Financial Modeling in a Creative Agency

Even in small businesses, accounting and finance can feel removed from the rest of the organization, with finance directors like me running calculations in the windowless back office or, God forbid, the basement. I’ve worked in a restaurant where the small “office” was tucked away behind the kitchen, akin to working in a sauna.

When small organizations allow accounting and finance to be removed from the daily general business operations, the financial work, ideas, and goals become abstract. The finance team delivers information and advice to business owners, and then can only hope those owners know how to disseminate the organizational objectives to the rest of the team, or watch as the owners keep the information secret, hoarding financial records and goals due to fear of misinterpretation.

The Importance of Transparency

When I came to Gauge Interactive, I found a breath of fresh air in how open and honest the owners are about the business’s finances. Under a policy of prudent transparency,  financials are not exposed entirely, but goals are assessed and the numbers are discussed during each quarterly team meeting. Gauge’s leaders understand an important business truth: Every team member is involved in achieving business goals. Without open communication about the long-term financial goals and the financial state of the business, team members can’t know what goals they should be driving toward. Perhaps more critically, if the team doesn’t understand how their roles contribute to overall financial success, they can’t buy in.

There is a beauty in the flexible and sometimes blank-state environment of a small and growing business. One of my first responsibilities at Gauge was to develop our annual budget and a capacity model. A capacity model outlines financial goals, and then demonstrates the balance between sales, hiring, and production needed to achieve those goals.

To create the budget and capacity model, I needed to gather information from many different departments. We identified areas that were “information deserts,” looked at our tools, and then considered what information we could record, but never had. Information gathering can be tricky in some environments. In a culture of financial secrecy, fear prevails, and team members often want to hold their cards close to their chests to avoid being criticized or losing resources to other departments. Gauge’s culture of prudent financial transparency eliminated that challenge. Because team members understood what I was doing and why, everyone was very open-minded and willing to share the critical information I needed.

Making Goals Reality: The Capacity Model

A financial model and strategy is unique to your industry type and what you’re selling. For example, if Gauge sold widgets, we would analyze things like product mix, inventory levels, marketing campaigns and return, and shipping. For our service organization, we started by creating a uniform depository for the simple metrics and information included in all of our contracts: contract type, expected duration, actual duration, team members involved, and value of the contact, to name a few. Then we looked our budget goals, fixed and variable expenses, team expansion goals, current team size, and our standard business schedule for the year. We analyzed historical data related to past contracts, found averages, and reasonable goals. Then we assigned income generation goals to each type of position at our office, taking into account positions that are more heavily production-oriented and those that require a greater skill level.

This is where the theoretical budget goal, which is determined purely by expenses, profit margin goals, and expansion goals, meets the projected income generation estimated in our capacity model in a sort of “If, then” statement way. If we have [x] team members at [x] date, can they reasonably generate [x] income required to accomplish our profit margin goal? Our hiring trajectory and sales are also informed by our capacity model. We try to look at our production schedule at least six months out to determine whether we need more sales to fill production gaps, or if we need to hire more team members to handle the projected workload.

The Feedback Loop

Our capacity model is a living thing, changing according to client needs and production variables. Projects are planned with educated-guess estimates. When changes in current contracts occur, either in scope, duration, or required team members to accomplish the job, our Project Managers inform key team members via an internal communication process. That information loop first touches finance, so I can update our projected income generation and measure the change’s effect on our team’s production capacity. That information feeds the Sales Department. Our Sales team compares the Finance Department’s results to our future and potential contracts, to see how it affects timing, size, and our production team’s availability. The loop continues with post-project reviews that summarize how well we estimated our contracts. We use that information to better inform how we propose future projects and fine-tune our estimates about timeframes, scope, and value.

Nurturing Transparency and Teamwork

A culture of transparency doesn’t always happen organically, so we’re intentional about fostering communication. We share the basic assumptions that set the groundwork for our goals with team members in leadership or management positions, because they directly influence the management of our success. We report on financials monthly, quarterly, and annually. There is a concerted effort to define success as a group and then move toward that common goal.

The lesson we’ve learned is that success isn’t directed from the top down; it’s built from the ground up. When the whole team understands the common goal, everyone can push to make it happen. Strong planning, continuous communication, and most of all, the courage to foster open sharing and prudent financial transparency has led Gauge to team growth and financial success for everyone.

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