We’ve dispensed plenty of advice over the years about what to do if your agency finds itself in an economic lull.
There are only two things you can do if you find yourself upside-down—cut payroll and sell like hell.
You must consider cutting payroll because payroll is the single largest recurring expense in all agencies. This is good news and bad news. It's good news because it can be controlled. It's bad news because it hurts like hell to cut into bone and let go the people you have worked hard to recruit, train, nurture and incent. But cut you must.
Our statistics indicate that payroll (not benefits or FICA or any other payroll-related expenses) should be no more than 55 percent of AGI. If your payroll was in line last year and your billings are down this year, then you need to make adjustments. Please take a look at the figures immediately. Many agencies are behind with their monthly financial reporting, so after the bookkeeper finally gets last year's numbers off to the accountant, it may be several months into the next year before you have a current P&L statement. Do what you have to do to get your payroll in line—layoffs, shorter weeks for each employee, attrition, terminations if necessary.
Watch your legalities. In most states, the employer has the right to employ whomever they choose, and it is not illegal to let someone go for any reason. But you cannot discriminate. For example, if you terminate a 40-year-old woman and shortly thereafter hire a 23-year-old to do even some of the former employee's tasks, you leave yourself open to a discrimination suit, even if your reasons are pure. It's an awfully litigious society we live in today.
Here are some other things you can do to save.
- Avoid entering into any long-term obligations. We consulted in a situation where an agency moved into new quarters after having one hell of a year. The agency principal thought it was the right move at the right time. They were flush with cash and it seemed a good opportunity to upgrade their image. They had spent the first part of their agency's existence in substandard quarters—no panache, no status, no classy downtown space, etc. Within two weeks of moving they lost their two largest accounts for unrelated reasons. This agency is now saddled with a ten-year lease and about $300,000 in leasehold improvements, much of which is owed to their all-too-accommodating banker. They can't get out of the lease and will struggle for the next few years regardless of what happens to the economy. It is not the time to upgrade space or to sign any long-term lease when the economy takes a dive.
- Pinch pennies. Buy or lease nothing not directly related to increased billings. No new cars, fancy computers, fast Macs or flat screens (last year's models will do). We once knew an agency principal who said his operating philosophy was to buy everything for at least 20 percent off. If the supplier would not sell it to the agency at a discount, his agency went elsewhere.
- The old proverb, "cash is king," applies in spades during hard times. If you can maximize cash through discounts, longer payment terms for vendors, and prepayments or progress billings from clients, you can right the boat more quickly.
- Have a line of credit, but do not touch it! It's one thing to owe a printer. If you don't pay, they work out a payment plan. It's another thing to owe the bank. If you don't pay, they take your business, your house, and maybe your spouse and kids as well (although we did once talk to an agency principal who thought taking her husband might not be such a bad idea). Learn to suck it up and buy only when you have money. If you are using your line of credit to finance your payroll—stop that immediately!
Activate Your New Business Efforts
As far as selling like hell is concerned, the only additional advice we can give you (and we preach this in almost every article we write and seminar we teach) is not to procrastinate. Many agencies make a solemn vow to get going on new business only as billings soften. First, they form a committee and decide what types of sales materials they will need, who is on the "A" list and how to hire a new business developer. These are all good things, don't get us wrong. We recommend all of them. But you should know that if you start doing new business for your agency today, and we mean right this minute, it will be at least 90 days until the front edge of your efforts will bear fruit. In light of that—and this applies in any downturn—our advice is to start making calls TODAY. Not just one person, but every live body in the agency needs to start making contact with prospects and current clients. Account executives, creatives and even the delivery person can aid the agency principal in this process.
Finally, you have to keep track of where you are from moment to moment. Lay out a spreadsheet and list current sales, costs, overhead, new business prospects, payroll and profit goals. Keep this spreadsheet on your desk all the time and run your life by it for the rest of this year.
The key to coming out of a downturn is focus. As Alan Kay once said, "The best way to predict the future is to invent it."