Jeremy Weisz 19:49
I’ve heard varying thoughts on this I’m curious of your thought as far as reserves go, because you mentioned that how much reserve I don’t know how the terminal months? So like, what are some of these months? You should think about?
Ryan Watson 20:05
Yeah, so we use three months as like our standard rule of thumb, three months of operating expenses. So, you know, don’t sell another dime of bookings, and also another dime of work, can I with the cash on hand or the current, cash plus some receivables, I have high degree of confidence collecting, Can I keep this business open for the next three months? However, that’s such as you know, that that rule of thumb can change based on certain factors, right. So like, if I have a high degree of unpredictability or, or really chunky cashflow, or low visibility into my pipeline, I might want to keep more and if it’s the opposite, where I’m in a recurring, I got a retainer-based business, I’ve got credit cards done file, you know, I have a high degree of predictability, then as an ownership, I might be more willing to distribute more of the profits and leave less of the money in the business because it’s not necessary. So yeah, that we’ve got to flex up with flex down. So But three months is kind of like our standard rule of thumb absent whatever.
Jeremy Weisz 21:13
I want to talk and get a little granular with the different phases? And maybe yeah, we can talk about some scenarios, and then that will we can get into the weeds with some of the KPIs there. But let’s say there’s a I know you’ve dealt with agencies coming to you, they’re struggling to even make payroll. So we’ll start in like that, that phase all days. So there was one in particular, I know that they came to you in that. What did you do?
Ryan Watson 21:41
Yeah, this was pretty recent. Right? And, so this was sort of somewhat recent clients had come to us, after having, unfortunately lost a few important retainer clients, and was just feeling some headwinds in the market. I don’t think, I’m sitting here on March 3, I don’t think that’s a completely rare emotion, given the kind of economic uncertainty so this agency owner was feeling that as well. And look, this owner, like so many, so I’m not shaming this behavior at all, I’m acknowledging it, when things get bad, the reaction is, I’m gonna worry about all the other stuff, like I’m gonna really, I’m gonna get infatuated with like, my AP process, or my expense reimbursement tool or my like, operations workflow, because like that stuff I can control. And the really hard thing that actually matters is scary. And it’s something that I can’t control. Right. So this agency, after having lost some of these retainer clients, had a solvency problem, I don’t think realize to the degree that they had an insolvency problem. But the first thing we did it, we run a client due to the Maslow’s hierarchy of needs, or the Upsourced hierarchy of needs. And this business and specific had a really low runway, right, so given the current stage of the business, and what we had line of sight to in the way of cash and receivables, we’re looking at it like less than two months of runway closer to one month of runway. And that’s those are alarm bells for us, right? And so we’re hearing AP conversations, we’re like, hey, stop the presses. Let’s not worry about that right now. Right? Let’s worry about this one singular problem, which is how do we keep this agency alive. And in that case, there were a couple of solutions. The first is obviously revenue related, right? Like this is part of this problem, or part of the solution sales generated this particular agency had recently experimented with a different offering. And the solution here was like, let’s put that on the, let’s put that on ice for a second, let’s go back to selling what we know how to sell. Because we got to build, we got to carry ourselves out of this problem. So that was number one. Number two was, we’ve got to lighten our burn, right? Our runway is a month, and in part because we’ve got too much overhead. Unfortunately, sometimes overhead is a nasty word for people. And so we had to make some tough choices related to headcount. And so look, we made those solutions fast forward and in the moment, those are never fun to hear. But this business to fast forward a couple of weeks, this business owner comes to us like proud as a peacock like, hey, I took your advice. I did what I had to do, it was really hard. Like I lost a lot of sleep. But man do I feel like a giant two ton weight was lifted off my shoulders. And I’m feeling good, like, hey, we just got I got this new client that just signed I got a couple I feel really good about and even without those things, like my runway just doubled because, like, I got a bunch of utilization sitting here. I didn’t I didn’t have worked for these people. I’ve unfortunately had to let them go. And as much as I hate calling the loss of employees, in some cases success. Unfortunately, that is what businesses need in some cases. And that is a success when you find yourself in that creating phase, and in some cases, you’re heading the wrong direction in the creating phase. And so again, the lesson there, like a lot of ours is just unrelenting focus. Hey, forget about all this other stuff. Got one thing that matters, it’s your runway. We’re going to fix it and In this case, what you did that was a happy ending.
Jeremy Weisz 25:03
There was another scenario, Ryan, where there was a million dollar agency, but there wasn’t a lot of profit there.
Ryan Watson 25:12
Yeah, so the million dollar this is a very common archetype for and I like it because I have a lot of sympathy for this. I’ve been this business owner. So I know it’s super well, but yeah, like the very classic archetype of an agency, where they come to us and they got to a million they’ve arrived. But this agency she, you know, owned a job, right? She did not own a business, you own a job wasn’t sharing a lot of profit, saying, hey, how do we fix this? Right? So we go through the hierarchy of needs businesses solvent, that’s good. Not earning. So the next Hierarchy of Needs is like Project profits. We’re not we look at the gross margin snack rate. Right? So we start the conversation with just like our Well, let’s look at the top five most profitable projects that you have the least five most profitable projects, you have see what we can figure out here. So this, she brings me like her top five revenue, like top five billing clients top bottom five billing clients. And so like, what’s interesting information, but it’s actually not what I meant. That’s not what to ask for. I’m not looking for how much revenue we charge. I wonder how much profit we’re making on each of these projects? Of course, we get like the blank stare, like, I don’t know. I mean, I’ve got salaried employees, whatever. It’s like, okay, got it. Well, let’s figure this out. Right. In this particular case, one of the solutions was, well, we don’t have the data to answer that question. We’re not tracking time. And this is a conversation that we have a lot. We’re not like time directing, like gurus. But so often, it’s an important piece of information if you find yourself stuck at this stage of the hierarchy of needs. And so we said, Okay, well, we need the time, we need to track times we know what the costs, what the hours are being put to each of these projects, we know for making any money or not. So we implemented a tool, we built a process, we actually in this case, got in front of the client and their team and help them sell it in. Because a lot of times, there’s some like, some negative feelings about the concept of time tracking some big brother emotions, we just wanted to make sure it was clear what the motivation was, why this actually helpful, in many cases for the employees. And so got some buy in, let it go for four months, right? We come back and say, all right, great. Now we’ve got some information, let’s figure out what’s going on. And so if you’ve got a gross profit problem, by the way, you have one of two problems to drivers, if that one driver is utilization, you’ve got service people that you’re paying for, and they’re not generating revenue for you not doing they’re not doing enough work. Okay? So utilization is one problem or rate per hour, like you have a good utilization, they’re doing a lot of billable work, it’s just the realized rate on them is bad. So it’s one of those two problems. So we use that data to say, which is it in this client. So in our case, utilization was good, we try to target like firm wide, including non-billable people like 65 70% utilization, she was over that. So we were good there. The next was, was rate per hour. And that story was much worse, right? So in her case, their rate per hour was like, not even double the fully loaded cost rate of each of their employees. And that’s just not going to get you after accounting for unutilized time, it’s not gonna get you anywhere close to a gross margin of 50%. And so what we found was like, look, when we’re proposing these, we look good, like our cost rates are three to four times expect our billable rates, that what we expect to earn is like three to four times what the fully loaded cost rates were. Problem is we just got a bunch of projects blown scope. And we’re not doing a great job of communicating that we’re blown scope, we’re certainly not doing a good job of billing for that overage. And that’s killing us. And by the way, the most common reason why gross margin is bad is this. So I’m not surprised. But like, once we were able to identify that was the culprit, the solutions, almost trivial, right? Like we have the data, we have to track it, we create, we create a feedback loop to identify when we’re approaching sort of the budgeted hours on a particular project. And we have conversation with our client, on whether we want to rein it in, or we want to build over and in both cases, we can keep our margin there. And I can tell you that this is an ongoing socialist, a relatively recent client, but we’ve already seen gross margin tick over kind of like our low watermark for them. And we’re feeling right, right, easy solution once you have the data, but getting the data is not always intuitive. And so that was good about that.
Jeremy Weisz 29:22
Yeah. I mean, sometimes clients don’t even realize it, right? If we don’t…
Ryan Watson 29:26
Totally, yeah. None of its you know, it’s you don’t know what you don’t know. I mean, none of the stuff that we do is like magic or mystical right. But if you’ve not gone through it, like it’s not intuitive.
Jeremy Weisz 29:37
Once someone has the data, so the data they need for like Project profit, right? Yeah, they need the hours tracked and how much they charged. You Is there anything else you need to analyze the project profit.
Ryan Watson 29:57
Well, in a very traditional like service day contract branding agency, that’s going to be pretty much it. It’s just your costs are people and your revenue is what you’re billing them. There’s definitely some production works and media work where you have the additional out-of-pocket costs. So like, for instance, in our influencer agency, we had media costs, we had content production costs. And we also which were out of pocket, they were housed external costs. And we also had the hours. And so in some cases, when out-of-pocket costs are passed through costs are substantial, having a good mechanism, and that’s kind of the other like flag, out-of-pocket costs pass-through costs are probably the number one thing that agencies who come to us don’t track well. And it dramatically distorts their picture of whether they’re making money or not. If you have seen significant out-of-pocket costs. That’s something that you really have to track and segment away. Well. So anyways, but what though? That would be the other thing to add the out of pockets? But yes.
Jeremy Weisz 31:00
Ryan, are there Time Tracking Software? There’s a lot of tools out there. But I don’t know if you’ve seen a bunch of like, what tools do you see people using that are good for that? There’s I mean, if that’s inaccurate, it kind of creates an inaccurate, you know, orderly outcome on the other end?
Ryan Watson 31:20
Yeah. So I’ll answer your question, which is, I really like hardest. But I also am a I’m a firm believer in the idea that everybody thinks they have a software problem, and everybody actually has a process problem. And so what I feel stronger about is like, I don’t know, if you do Google Sheets, if that’s what you want, it’s probably the best software that’s ever been invented. But make sure that you’re doing it every day, which I know feels like a lot, but like, oh my gosh, that we’ve read studies, and don’t ask me to tell you what the result is. Because I can’t think about top my head. But the percentage is dramatic, which is the degradation in like the quality of the data, going from daily time dragging to weekly time tracking. So look at this matters, and you’re really trying to solve a problem like she was do it daily. And the other thing is, like, time tracking should be everybody’s problem, right? So if it’s like, hey, Team track time, that me the owner, for this other person, we’re not going to track time, like that creates a lot of resentment. It undermines the importance that you’re trying to communicate. And so down track is a team sport, do it every day, and just choose something but like we use Harvest here. And of course, internally, a lot of our clients use Harvest. And there’s a bunch of tools that integrate with Harvest, that are good for kind of capacity planning that stuff.
Jeremy Weisz 32:33
So how long does that take you? So someone? lumps on your desk, right? Hey, here’s the data for this project profit. Yeah. How long does it take to analyze? Typically for you?
Ryan Watson 32:50
Minutes. Minutes. Yeah, I mean, it’s not hard at all right? Like, as long as like, we’ve collected the data in a way that we can look at, right? So you know, we look at our revenue, and we can assign it to projects, which if the process is the way that we’ve helped set it up, very easy, it’s already done. And again, the time tracking, if we’ve set it up properly, where we’ve got like, the
Jeremy Weisz 33:09
Big ifs there, you know what I mean?
Ryan Watson 33:12
Yeah, maybe a process problem, that it’s not a software problem, maybe there’s some, the best tools, you know, we are big fans of parallax, for instance, such a great tool, it’s but it’s, it’s very powerful. And if we’ve ever seen any, any challenges with it, it’s not a function of software, it’s that like, it requires a really good process and somebody doesn’t own the heck out of to be successful. And that’s the thing that falls apart. So you’re right, if you’ve done it, right is trivial. The analyzing can be automated, in most cases, we do automate it. However, we don’t have like a really good process that has good compliance, then the time is infinite.
Jeremy Weisz 33:51
Yeah, yeah. So the next phase, so in the 3 million phase, what are some of the I know there’s a scenario you want to walk through in the 3 million phase? And then some of the KPIs
Ryan Watson 34:07
Yeah, yeah. So the 3 million phase is really interesting, because again, I think like, you know, when I think about the hierarchy of needs, that I went through, you know, solvency project profit, reserves, net profit, and then like repeatable revenue growth, and that’s kind of the Capstone that’s really important. I’m throwing out these thresholds for each stage. But ultimately, like you’re not in the growing your agency phase, whether you’re three, five, whatever, if until you’ve nailed that top piece, the repeatable revenue growth once you’re there, now you’ve got this as I kind of alluded to, before we get this whole is a very interesting business, which is like again, things start to break. And you just, you cannot bear hug as an owner or partners, all the things like you need to have processes and systems that operate Apart from you, where people know people are empowered to make decisions, and they know what decisions they need to make. And that requires a whole new set of challenges. I can I can tell you that we had, I just remember because I lived in it was so painful, I remember that that phase is at a holiday. This was the agency that we that I had sold. I very much remember the like the 3 million. And you also start to feel because you’re trying to bear hug everything. And that’s not possible you have, things start to mistakes start to happen in your work. But also like employees start to you start to see more turnover, you start to see more like morale problems. And we definitely had that we definitely had that. And I think..
Jeremy Weisz 35:52
Why do you see more morale problems at that point?
Ryan Watson 35:54
Well, because I think like in the case of apology, I think there was a growing number of people who felt like their voices weren’t being heard. Because the people who are insisting on controlling the decisions are increasingly increasing layers away from the actual work being performed. And the further you get, the more friction there is just doesn’t work. You’ve got to empower people to like run. And we felt that. And so one of the solutions for us was expanding the leadership team and really empowering these next level of leaders to own with a high degree of autonomy, different pieces of the business, all the way to the p&l. And again, I’ll just say like, this wasn’t necessarily as true to all of you, but like, I have this conversation a lot with agency owners, agency owners who spend their nights and weekends and vacations, agonizing over their businesses and decisions. They just think to themselves like, oh, my gosh, nobody’s gonna think of my business this way. They’re not ready to be on leadership, because they don’t care like I care. Yeah, no kidding, nobody will, let’s forget about that. Drop that and that is an unreasonable bar. You need people who are good stewards of your business. And you need to lead and by the way, those people often don’t become the kind of steward to your business that you want them to be until after you promote them. And they get that feeling. So anyways, one of the key things that we did at colleges we did, we leaned into that we promoted a fresh round of leaders. And like I said, we exposed the p&l to them. So this leaders now had, as I mentioned, at Ahallogy, we were an influencer agency. So we had media revenue, we had content production revenue, and we had some service revenue. And we had owners of each of these areas. And they now join the leadership team. And they own p&l, like you got your margin report, we had monthly business reviews, and you are now empowered to present to the leadership group, the results of your last quarter, or your last month, rather, down to the p&l impact the margin of each of your projects. And you got an opportunity to sort of celebrate the wins, but also propose solutions to margin problems or service problems. And I’m telling you, I mean, again, I do this for a living. But I was blown away at the kinds of solutions to problems I knew we had that I never would have thought about because I was so many layers removed from how the sausage was being made, that once we empowered them to say no, no, you own this, and it’s your job to come up with the solution. Their solutions are so much better. It’s like, wow, we are a better company. Because you are now we hear and hear this whole time. It’s like are they going to do they think about it as much as we do blah, blah, blah, no, no, that in many cases, they’re better leaders. And that was, in our case, a transformational decision. And we applied that decision in a bunch of other areas with regard to incentive comp, and equity plans, and just different ways to say, oh, my gosh, we need to empower and incentivize as many people to make the right decisions. And our job isn’t to make the decisions, but it’s to create the framework within which we want them to make the decisions. That’s the whole game at the three to 10 million. That’s it. That’s the game.
Jeremy Weisz 38:59
I really love that. Ryan, quick question on that. So, that stage, growing from a one to three and three and beyond, you know, I find when I’m talking to people, the it’s a relatively flat organization, right. Yeah. And that’s in so in, there’s maybe different departments that need leaders. How do you prioritize that? Maybe in that agency, where did you plug in leaders first, if you can’t, from a, maybe a budgeting perspective, okay, we know we need five different leaders in these departments. In that company, where did you start plugging in leaders first, or was there a prioritization there?
Ryan Watson 39:39
Yeah, it’s your question. I haven’t thought about it, but I will answer you off the cuff. I mean, I guess we were a, we had a mentality around hiring in general, which is we hire when it hurts, right? As opposed to, we’re going to hire in anticipation of pain. Let’s be ready for this. We’re gonna get to this phase, we’re gonna need this leader, let’s get them in place now, like, that’s such a fallacy, like you need them so much slower than you think you do hire when it hurts. And so some of our work like are some of like, our media work was operationally more complicated and the impact of margin was higher, like, the volatility was much greater. So we leaned in there maybe a little bit earlier. But it was through the lens of like, hire when it hurts.
Jeremy Weisz 40:33
Yeah. So I know, we have a few more minutes, but I want to touch on the eight to 10 million plus, and I know, there’s probably a wide degree of variability with this group, but maybe talk about one case that sticks out and some of the KPIs that they were looking at this stage.
Ryan Watson 40:54
Yeah, so I guess what I will say is like, once you get out of in that growing slash scaling the ladder to now the KPIs don’t dramatically change, like, and the biggest difference between, like, in that that prior bucket that we were talking about the growing phase is you’re using a lot of the same profitability based KPIs but you are now disaggregating them to individual owners, you’re creating more ownership through more granular KPIs, that ladder up to the company level. So departments revenue model, or product lines, whatever it is, once you’re in the 10, it’s like a change that dramatic amount in terms of like how you’re evaluating it. But what I do think is, the game at the 10 million is now more about like, you’ve decided that you wanted to be a really big business, you also need to decide like, why and like to what end. And so I’d say a lot of it ends up being like you are starting to add very specialized skill sets. And you’re also growing in different ways. So like this is where while we always talk about Exit Planning, and m&a as like a potential piece of the strategy, this is where it actually becomes really relevant. So we find our agencies that are at the 10 million mark, are either laser focused on getting acquired, or laser focused on acquiring others growing through inorganic growth, in addition to organic growth. And so a lot of the value, a lot of the discussion ends up being very specific to one of those two paths. But as you said, those are unique snowflakes, because I just in my experience, we have a lot of agencies who exist because they want to do great work with friends, like they just love. I mean, they are creatives because they’re creative, they cannot imagine anything else. And it just sounds like a lot more fun to do with friends in an organization they’ve built in to do it otherwise. And we love that. And that motivation doesn’t necessarily lend itself perfectly to I want to go grow a $50 million agency, many of our agencies don’t want to do that. So we found a lot of people who, like it’s just a lot less stressful to run a growing agency three to 10 million. And so that is almost always a goal for people but over the 10 discretionary got a lot of folks who just don’t want to do it.
Jeremy Weisz 43:12
Love it. First of all, Ryan, I want to be the first one to thank you this has been tremendously valuable. And I want to point people to check out upsourcedaccounting.com to learn more and more episodes of the podcast. So thank you so much for joining me and thanks everyone.
Ryan Watson 43:33