The end of the year for your business isn’t just about tying up loose ends and closing the books. It’s an opportunity to reflect on how your business performed, and what you can do to improve in the new year.
But hang on—some of you don’t even know how to close the books properly. If you’re a business owner, this isn’t necessarily an oversight. While you don’t have to concern yourself with the nitty-gritty details, your finance team should.
Not only that, but the same team that manages your accounts receivable should also be able to provide insight into what’s working at your agency and what’s not. Basically, you need the technical and the strategic to-dos of closing out the year covered. If you have one without the other, you can’t set your business up for success.
Start on The Right Foot: 3 Things Your Finance Team Should Be Doing
It’s important to get your house in order at the start of the year. Before you’re off to the races with projects, your finance team needs to get their house in order. Here’s how.
1. Tie Up Loose Ends For The Current Year
First things first: make sure all your completed work is billed, and close all your completed jobs. Have old receivables with clients that haven’t been paid? If there are, assess whether they are collectible, or if they should be written-off. Have a bunch of small balances sitting on your accounts receivable or accounts payable report too? Now is a good time to clean them up.
Secondly, take the time to accurately capture revenue for the year. This is especially important if you do cash accounting throughout the year. For your year end, you will want to make sure that you are adjusting your revenue so that you are not recognizing revenue for work that has not been completed yet. That revenue should be deferred to next year. Make sure you are giving credit where credit is due, and not mistaking gross billing for earned revenue.
While you’re reviewing your financials, perform a reasonability test. Ask yourself:
1. Are there any large costs missing?
2. Are there any expenses that look strangely high?
3. Is your revenue and profit at or about what you expected?
If you think something fishy is going on, ask your accountant to review the details of specific transactions to see where things may be going awry. Often the cause of high or missing costs is that a transaction has been miscategorized.
2. Review Your Current Financial Health
It’s time to study your KPIs. How did your business perform on key metrics like revenue per full-time equivalent (FTE), staff cost, and overhead ratios? Generally speaking, staff costs and rent should be an agency’s biggest expenses. If you manage your staff costs and your overhead expenses well, your business is unlikely to have a profitability problem.
This is also the time to take stock of your client list, and assess who contributed the most revenue — and profit. Overall, did you achieve the revenue you hoped for? The profitability? No matter how the year shook out, it’s important to reflect on what decisions (and which clients) lead you to this point.
You may have some epiphanies. For example, you may discover a specific client contributed tons of revenue to your business. However, in some cases the cost of doing business with them is so high that their overall profitability is less than you anticipated.
“Should old acquaintance be forgot?” Well, that depends. If you do have unprofitable clients, it may be wise to make a plan to improve their profitability in the coming year. Occasionally, agencies will find themselves stuck with many small, unprofitable clients that eat up capacity but don’t add much to the business’s profitability. You may need to make some tough choices about which client relationships are worth taking into the new year, and which to leave behind.
On the flipside, you may have a client that is bringing in tons of revenue. And while it may seem counter-intuitive, having a client that contributes more than 25% of your overall revenue isn’t altogether a boon. Don’t get us wrong: it’s great that the client is so lucrative. But it should also prompt you to think about what you would do without their business. Things happen, and you want to make sure you have a plan B if that relationship were to end for some reason.
3. Plan For the Following Year
Once you get an accurate sense of your current financial health, you can budget for the new year. Consider your revenue by client, your staff costs, and your overhead costs. Is it time to increase your staff number, or add new roles? Depending on your profitability, you may also consider developing your current employees or investing in marketing your business. Even agencies who aren’t interested in growing in the new year, who are happy with their size and capacity, can still invest in their team.
Regular Financial Planning and Analysis Guarantee Your Success in the New Year — and Beyond
In our experience, the businesses with the best shot at meeting their financial goals are those who engage in regular review. The problem? Most financial teams aren’t equipped with the personnel they need to review the business’s performance consistently. And some don’t even know what to look for when they review financial statements.
It comes down to where your team’s expertise lies. Finance teams without agency or professional firm experience don’t typically keep track of the most important KPIs for agency work. They’re unlikely to know what “good” looks like, or the red flags that signal when something is off.
Additionally, if you don’t have strong leadership in your accounting team, they might not have the most effective processes around billing, collections, payables, cash management and financial planning. This may be due to gaps in capabilities, gaps in technology, or simply not enough resources to complete the work to fidelity.
An Outsourced Accounting Agency Can Get You in a Routine
If you’re not getting what you need from your in-house finance team, add “contact a remote accounting firm” to your list of New Year’s resolutions. Like personal trainers, we can help your business stay in good financial shape throughout the year. You get a team approach to your finances, instead of relying on one in-house solution with an interminable list of responsibilities they can’t fulfill. Just like your firm provides a team approach to your clients’ marketing problems, an agency-specific accounting team provides a team approach to your accounting problems, often at a fraction of what you would pay for the equivalent experience in-house.