Put these habits into practice to improve your firm’s performance.
Every successful business – whether a motion design studio or a law practice – is comprised of Seven Ingredients. But Creative Studios are not founded by business people. They are founded by creative people who often struggle in certain areas, especially in the area of Finance.
As you look ahead to the New Year, here are three accounting habits of highly effective studios. As we say here at RevThink, “Finance is the tool which enables you to influence the future.” I hope you find these tips helpful.
1. Don’t Invest in Client Concentrations
The number one Creative Company killer is client concentrations. Because when a large client (more than 25% of total income) goes away, the cure (layoffs, cutbacks, etc.) is often worse than the disease. Most firms won’t survive the upheaval.
HABIT: When any one client generates a concentration of more than 25%, don’t invest new long-term resources to support the additional business. Hire freelancers and temps instead, even if it means sacrificing profitability. This accounting habit will give you the flexibility to scale up – and down – without threatening your core team. (Definition of core team = those key players who will remain on your payroll regardless of how busy or slow things get.)
Important side note: If you have two or more clients generating more than 25% each, you have a bigger problem. Take a hard look at your firm’s positioning and confirm your team is using a disciplined sales system founded in routine and accountability.
2. Expense Production Employees in COGS
Only your core team’s salaries should be categorized as expenses (i.e., overheads). This includes principals and key positions such as your executive producer (the top person driving sales and account management) or your top creative (the top person representing the creative soul / aesthetic of your studio).
HABIT: Most accountants will tell you to list all employee salaries as expenses on your chart of accounts. Don’t. Employees who are devoted 100% to production (editors, motion designers, producers, etc.) but are not part of your core team should be expensed as cost of goods sold (COGS).
This accounting habit will not only allow you to more accurately determine key metrics – such as your monthly “nut” – but it will provide you with powerful levers on which to push and pull as business grows and contracts.
3. Keep Your Eye on Gross Profits
Top, well-managed creative studios can achieve gross profit margins (total income – COGS) as high as 55%.
HABIT: Track your studio’s gross profit on your weekly financial dashboard. If it dips below 45% on a regular basis, that’s a red flag. Look to an outside financial consultant to give your studio a “health checkup” and help you implement corrective measures. If you don’t have a financial dashboard, have your accountant create one for you ASAP.
Putting Into Practice
As I stated above, Creative Studios are generally founded by one or more creative geniuses. As they realize success, they can’t afford the time to master all the other skills their growing business requires.
So when you are ready to make headway on these habits, I recommend you make it your goal to either (1) master and run your firm’s finances or (2) delegate your firm’s finances to a trusted expert. But pick just one. Because over the long term, hitting the gas while holding the brake eventually leads to burnout.
“You can accomplish anything. As long as you are not the one doing it.” – Dan Sullivan