Why your agency is destined to fail?
If you google failure rates for digital agencies, you will find various statistics. None are definitive, but a survival rate under 50% after 5 years looks about right.
So why the high attrition rate? Why do so many dreams turn into disappointment? Maybe some agency founders aren’t good enough designers/marketers/consultants or coders.
I have a feeling, completely lacking in evidence and entirely anecdotal, that most failures will be caused, not by a lack of core talent, but by a lack of wider business or commercial knowledge.
What are the things that new Agency founders need to know to get through the early years? Here are my favorites:
At some point when you start hiring people it will become crystal clear why new business is so vital. You have to cover your costs and then some. And you have to do it every month. You have to balance doing the work right now with investing some time with making sure there is enough to next month too.
It’s easier when there are just one or two of you but as your team grows that fixed cost becomes more and more pressing. The work from your initial clients or contacts won’t be enough, and you will need to widen the net for potential new clients. It’s not my area of expertise but I have seen inbound marketing work, I have seen networking work as well as intermediaries and that old favorite, ex clients who are advocates.
Whatever the source, make sure you keep an up-to-date pipeline. If you like spreadsheets I have a pipeline spreadsheet to help you get started – just email me (email@example.com), and I’ll send you a template.
I personally prefer to use close.io but for starting out the the sheets will get the job done
You don’t need to be a qualified accountant to be a success running an Agency. In fact the opposite is probably true, but you do need some insight into what your numbers mean and, more importantly, what they suggest you need to do and how quickly you need to do it.
Understanding finances are vital in life and in business, however you don’t have to be a next warren buffet to understand what are the most vital numbers in your business mean. You need to know you:
- Cost per acquisition
- Cost per show up
- Cost of delivering services
- And many more
This is something that people call “good problem to have”, but they relax and get hit by a sucker punch. You have closed few clients, employed some people and you are planning to surpass Elon Musk in the Forbes list. Paradoxical as it might sound, it is possible to be profitable but be hit but poor cash flow. Kit has to be bought up front and salaries paid monthly but it might be several months before the cash from that healthy growth comes through. Just be (even more) aware of your cash flow and don’t get carried away with your early success. Delayed gratification and a healthy caution will, literally, pay dividends later.
The best thing to do with a problem is to react quickly. Too often I see Agencies where a potentially fatal crisis has developed where earlier action could have avoided potential disaster.
Part of this is human nature; most founders are optimists who believe things will get better next month. But to make sure this doesn’t happen to your Agency you need to do a couple of things.
First is to make sure you have a robust forecast. Let me repeat this; if you read this and take only one thing away from it is this; make sure you have a robust forecast. By robust I mean only include revenue you know is going to happen. Not what might happen. Not what you think might happen. What you absolutely, 100% for sure, know is happening. The other possible stuff goes into the pipeline. This will make it far, far easier to know when to react.
Secondly make sure you get good, clear and understandable figures from whoever does your numbers. And make sure you get them promptly. Good and early numbers beats perfect and late every single time. Whoever does your figures needs to get them to you promptly – ideally within 5 working days but certainly by 10.
If, for whatever reason, this isn’t possible then it should always be possible to estimate the P&L based on forecast revenue, known salary costs and a pretty good estimate for overheads. It’ll be a little rough but it’ll help react.
Most businesses that fail will fail not because of lack of talent. They will probably fail due to one of the above reasons. The good news is that they are avoidable. A little care and a few well designed spreadsheets should make sure your Agency survives.