You may enjoy riding the roller coaster at an amusement park, but not many agency owners enjoy the revenue roller coaster that most agency businesses experience.
In a service-based business, it is difficult to avoid occasional peaks and valleys. Many owners inadvertently make it worse and feed the feast or famine cycle.
The revenue roller coaster isn’t just stressful, it’s bad for the business if you don’t follow some basic safety rules.
While you may not be able to avoid the roller coaster altogether, you can take steps to reduce its impact.
You — and your account managers — need to understand the profitability of every project. As a business owner, you should be setting the target profit margin for the agency and the projects. Then you must work with your team to ensure you’re hitting those targets.
Just as important as keeping existing projects profitable is targeting the right kinds of clients and revenue in the first place. You should know which services you can deliver most profitably and then pursue those opportunities.
Remember that not all revenue is created equal. Some of it is more profitable, and the key to building a sustainable business that can whether peaks and valleys is to create a foundation of profitability.
Market when you’re swamped
Most agencies take the foot off the gas when there’s more work than the existing team can handle. That’s the wrong move and only makes the roller coaster ride worse.
Whenever you feel like you don’t have time to market to new prospects — or that you couldn’t handle the business if it came in — is exactly the time you need to ramp things up.
Remember that there’s always a gap between when you start talking to a prospect and when that business comes in the door (and when the revenue starts flowing). In many cases, agencies can have months in between first contact and first check.
Fill your pipeline when you’re busy and you will help smooth out the revenue down the road when things calm down.
Diversify your revenue
Successful agencies diversify their client base and revenue streams. My Agency Leadership Podcast co-host Gini Dietrich and I have even talked about some non-traditional revenue streams that you might consider.
Regardless of how you do it, the more variety you have in the types of income (project vs. retainer) and the concentration of clients (avoid any one client representing more than 20% of revenue), the more likely you are to weather the ride.
The idea is to limit the impact any single decision or external event can have on your business. Mixing and matching your revenue gives you greater resiliency.
Maintain cash reserves
No matter how hard you try to prevent dips, you will still face them at some point in time. You can’t wish away these bumps in the road, so you better be prepared for them.
Take advantage of profits during good times to build up a cushion against these inevitable declines. A solid cash reserve — ideally at least 2 to 3 months of agency operating expenses — will provide you breathing room to get out of the valley and back on solid ground.
Having cash on the sidelines ready to deploy in a crisis will give you increased peace of mind and allow you to make strategic decisions rather than knee-jerk reactions.
Don’t overreact to highs and lows
Even if you follow all of the advice in this article, you will still have highs and lows. Some of them may even seem extreme in the moment.
The worst thing you can do is overreact — panicking when business declines sharply or getting greedy when things are going well.
When business is booming, resist the urge to pocket all those excess profits. Reinvest in the agency, set aside funds for a rainy day, and focus on growing a sustainable enterprise.
When revenue shrinks, don’t go slashing costs or headcount without a plan. Use the breathing room you have built up to strategically reevaluate the business and make decisions that will help you get back on the path to success.
If you follow basic safety rules, you might not enjoy the revenue roller coaster, but at least you’ll be able to complete the ride safely.