Running an agency comes with its fair share of challenges, and one of the most significant hurdles can be managing the financial aspects of the business. In 2019, my outsourcing company, DUDE, was generating around $800,000 in revenue, yet it wasn’t very profitable. I was only making about $70,000 a year. Despite having strong sales months, there was never any money left over at the end of the month. This was a constant source of disappointment and frustration, and I couldn’t figure out why it was happening.
Ignoring the Cost of Goods Sold (COGS)
One of the biggest financial mistakes I made was not understanding the concept of Cost of Goods Sold (COGS). It wasn’t until I learned from Russ Perry, who ran Design Pickle, that I had a light bulb moment. Russ explained the importance of COGS, and it completely changed my perspective on managing my agency’s finances.
What is COGS?
COGS represents the direct costs associated with producing your agency’s deliverables. For DUDE, this primarily included production labor and software expenses. However, I realized that our COGS was significantly higher than it should have been, which was stifling the business’s profitability.
- Understanding the Impact:
Not having a handle on COGS meant that I couldn’t accurately assess the profitability of each project or client. We were spending twice as much as we should have on delivering services, which left little room for profit and reinvestment. - The Importance of Tracking COGS:
By tracking COGS, agencies can identify inefficiencies, optimize resource allocation, and set appropriate pricing strategies. It’s crucial to ensure that your pricing covers these direct costs and leaves room for a healthy profit margin.
The Consequences of Financial Ignorance
My ignorance about COGS led to several negative consequences for DUDE. Despite generating substantial revenue, our profits were minimal, and the business struggled to grow.
- Lack of Profitability:
With high COGS, our profit margins were razor-thin. This made it difficult to reinvest in the business, expand our offerings, or weather any financial downturns. - Cash Flow Challenges:
The constant cycle of strong sales followed by financial shortfalls created significant cash flow challenges. It felt like we were always playing catch-up and never gaining ground. - Stifled Growth:
Without adequate profits, we couldn’t hire new talent, invest in marketing, or improve our infrastructure. This stifled our growth and limited our ability to compete in the market.
The Path to Financial Recovery
Recognizing the mistake was the first step toward recovery. We took immediate action to address the issues with our COGS and get our financials back on track.
Raising Prices and Cutting Costs
- Pricing Adjustments:
We reevaluated our pricing strategy and made necessary adjustments to ensure that our prices reflected the true cost of delivering services. This helped improve our profit margins and provided a buffer for reinvestment. - Cost Reduction:
We conducted a thorough analysis of our expenses and identified areas where we could cut costs without compromising quality. This included renegotiating contracts, streamlining processes, and optimizing our use of resources. - Improving Efficiency:
By focusing on efficiency, we were able to reduce production costs and improve the overall profitability of our projects. This involved investing in technology and training to enhance productivity and streamline workflows.
Lessons Learned
This experience taught me several valuable lessons about financial management in an agency. Understanding and controlling COGS is essential for profitability and growth. Here are some key takeaways:
- Educate Yourself:
Financial ignorance can be costly. Take the time to educate yourself about key financial metrics and how they impact your business. Seek advice from experts and learn from their experiences. - Monitor Financials Regularly:
Regularly review your financial statements and track key metrics like COGS. This helps you identify issues early and make informed decisions to improve your agency’s performance. - Adapt and Evolve:
Be willing to adapt your strategies and evolve your business model as needed. The market is constantly changing, and staying flexible is crucial for long-term success.
Conclusion
Making financial mistakes is part of the journey for many agency owners, but the key is to learn from these experiences and take action to correct them. By understanding the importance of COGS and making strategic adjustments, we were able to turn DUDE’s financial situation around and set the stage for future growth. Today, we’re more profitable and better positioned to achieve our goals, thanks to the lessons learned from those challenging times. By sharing my story, I hope to help other agency owners avoid similar pitfalls and achieve financial success.