Understanding the Finances of Your Business September 13, 2012

Agenda Income Statement Cash Flow Managing for Profit Managing Retainers Client Interaction

Income Statement Revenue Recognition Fixed and Variable Expenses Critical Ratios Expense Reduction Profitability

Revenue Time – Billable Hours – Retainers – Project Fees Mark-up – 17.65%

Mark-up Media Billing to client100 Paid to Media 85 Commission 15 Comm % - 15/100 – 15% Production Paid to Vendor 85 Mark-up 15 Billing to client100 Mark-up % - 15/85 – 17.65%

BillingRevenue Time 20, Out-of Pocket 5, Total 25, ,882.50

Cost of Goods Sold

Compensation Account Handlers Salaries Administrative Salaries Bonuses Benefits Freelance Labor

Facilities Rent Telephone Computer Services Computer Equipment? Furniture?

Marketing Website New Business Networking Speaking Engagements Conferences

Other Expenses Databases Insurance Supplies Travel

Expense Reduction Rebillable Expenses Admin Surcharge Volume Discounts Rebates

Critical Ratios

Revenue100% Compensation57%52% Facilities8%7% Marketing3% Other18%16% Profit14%22%

Critical Ratios Revenue100 Compensation5752 Facilities87 Marketing33 Other1816 Profit1422

Critical Ratios Revenue100 Compensation57 Facilities8 Marketing3 Other18 Profit14

Critical Ratios Revenue Compensation57 Facilities88 Marketing33 Other18 Profit1424

Critical Ratios Revenue % Compensation57 52% Facilities887% Marketing333% Other18 16% Profit142422%

Cash Flow

Billing & Collections Profit Growth Capital Expenditures

Cash Flow Reporting Beginning Balance – Less Cash Out – Plus Cash In Closing Balance

Revenue: $110K Profit: 22% Billing: Retainer Month Balance(116,000) (122,000) (98,000) (74,000) (50,000) (26,000) (2,000)22,000 Cash Out - Compensation 57,000 - All Other Expenses 29,000 - Client Expenses 30,000 Cash In - 110, ,000 Balance (116,000) (122,000) (98,000) (74,000) (50,000)(26,000)(2,000)22,00046,000

Revenue: $110K Profit: 22% Billing: Time Month Balance(116,000) (232,000) (208,000) (184,000) (160,000) (136,000) (112,000) (88,000) Cash Out - Compensation 57,000 - All Other Expenses 29,000 - Client Expenses 30,000 Cash In ,000 Balance (116,000) (232,000) (208,000) (184,000) (160,000) (136,000) (112,000) (88,000) (64,000)

Revenue: $100K Profit: 14% Billing: Time Month Balance(116,000) (232,000) (218,000) (204,000) (190,000) (176,000) (162,000) (148,000) Cash Out - Compensation 57,000 - All Other Expenses 29,000 - Client Expenses 30,000 Cash In ,000 Balance (116,000) (232,000) (218,000) (204,000) (190,000) (176,000) (162,000) (148,000) (134,000)

Cash Flow What’s the Effect of… – Rapid Growth? – Capital Expenditures? – Loans? – More Rapid Billing and Collection?

Interactive Cash Flow

Managing for Profit

Profit Influencers 1.Raise Prices - Higher Value 2.Lower Variable Costs - Efficiency 3.Fix Underperformers 4.Increase Volume - Utilization 5.Lower Overhead Costs

Raise Prices Earn higher fees – Specialization – Innovation – Add more value Get “better” work Train/develop staff Invest in new (higher-value) services

Lower Variable Costs Develop methods/systems to avoid duplication of efforts Improve performance/efficiency for each assignment Increase leverage in the delivery of services – use appropriate level for each activity

Fix Underperformers Deal with underperformers Drop unprofitable services Drop unfavorable clients

Increase Volume Increase utilization (billable hours per person)

Lower Overhead Costs Reduce space and equipment costs Reduce support staff costs Improve speed of billing Improve speed of collections

Profitability Levers Salaries Billing Rates Hours Worked Billable Percent Overservicing

Billing Power Analysis Number of employees at each level X Billing rate for the level X Total Hours (1,750) X Billable Target = Potential Income

SAS – Billing Power

Salary RateTarget Revenue Ratio Level 1 110, % 308, Level 2 85, % 267, Level 3 65, % 252, Level 4 40, % 199, Total 300,000 1,027, Average 75,000170

Financials Interactive

Causes of Overservicing Poor budgeting/over promising Mis-used time Improper Staff Allocation Staffing to monthly retainers

Budgeting Define Scope of Work Budget by activity Include details

Mis-Used Time Work done at wrong level Perfectionism Low-value activities

Staffing to Retainers

Staff Allocation Anticipate staff levels on each account for the upcoming month Balance with individual employee billable targets Be realistic – tie to actual activities Compare actuals to anticipated

Staff Allocation Interactive

SAS SOW/Over-servicing Report

Staffing to Retainers View budget as annual – Monthly billing is a convenience Anticipate high activity months Account for number of billable days/month Inform client of monthly staffing levels Do work at appropriate levels

BillableStaffing Month Billing SpikesDaysLevels Jan 20,000 14, ,067 Feb 20,000 14, ,727 Mar 20,000 14, ,737 Apr 20,000 14, ,067 May 20,000 40, ,000 Jun 20,000 14, ,067 Jul 20,000 14, ,397 Aug 20,000 14, ,407 Sep 20,000 60, ,000 Oct 20,000 14, ,407 Nov 20,000 14, ,397 Dec 20,000 14, ,727 Total 240, ,000

Retainer Interactive

SAS – Budgets/Client Forecast

Client Interaction

Contract Considerations Managing the SOW Organic Growth

Contract Considerations Compensation Terms – Mark-up – Payment Speed – Cost Adjustment Capability Termination Terms – No End Date – Automatic Renewals – Protection on Front-Loaded Programs Other Issues?

Managing the SOW Budget with Details Build in a Contingency Budget Review Month’s Budget Mid-Month Review Annual Spending Monthly Communicate Overages to the Client Manage Staffing Changes Keep Staff Fully Engaged – Internal, if Necessary

Growth New Business – 30-35% Loss Each Year – $4 Billion Total – $1.2-$1.4 Billion Organic Growth – Much Less Expensive – Excellent Investment Client Satisfaction/Retention – 6 Month Extension – Double Growth Rate

Other Issues?

Understanding the Finances of Your Business September 13, 2012