way. They tell us, “Our clients are massive companies. We have to be able to bill their way or we won’t get them as clients.” So our job becomes making sure that all 32 flavors are done correctly, if they have to be done. That’s a purposeful business decision that’s expensive, but they understand that that’s the market they need to compete in to win. My point is to make sure that your accounting systems stay in control, so invoices get out on time and accurately.
Good Billing Practices: Worth the Investment
Building effective accounting systems around invoicing is a great way to plug profitability leaks in your agency or service-based business.
Invoicing practices affect cash flow, which affects everything, especially in high-growth companies and startups. Good practices can prevent losses. Billing should not take up a lot of overhead costs either, so your question should be: how can we make it efficient?