The realities of starting an agency

The planned short book I’m struggling to finish is the result of numerous people suggesting I write down the advice I have been asked for over recent years.

The working title is ‘Day 1 to day 2555’ or seven years in the life of an ad agency; this assumes between 5 and 7 years of existence some event happens such as being bought, merged, etc. This week I’ve had two unconnected people get in touch wanting a chat about new ventures, I will happily do so however there is one ongoing theme most people don’t get or choose to ignore. It is finance and the ability to keep a young business going as the drive for clients continues.

In the book there are several mentions of finance from successful individuals. Jeremy Miles of MCBD for example says ‘start with a finance director’, Steven Hunter of August Media says ‘fail to plan and you plan to fail’ with regards to finance and so on.

Over the last few years I have advised a few start-ups where the finance issue has been brushed under the carpet, or put on the too difficult pile and in both cases this has led to early problems.

When we started Simons Palmer we had access to £350,000 and a finance director from day 1 – Steve Lepley who now is a senior bod in the Ogilvy organisation. That was in 1988 so this would be more like £500K plus today. We produced a 3 year plan based on a range of assumptions regarding clients, income, costs, etc., and the computer said a loss in year 1, break-even in year 2 and a small profit in year 3. We were lucky and improved on our forecast but we still needed the safety net of the funds as cash flow was the major challenge for several years.

Having Steve there was a massive help because it allowed the rest of us to concentrate on clients and the work and not attempt to learn how to handle the multitude of tasks needed behind the scenes.

When Robert Senior and Michael Wall started Fallon in London Carl Johnson, Simon Clemmow and I took them out for dinner and gave them our top 10 golden rules on the life and death issues. Robert said to me some years later that he kept that piece of paper on his wall for a long time. One of the rules was get a finance director which they did very early on.

Over the course of this year I have been working with a small consortium trying to acquire an existing business, not in the advertising world, and we eventually withdrew from the transaction. One of our team is a highly experienced finance man and he had produced very thorough forecasts over three years with P&L, Balance Sheet and Cash Flow. What it told us was buying the business wasn’t a problem but having sufficient cash to keep it trading was a much bigger challenge so we all agreed to stick to a minimum level of funding otherwise we wouldn’t go ahead. As it turned out we couldn’t raise this minimum level in the time available so we withdrew.

The reason was the forward view and the potential of the business being unable to fund the level of liabilities down the track and the real risk of running out of money. It was a hard decision to take after all of the hard work, costs, and opportunity/cost of our time but I am in no doubt a very wise decision.

When a group of people from advertising, design, digital, or wherever get together it is highly probable the people concerned have never needed to understand the finer points of finance – someone else does that and most board meetings I’ve sat through I’ve seen the boredom set in when finance is on the agenda. I guess media boys and girls are different as their world is numbers and they always seem more savvy on the finance stuff.

It seems to me the risk of starting a new business is pretty big and the founders are on the hook for the liabilities of the business they are creating. Given that it seems pretty sensible to understand the risks and ensure the safety net is firmly in place. I have been involved in a number of very successful new ventures but I’ve also been involved in a few that have not been a big success. If you examine the Virgin Group they jettison businesses that are not working so they have as many fail as the ones that are a big success.

Clearly the point is get yourself top drawer help on finance, get sufficient capital in the business to allow you to ride the ups and downs of cash flow, and appoint an finance director at the start of the venture – it is worth his/her weight in gold. Finally it is illegal to trade when you are knowingly insolvent so the consequences of getting this wrong go beyond losing the business, your cash, your livelihood and your ego!

As they say cash is king, never forget it.

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