You can be on Entrepreneur’s cover!

Mo' Money, Mo' Problems: Surviving Your Digital Agency's Success Enjoying the afterglow of landing that big account? There may be financial traps ahead.

By Geoff Mcqueen

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Mad Men | AMCtv

The recovery of the economy, combined with the accelerating move to embed smartphones and tech into our daily lives, is leading to more and more business investment in digital marketing. The result is a boom for digital agencies: According to Ad Age's 2014 Report, digital work accounted for more than a third (35 percent) of U.S. agency revenue in 2013.

Related: Madison Ave.'s New Kids On The Block: How Big Data Is Shifting Advertising's Landscape

Looks like we're not in Don Draper's world anymore.

With such growth across digital marketing, agencies are securing larger, more substantial accounts, giving them more revenue to hire the best people, do their best work and continue to climb the account ladder into the big(ger) leagues.

But while an expanding client roster and growing teams are signs your company is doing great work, these changes can also create a ticking time bomb if you're not careful.

More clients means more work, more projects and more costs every single day -- and a bigger risk that just one project going sideways could kill the whole company.

Time: the most perishable inventory

All professional-service businesses work on the same basic model. They do work for clients (either on a fixed-price or billable-time basis) through projects, campaigns and ongoing retainers, and the work is done by their talented (and expensive) people.

This means that their staffs' time is the primary resource for serving clients, completing projects and ultimately getting paid. The problem is, time stops for no man. It bleeds away every minute of every hour of every day, whether profitable and productive work is being done by the people being paid or not.

When your agency was small and trying to break through, you probably had pretty small costs and could manage "by the seat of your pants." Operating based on the "feel" of how busy your small team was, combined with your bank resources and sense of impending deadlines across multiple projects, worked just fine.

However, agencies grow; and once an agency has 20 employees, it has 160 hours a day to use and be successful, and those 160 hours a day will cost the business whether they are productively utilized or not. If your average person is being paid $70,000 per year, just opening the business' doors each day costs over $6,000 in labor costs alone.

The sad truth is, an agency may be growing, but if managers still rely on manual methods of managing projects, budgets and workloads, the inefficiency and leakage grow even faster. This helps explain why only 2 percent of professional services businesses make it to the stage where they are companies with more than 100 employees.

To get a sense of the costs of lost or leaked time in a business, AffinityLive conducted a 2014 study that found that only 36 percent of people fill out their timesheets weekly or less. Studies (see the Ebbinghouse learning curve) have shown that the wastage of time spent tracking agency employees could be limiting profits.

Another factor in time tracking is that many growing agencies rely on outdated time and scheduling management tools that are manually operated and highly inaccurate. These tools may have worked well when a company was smaller, but now, as a thriving business, it might find that these outdated tools are hindering its ability to grow.

The same study mentioned above found that the average professional services business loses 40 percent of its people's time every single year. A comparison might be made to working a three-day week or only showing up to work at the beginning of May each year.

Related: The 4 Digital Advertising Trends That Are Reshaping Advertising

Projects: the bigger they come. . .

With more clients and higher project budgets, companies find that the consequences for not completing projects successfully grow larger. Think of a car wreck; the damage is worse when the vehicles involved are bigger and moving faster.

The lesson: If a big project goes sideways, it can easily threaten the viability of the business. The bigger the projects come, the longer they take, and the more costly the problems become, often frighteningly quickly.

With multiple high-paying projects in the works and dozens of expensive people needing to keep busy, it's no longer effective to manage these projects with a mix of spreadsheets and white boards. Without a system in place and the right technology to manage these projects, it's too easy to make small mistakes that can get the business into trouble. Another study by AffinityLive, in early 2015, found that two-thirds of professionals don't use any form of project tracking -- which helps explain why so many projects run over time and over budget.

Cash: more king than ever

The third big factor associated with growing your agency, having more people working on bigger projects, is cash, or more importantly, the increasing gap between when you spend money and when you get paid.

Taking on more clients doing larger projects means hiring more people. While this is great news for those wanting to grow bigger, more successful businesses, in the short term, will be seeing higher costs, which start from the first day that new employees come on board.

Similarly, bigger projects generally take longer to complete, and while the revenue is more lucrative (and the projects more impressive, helping you land that next big account), you'll generally wait longer for that final "project-delivered" invoice to be paid.

This is where the short-term cash costs of growth can be enough to sink your business. If you have clients paying you after 45 days, and you had to pay your people after 15 days, you're carrying a full month of payroll out of retained earnings. You're probably also dealing with people who aren't (as) profitably productive for the first month or two, as they become familiar with the company and its processes.

This means that each time you grow by 20 percent, you'll need two months of cash just to fund operations until your business gets paid -- and this sum can be even higher if your people take longer to get up to speed or your clients pay you more slowly than within 30 days.

The best way to overcome these cash pressures is to get more cash upfront from your clients. Never start a project without a deposit. Ensure you time your milestone payments with your costs (either for work done each month, or in ways where you're in control of the milestone being hit and aren't dependant on the client, who may well cause delays).

Also, don't be afraid to walk away from a juicy-looking deal if the payment terms backload payment; you'll go broke before you get to that pot of gold at the end of the rainbow.

In summary, the boom in the digital sector poses serious threats to growing agencies. Whether the growth causes cracks to appear in business operations, or larger projects cause damage because they're not well managed, or you encounter a cash crunch due to higher short-term expenses for more lucrative projects: The risks are real.

They're also a big reason why only 2 percent of professional service firms make it into the triple digits. These problems are even more dangerous because they're often masked by the afterglow of winning a big deal or marquee client; things "feel" like they're on the up and up.

For all these reasons, getting ahead of the issues -- putting the right systems in place to manage operations and projects, and being smart about getting money from clients faster than ever -- is critical to growing your business successfully and profitably in the middle of a hot market.

Related: 9 Marketing Mistakes That Cost Your Business Money

Geoff Mcqueen

Founder and CEO of AffinityLive

San Francisco-based Geoff McQueen is the founder and CEO of AffinityLive, a company that creates cloud-based email automation, customer-relationship management, project management, service and billing software for the professional service sector. Prior to founding AffinityLive, McQueen created a digital agency in Australia.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Side Hustle

This Dad Started a Side Hustle to Save for His Daughter's College Fund — Then It Earned $1 Million and Caught Apple's Attention

In 2015, Greg Kerr, now owner of Alchemy Merch, was working as musician when he noticed a lucrative opportunity.


Bring the Fun to Work with This $40 Xbox Accessories Bundle

Includes cables, charger base, a gaming headset, and more.

Thought Leaders

We Live in a Data-Driven World — Here's a Case For Listening to Your Gut Instead

Honing and trusting one's intuition can lead to quicker, more effective decision-making. Here's how to harness the power of listening to your gut to make the best choices.

Growing a Business

Bantam Bagels' Founder Fell Into a Mindset Trap 'People Don't Talk About' After Selling the Now-Defunct Business for $34 Million — Here's What Happened

Elyse Oleksak and her husband Nick founded their mini bagel business in 2013 — and it was an instant hit.

Business News

Yes, You Can Buy a Foldable Tiny Home on Amazon — And Now It's Selling for Less Than $12,000

The waterproof and flameproof house was listed around $35,000 a few months ago.

Money & Finance

Setting Your Business Up for Success Through the Rest of 2024

CFO's mid-year update: Understanding the latest trends and regulations impacting business finance.