Budgeting success: your agency's guide to realistic financial goals
Budgeting in an agency is both done for motivating the team for better results, and to support decision making. Many professional service companies have a tendency to create a budget haphazardly. This causes frustration in the whole company throughout the year. A budget that's too low or high will demotivate people, and performance starts to suffer. Read further to get an idea on how you should actually create a budget in an agency.
A half useless budget
You lock up in a room with the management team for a day, maybe two. It’s going to be a lot of numbers crunching. In the afternoon, black smoke rises from the chimney. The same happens again once more, but finally when the day has changed, there it is: white smoke. The management team has successfully formed a new budget for next year.
This budget, like all the budgets before, is a great one. It’s also a half useless document causing frustration throughout the year. It wouldn’t have to be so.
The intuitive (and incomplete) budgeting process
When the end-of-year is approaching, consultancies often start drawing their targets and budgets for the next months. First you draw a desired revenue curve, which gives you a nice growth track compared to last year. You aim for YoY growth a bit higher than the industry standard. Next, you calculate the amount of consultants you need to make that happen. After that, you optimize the ratio of non-billable and billable roles and factor in your averable billable utilization – that's it, it sure is a budget that's ready to be handed to the team to be executed. However, a crucial part is missing.
What agencies forget when budgeting for the next year
Every management team should have a strong gut feeling on next year’s numbers. However, many leave out the most important part: the sanity check. Making sure your budget is realistic is not the simplest task - that's why many won't do it. However, engineering a budget based on gut feeling, especially at scale, is like throwing darts and choosing the number you just hit on the board.
In order to successfully reverse engineer a budget (i.e. do a sanity check), we assume you have set up...
a) …a proper account management process
b) …a clear capacity planning process
An account management process makes it easier for your teams to discover and log new opportunities. Having a capacity planning process to keep resource allocations up to date ensures you have a reliable enough estimate of your near future to use as a baseline for longer term forecasting.
How to reverse engineer an agency budget
Let's break things down:
- Look at frame agreements and confirmed work at existing clients for next year. The target revenue you’ve set subtracted by this baseline revenue gives you your sales targets.
- Assess the current value of your sales pipeline. Account for uncertainty and give deals weights based on their probability of success.
- Figure out the proportion of revenue you need from existing vs. new customers
- Ask account teams to estimate the potential in the largest accounts
- Use historical averages to estimate the amount of sales to smaller existing customers
- The rest of the revenue needs to come from new customers
- Backtrack the amount of deals, proposals, and new business meetings needed: can your sales team pull this off?
- Adjust if needed
After going through the process you should have an idea on whether your targets are reachable or not. Some fine-tuning is often needed: perhaps you need to hire a new sales rep, put more focus on your key accounts, or to simply increase the focus of sales from existing business to new business.
Communicate the budget and have a real-time situation constantly available for everyone in the company. This ensures people will know how the company is doing and they don’t have to guess. This makes wonders for the company culture.
Optimally, you'd have this process as a rolling quarterly setup, so you could update and adjust your budget more often than once a year.
Conclusion
Plans are worthless, but planning is everything. Budgeting is your company’s way of aligning on next year’s goals. Don’t just give your company random numbers to execute on, but backtrack your numbers and make sure the targets can be reached. This makes it easier for you to motivate your whole team, and you have solid estimates to use as basis for decision-making. Don't get hung up on the numbers you've initially set, but be ready to adjust your budget as time passes. Market situation might change drastically, or you might win a big deal out of the blue. Make sure you're familiar with all the key agency metrics before starting to craft your budget to account for everything.
The next and final chapter in the playbook on how to grow an agency successfully will focus on sales management. It's tightly related to budgeting.
