Growth, Part 4: The Math
Entrepreneurs do what they do because we love it. But we also need to make some money.
When it comes to finances, the hardest thing for a business owner to do is to adjust to realistic expectations while straddling that line of optimistic projection. I have a five-year growth expectancy based on some math-ing and collected data to accurately trace some sort of steady projection. But the fact is, what we do remains highly seasonal and occasionally volatile.
Everyone says agency life is feast or famine — and they are right. Unfortunately, the reality is that when the business takes a downturn, after slimming down expenses to the barest of bones, the owners are the ones left eating the shit sandwich. So how can you plan with two feet rooted strongly in reality, but your eyes fixed on the possible growth ahead?
My advice: look at the data and look for trends. Forecast conservatively. (Our agency can see anywhere between -5 percent and 250 percent growth from one January to the next.) It can be tricky, but most of what I have learned is to factor your lowest month of revenue for the year by averaging the three slowest months from the year prior. Generally speaking, even volatility has a way of averaging us out over the year.
Filling out the rest of the projections for a rolling 10 months can evolve from there, but the idea is to stay conservative. We base our projects on the average engagement cost multiplied by the average number of projects booked a month. Our cost of goods (COGs) are all percentage-based, and our agency costs are generally fixed. All of this is to get to one number at the end of 12 months: your closing cash balance.
Not to skip over these on a monthly basis, but you should always aim to be in a positive cash balance position. I know lots of people who disagree with my methodology for scaling businesses. (Think fast-growth businesses, posting losses for tax purposes, etc.) It took us seven years to take out a loan — and even then, it’s a rainy day cash balance that sits in our savings. We certainly don’t have to do work this way, and many would argue we are kneecapping ourselves. But we are mindfully not operating like a start-up because we don’t scale like a start-up. We have our reasons.
Knowing your rolling 12-month cash balance tells you where you can make adjustments. If you are in a high-profit position, you’re likely going to need to go back and adjust your numbers for more teammates. Kelsey and I take a small founders commission from each project and rely mostly on profit disbursements quarterly to pay us a livable wage. That shit sandwich I am talking about? We only make money if the business profits, and that’s called keeping skin in the game.
The closing cash balance is your real-talk moment. Applying for a loan won’t help this because you will be unattractive to lenders (whomp whomp). How are you going to pay back a principal without positive cash? You need to make expense adjustments, and margin adjustments, and you have to plan for the unexpected to happen at least once.
Three months operating cash is a lovely nest egg to perch upon. Then you seek the loan for growth potential and a warm fuzzy feeling. And finally, you light the fire under your ass and get to selling.
— Mallory Ulaszek, Co-Founder
