Understanding the status quo can be a good start to the 2019 budget process for many agencies.
Start by asking yourself what your budget would look like next year if all you did was to continue to service existing clients – without undertaking any new initiatives or engaging in any business development beyond seeking renewals of current contracts.
Project revenue on a client-by-client basis
The first step in this process will be to do a careful review of all of your clients with the account managers. This is something that you ought to be doing in any case, but it is especially helpful in understanding the financial outlook for your agency.
The account manager should be able to predict, with a reasonable degree of certainty, the expected month-by-month revenue for each client for the year ahead.
Fixed retainer clients will be the easiest to project, but even variable activity clients will have known patterns that can be examined to make the predictions more accurate.
In larger agencies, these account manager projections can be rolled up in to team or group estimates.
Take a hard look at renewals
Whether your agency has hard-and-fast annual agreements or operates primary on evergreen month-to-month arrangements, it is important to have a handle on renewals.
As you do your 2019 revenue retention forecast, there may be projects that you already know will come to an end. Those are easy to handle.
But what about a client with a contract that expires in May but you hope and expect to renew?
There are several ways to forecast these renewals.
- Apply a discount rate to the individual client revenue forecast. If you have a client expiring in May, you might project them at 100% of the retainer amount through that month, but at a lower amount for the remainder of the year. How much lower? A good idea would be to use a percentage tied to the likelihood of renewal to come up with a weighted number. So if you are 70% certain that they will renew, multiply the monthly retainer by 0.70 for the remaining months of the year.
- Apply a global discount rate to all potential renewal revenue. You might prefer to aggregate all of your renewals on a separate line item and apply a discount across the board. If you know that you retain about 90% of client work from year-to-year, then you could simply multiply the renewal line item by 0.90 to get an estimate for your budget.
- Create a projected losses line item. Just as you might forecast wins in terms like “3 new accounts at an average of $10k/month,” you might do the same with failed renewals. So if you project that you will lose 1 client every quarter with an average value of $10k/month, you can build this in as negative numbers in your revenue budget.
Never assume a perfect renewal rate
The biggest mistake that agency owners and executives can make in the budget process is being overly optimistic.
Many leaders realize this and will focus in on the challenge – but typically that focus is almost exclusively on looking at overly optimistic upside projections for new business.
It is just as important not to become overly optimistic about negative items, like lost renewals and operating expenses.
No agency keeps every client forever. There will always be churn.
There’s no need to be a pessimist in the budget process, but you need to carefully – and brutally – assess the likelihood a client will continue.
How do you predict which clients will renew?
The day-to-day account manager should have a pretty good handle on the satisfaction level of each client they serve.
Of course, depending on the client, that individual may or may not have final say – or even strong influence – over the decision to remain with the agency.
Just as you work hard to get to know the decision-maker for new business, it is just as important to know and stay in touch with the decision-maker for existing clients.
Of course, a change in that decision-maker is a huge red flag in the relationship and renewal process.
New senior executives frequently have their own preferred agencies and vendors. Or they may just want to make a change to put their stamp on things.
Apart from that obvious red flag, though, there are other things to be on the lookout for as a hint that change may be coming.
Is the client experiencing financial difficulties? Has there been M&A activity that might impact your work? If it is a public company, how has their stock been performing? Have other new vendors/consultants/agencies joined the picture over the last few months?
No matter how good you are at making projections, you will still be blindsided by sudden client departures now and then. But you need to make the best effort to predict the likelihood of renewal as part of your budget process.
Build the rest of your budget on the foundation of your retention forecast
If you do a good job of projecting your revenue retention for 2019, you will be able to forecast growth and budget accurately.
The better you do in the budgeting process now, the easier (and more profitable) the new year will be.
It all starts with taking a careful look at your existing client base and understanding what to expect from it over the next 12 months.