Trading through a downturn, part one: agency finances
Kicking off our three-part series on running agencies through economic downturns, we chat with Stephen Waddington about how to take control of your agency finances.
Scaling Service is a newsletter about launching, managing and selling agencies. This week, we’re kicking off a three-part series with Stephen Waddington on trading through a downturn.
If you’d like to book a 30-minute meeting with Stephen to discuss any issues covered in this newsletter, you can contact him via email at stephen.waddington@wadds.co.uk.
On 18 May 2000, Boo.com was liquidated.
It had been a wild two years for the British e-commerce start-up. Headquartered in Carnaby Street, they'd raised more than £80m from investors such as JP Morgan and Goldman Sachs.
Most of this money was spent on marketing and building a website so ahead of its time that most people couldn't get it to load on their computers.
It didn’t make it to its IPO. It ran out of cash and crashed spectacularly. Five years later, The Guardian described it as the week Britain's dotcom dream died.
While it would be unfair to suggest this was the spark that triggered the Dotcom Crash, Boo.com's collapse marked a clear inflexion point in the Dotcom era as investor confidence began to evaporate.
Following Boo.com’s failure, funding for 'internet ventures' with sky-high valuations began to dry up, and tech companies en masse began to go out of business.
Hundreds of companies - in the US, the UK and worldwide - went bankrupt.
Stephen Waddington was running a tech agency, Rainier PR, around the corner from Boo.com near Carnaby Street in London as the dotcom bubble burst.
"We'd have weeks where you didn't want to check email or answer the phone,” says Waddington. “Every call was a client saying we're pulling out of the UK market, we're pulling our retainer or we're making redundancies."
“It was just a horrible, horrible time," he says. Waddington is now the founder and managing partner of Wadds Inc., advising agencies on management, finances, proposition and growth. He’s traded through three recessions: the dot com crash and 9/11, the financial crash and COVID-19.
With the benefit of experience, he believes there are some fundamental rules to successfully navigating an economic downturn. One of them is financial discipline.
"In an owner-managed business, you don't tend ever to get a moment where you re-examine everything and look right across the business," he says. "It's rare that you would stop a business at a point in time and say, right, there are no sacred cows here. We're going to look at every asset aspect of the business."
But looking at every aspect of a business can be daunting at the best of times. When you're in a downturn, where do you start?
Start with zero-based budgeting
When looking at expenditure, Stephen recommends undertaking a zero-based budgeting exercise. Rather than starting with what you're currently spending, start with zero in every column - hence the name - as if you were launching the company today.
"The opportunity to do a zero-based budget is important because you don't do it any other time," he says. "Typically, you base the budgeting process on 10, 20 per cent of whatever we did last year and scale costs accordingly."
"The exercise of going through and looking at every line in a P&L and saying, 'Do we need that? Do we need that? What value is that adding to the business?' and putting it into a new forecast is valuable."
What goes down must have come up
Seeing your revenues halve is terrifying. However, you were doing those numbers profitably at some point in the past.
"You get feature creep in businesses during periods of growth because you can afford to do stuff like invest in a new technology that's come along. When you're growing, you see a new subscription, you'll buy it."
If your revenue numbers are dropping, see what your costs looked like at that level on the way up. It's an exercise that will quickly give you a framework to build from.
"Go and look at what happened then and figure out the difference between there and now. It's an excellent exercise to do."
Be transparent with your staff
One mistake Waddington sees agency leaders making is disrespecting the financial literacy of their teams. He says you should always try to be candid and transparent with them.
"I'd always say, be as transparent as possible," he says. "If you're not transparent, anxiety will kick in and people will start looking for jobs anyway because no one wants to work in a directionless, leaderless business."
Besides, if you've got the right people working for you, they will probably already know what's up.
"Most people in professional services in an agency environment understand how an agency works. If they see a large client pull its budget, they're not stupid. They know that's inevitably going to have an impact on staffing needs."
This process can make you stronger
Waddington was keen to emphasise that as brutal as this process can be, it can make you stronger – not just over the short term, but for the longer term.
"It takes an intervention," he says, offering a personal perspective. "It typically takes something dramatic, such as illness or the death of a friend or family member, for you to take control of your health and well-being, for you to go right, I need to do something about this, I need to start losing weight, I need to exercise and diet. And that's what moments like this happen.”
“Please do not bury your head in the sand when it comes to difficult decisions. The psychological issues are as challenging as the business issues.
"The emotional issues are crushing. There is nothing harder as an entrepreneur or manager than making redundancies.”
"It is our role as leaders to say, 'This is the situation, but there's the future. Here's what we're doing about it.'"
In the next two parts of this series, we’ll look at how you work with a management team to develop a sustainable business plan and then shift back into growth.
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