Accounting for Advertising and Marketing Agencies

by margento | November 22, 2022

You wouldn’t want your client’s marketing strategy to be all over the place, would you?  As an agency, your strategy involves getting an understanding of your clients’ buyer’s journey, and sales process and you create a strategy to deliver the best results.  Accounting and taxes are no different from that.

Your accountant should spend time upfront getting to know your systems and processes, what you have implemented in the past and discover what works and what doesn’t.  From there, use a custom-tailored approach to get you the results you’re looking for.  Financial clarity on key metrics and automation to save you time.

Key reports for agencies

Profit Report – you want to have 100% financial clarity on your income.  Profit reporting is the basis for some of the biggest decisions in your business.  This report breaks down all your revenues and expenses.  If it’s not accurate, you could be making wrong decisions.  You don’t just want to know your net income either, you need a detailed breakdown of your revenue streams and expenses so that you know exactly what you are spending money on.  With accuracy, you can budget and forecast and compare budgets to actual so that you know if you are hitting your targets or not.  Without this information, you could be making poor decisions to hire more staff, increase budgets for ad spending, and many other key decisions.  

Customer Acquisition Costs – When your profit reporting is accurate, we can determine what your customer acquisition costs are.  This is key to your business’s growth because it tells you exactly how much money you need to spend to acquire new customers.  Your customer acquisition cost is calculated by taking your total sales and marketing expenses divided by the total number of new customers.  Your accountant should be the one who reports this metric to you because they should know all these details after reconciling your books.  Our agencies get this metric delivered in their monthly report as a trailing average, so they know whether this number is improving or getting worse over time.  With this number accurately reported, you can move to the next calculation in the value equation and understand your customer’s lifetime value.

Customer Lifetime Value – How much does one new client earn your business in the long run?  If you don’t know this metric, you can bet your competition does.  And they are using this calculation to land more deals than you.  Your customer lifetime value is the average value per deal x # of deals per client x # of years they are your client.  Let’s use an example from the accountant’s perspective.  XYZ Agency engages with us for bookkeeping and taxes for $10,000/year.  The gross margin on this engagement is 50%.  This means our average value on the deal is $5,000.  XYZ Agency has 1 transaction per year for $10,000 and works with us for 10 years.  That means the customer lifetime value is $5,000 (gross margin) x 1 transaction per year x 10 years = $50,000.  Wow!  This client would have a lifetime value of $50,000 with our firm!  What a great client.  Getting to think about customer lifetime value is a key thought process that drives your business growth, because the more you can increase this value, the more long-term revenue, and profits you will earn.  But there is more to it than just numbers.  You need to increase customer lifetime value in other ways, such as client loyalty and other value-added services.  To get someone to stick around for 10 years means there are more reasons why they should do business with you.  You have to stay on the cutting edge of innovation to come up with new ideas on how you can keep these clients around.

Revenue Per Employee

This is a very simple but important metric to calculate.  Take your total revenue divided by the number of employees on your team.  Does this number make sense?  Whether it makes sense or not depends on your goals.  Every business has different targets.  We have seen some of these metrics be as high as $500,000 per employee, down to $150,000 per employee.  It depends on your goals and where your agency lies on the value spectrum. 

Key Automation

We know that you creative agencies out there are tech-savvy.  So here are some aspects of your finance functions that must be automated.

Accounts Receivable

Cashflow is the lifeblood of your business.  Make sure you are paid on time by invoicing directly from QuickBooks Online and using the in-app credit card collection feature.  If your repeat customers are happy to pay direct deposit, you could even set up your accounts receivable process using an app like Rotessa or Plooto to save on those pesky merchant fees.  We highly recommend to clients get direct debit payments when possible.  3% of your total revenue adds up quickly!                 

Accounts Payable

Plooto is our go-to app for payables.  The thing we love most about Plooto is it’s reconciliation feature.  This makes matching bills to bill payments seamless and keeps your records accurate and up-to-date.

Zapier

If you’re like most agencies we work with, you are using a CRM or sales app of some sort.  If it doesn’t come with direct integration, use Zapier to connect your apps together so that your finance function is interconnected and removes duplicate contacts/information from your database. 

Dext

Dext Prepare will be your main hub to all expenses, bills and invoices.  It connects with your cloud apps and helps you fetch invoices directly from service providers.  For example, connect your Google, Facebook, and Outlook accounts to Dext, and let the app fetch your invoices directly into Dext.  From there, we take your invoices and match them to your payments in QuickBooks or Xero.  What you get at the end of the day is a hands-off approach to gathering financial information for your accountant.  We accountants love this feature because we don’t have to keep bugging you about invoices, and get can get the info we need with ease so that your records are 100% audit-proofed on the cloud.

These are just a couple of the automations we recommend to our agencies, but there are plenty more areas where you could improve your finance function.

At the end of the day, you need to think about how your finance function is automated and delivering you the financial clarity you need to make better decisions.  There is more to bookkeeping than keeping records and audit-proofing for CRA.  The key is to understand exactly what these numbers mean and work with your accountant to create an action plan and grow your business.

Contact Argento CPA today if you have any questions or looking for expert advice on accounting systems setup and reporting on your key numbers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances

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