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Jon Morris, founder of Rise and creator of the CPR Score, shares the financial frameworks he used to scale an agency to $40M — and the blind spots most agency owners never see until it's too late.
Agency Forward explores the future of agencies as tech and AI drive down the cost of tactical deliverables. Topics include building competent teams, developing strategic offers, systemizing your business, and more.
New episodes delivered every Tuesday.
Chris DuBois 0:00
Hey everyone, today I'm joined by John Morris. John is the founder of Rise Interactive, a digital marketing agency that he grew to over 40 million in revenue before selling. He now runs Fiscal Advocates Incorporated and advises agency owners on the financial infrastructure that they need to grow without burning out or breaking the business, John's work sits at like the intersection of financial strategy and agency operations, and he spent years just helping agency owners understand the numbers that actually matter. Now, I wanted to have John on because most agency owners are running blind when it comes to their finances, right? You'll often know the revenue, maybe what's in your bank account, but like the metrics that actually predict the health and growth often seem to be invisible, just until it's too late. In this episode, we discuss why agency owners should stop ignoring cash reserves, how to use financial data to time hiring decisions, what profit margin separates thriving agencies from struggling ones, and more. No one was asking for another community, but I've made one anyway. So, what's different? The dynamic agency community is designed around access rather than content, access to peers who've done it before, access to experts who've designed solutions, access to resources that have been battle tested, and right now the price for founding members is only $97 a year. Join today, so your agency has immediate access to everything you need to grow. You can join at Dynamic Agency dot community. And now, John Morris, it's easier than ever to start an agency, but it's only getting harder to stand out and keep it alive. Join me as we explore the strategies agencies are using today to secure a better tomorrow. This is Agency Forward. Where do most agencies miscalculate their true gross margin,
Speaker 1 2:03
so most agencies that I talk to before they actually start working with me don't even know how to calculate gross margin. They don't even know what gross margin is, or why it's the most important number to look at. So, first I'm just going to give a clear definition and what you need to do to really have a great gross margin. When you take your revenue, and when I say revenue, I mean your real revenue, or what I call net revenue, so no pass through. So, if you're managing media, that doesn't count. So, if you have, you know, 30 million in media and four and a half million in fees, we're talking about the four and a half million dollars. Then what you want to do is take all of your cost that relates to client work, so your payroll, your freelancers, the technology, travel and entertainment, client gifts, anything that is specific to client work. I call it cost of service. Some people call it delivery costs. When you take that revenue minus that cost of service, you get your gross profit. So I'll just use that four and a half million dollars, and let's just say you have $3 million in direct cost to service that four and a half million, and one and a half million dollars left over that one and a half million divided by your four and a half million is your gross margin. In this case, it'll be 33% 1.5 over 4.5 Now, what I see, it's a default in accounting software, is that your payroll is one wine item for your entire business completely bundled together. So, in order to get your gross margin, you have to unbundle that payroll. Now, the other thing is the reason why this is the most important number, like there is literally not a single number that is most important is it will completely determine the profitability of your business and how much you can invest in the growth of your business. If you are below 40% you will most likely lose money. It is really difficult to get your back office and all your sales and marketing everything to be, you know, at a number that allows you to be profitable if you're below 40% gross margin. If you're between 40% and 50% you have to make a decision. Am I going to be profitable or am I going to invest in my business? And then if you're between 50 and 60% you are exactly where you should be, and if you're above 60% it sounds amazing. Like, yeah, why wouldn't you want to be 60% or why wouldn't you want to be 70% I just want to make sure nobody's getting screwed, you're not overworking your team and burning them out, or you're not under delivering for your customer, because now you're getting into software. Related margin, as opposed to service-related margin,
Chris DuBois 5:03
right.
Speaker 1 5:03
So, those are the major breakout numbers that I talk to people about.
Chris DuBois 5:08
Yeah, and if you hit that 60% then there's also the question of, like, what could we be spending money on in order to make, make it easier to maintain the 60% later. Yeah, right. Which then brings us into, like, the question of resource management and planning, right? How do you, how would you address that? I guess with someone who does have 60% what are you looking at?
Speaker 1 5:34
Yeah, so if someone's looking at 60% gross margin, the first thing that I want you to do, you know, and ideally you have a dedicated resource that does resource planning, and so you know before the beginning of every single month you should go through every single client based on the target hourly rate that you want to achieve and determine how many hours are they going to get, and then you have to look at how many hours you have available and assign those hours to every single client, and so if you're looking at a 60% gross margin, I want to make sure that if client A is supposed to get 100 hours for that month that you're not only giving them 80, that they're getting 100 hours now. If you figured out how to get a 60% gross margin, but the client still gets the 100 hours that they deserve, and that you know you need to give them in order to do a good job, then you might have really good cost management. You maybe are being under charge of premium for your services, you might have a near-shore infrastructure, you might have built some automation that goes into there, but ideally, before every month, you know by client, by service, exactly how many hours are being assigned. You then know who you're going to assign that to on your team, and so that's the planning phase, then you get into mid month, and it could also work for a project, but you want to make sure that you're pacing well. I can't tell you, you know, I just was talking to a client yesterday, and they, they were supposed to spend 30 hours for the entire month for a specific client, and the account manager just by themselves spent 80 hours on that specific client, so their desired hourly rate just got completely destroyed for that month, and so pacing becomes really important where you want to keep track of are you going hot or are you going cold in terms of how many hours being served and then finally you need to do your deep dive analysis so at the beginning of the following month so let's just say you know we're talking about the month of May you do your planning for may you do your pacing analysis during May, and then in June, you want to really look and see how did you do. Did clients get underserved? Do they get overserved? Do you have employees that are at risk of burnout? Do you have employees that, for whatever reason, have put nearly as many billable hours into this, and that will help you improve your planning for future months,
Chris DuBois 8:23
right. So, man, that that one client got me, like I'm still a little shocked with that one. So I mean, with a situation like that, are they just not tracking the time? Like, is it?
Speaker 1 8:39
I think that in that case I believe that the time was not being tracked properly. They weren't following that whole system I just told you that they weren't planning a month, they weren't pacing the month, they weren't doing their deep dive analysis after the
Chris DuBois 8:55
month. That makes sense. Yeah, and so as you're, I guess, budgeting everything out. This is so obviously there's like the challenge of say we're a web agency and stuff. They're like different phases of the project are going to have different numbers per designers are going to have to do this, right? Developers and so we're scoping everything out ahead of time, the without proper time track, and I just had a podcast yesterday where we were talking some days, but like, without proper time tracking, we don't even know what, like, did our designers spend as much time as they should be. This, how deep do you recommend that we actually go with the tracking of of our resources to be able to then make those decisions and make sure that we're doing the right things.
Speaker 1 9:41
It's a great question, and my answer is to go as shallow as possible, not as deep as possible.
Chris DuBois 9:48
Okay,
Speaker 1 9:49
your employees hate time tracking, and the more granular you get your time tracking, the less adoption you. Are going to have to your time tracking, and so ideally you want to do it by client and possibly by service, but sometimes you don't even need to do it by service. If you have a, if you have a person that only does search engine optimization on their team, it's not necessary for them to track their time, saying that you know, I worked on client A, and I worked on SEO, like it's obvious they worked on SEO, so you can reduce, like, one thing that they have to enter into their time, where people, I think, make the mistake is they go to the task and the subtask level and the deliverable, and you know, the next thing you know, they have to put time tracking into like 80 different things, and if time tracking was easy and you're poison and hate it, I would have loved that, but you have to determine why are you doing it, so I'll give you an example where I went more granular at Rise, I had a 25 person product development team, so we built our own media optimization software, and we wanted to automate all of the reporting that we did. We had about 250 employees, so we were spending 1000s of hours per month by channel on the reports that we were doing, and so I needed to know, how many hours a month did I spend on social media reports versus how many hours a month did I spend on paid search reports, versus how many hours a month did I spend on, you know, affiliates, or whatever the case may be, and so we did go more granular, but that became our product roadmap of, oh my god, we could save 1200 hours of manual work by automating just social media, and then that would be generally around a six month endeavor to automate that to free up those 1200 hours, and so that's that's an example where you can get more granular, you know, and that was, you know, you and I talked about how resource planning can be very strategic, because it allows you to think about how you do things differently, and how you can make sure that you maximize the time. We were very focused on gross margin improvements, and we wanted a gross margin advantage, and so we looked at how can we improve our gross margin and improve the quality of a service for our clients, and so we viewed automation as a big way of doing that.
Chris DuBois 12:30
Yeah, so I guess as you look at like the resource management and just allocating anything, when you do have that 60% situation, you're like, I know that I have budget that I can put into things, I guess. And this is quick aside. This is one of the reasons why I love talking to, like, finance agency financial folk, because, like, you have insights where, like, I talk positioning, and that's like I'm really good at, like, the demand side of this, but, like, I find the financial people, you see so many different parts of the business, and what the results are from, like marketing spend, from adding sales spend, that it's like you get to see like where you should actually be spending that budget, and so I love asking this question, where, like, I guess we've got a 60% gross margin, right, so we know we got some wiggle room here, we need it, we want to grow the company or improve client satisfaction, which would then probably grow the company just through like account expansion, potentially. Where, where are those few things that you're going to first look to allocate that budget?
Speaker 1 13:32
So the income statement, you know, as you talk about positioning, actually tells a story. I can read any income statement and tell you the story of the business. And in the marketing agency world, it's actually not that complex of a story. There are only four or five major benchmarks that you need to know, so you want to know a 20% annual growth rate is considered best of best. 20% profit is considered best of the best. In order to get to the 20% growth or profit, you need the 50% gross margin, and then you need to spend 30% on non-client related expenses, and those non-client related expenses fall into four buckets: sales and marketing, operations and finance, your executive team, and R and D. And so you know when you organize all the data and put everything into those buckets, I can tell the story of a business. So let's just use someone who's hired you to do positioning, and let's just say you nailed it, and the positioning is amazing. And then I go, and I look at their income statement, and they're spending 1% of their revenue on sales and marketing. Well, just so you know, the average company spends 8% of their revenue on sales and marketing, so if. They're only spending 1% of the revenue on sales and marketing. No one's going to ever hear about their positioning, and you know this is a very common thing. I see people come to me and they're like, "I hit a plateau, I don't know why I'm not growing. I was like, "Well, it's not surprising you're founder-led, you only count on word of mouth and referrals, and you spend no money on sales and marketing, even though you own a marketing agency, and that's what you sell for a living.
Chris DuBois 15:26
Cheers, that is the, the struggle, Solomon's paradox. All right, so let's, let's shift into, like, what is the, I guess, the blind spot that is killing most, most agencies within their finances, specifically.
Speaker 1 15:46
Yeah, I mean, to me the first thing is just knowing those benchmark numbers that I just shared and living with them. I would say the second thing, which you'll be surprised, because it's it's finance related, but this is what I've really learned in this six year journey of running Fiscal Advocate, is to do proper running of your business based on financially driven data takes a certain level of emotional strength. 80% of our cost are people, and they're people we love, they're people we care about, people we've been in the trenches with, and you don't have that many levers, you know. Let's just say you came to me and I was like, okay, you got a gross margin problem, your gross margin problems 35% and you have a sales and marketing problem, you're not investing enough in sales and marketing, so I want you to invest more in sales and marketing, and I want to take a lot of cost out of your business in terms of running your clients and figuring out how to service your customers more profitably. Well, what I'm really talking about is impact to people, right? You're going to have to potentially move somebody to sales and marketing if there's a good fit person, or you need to hire somebody new for sales and marketing, and then you need to let some of those people you love and care go, and like that's a huge part of my job. Like, I can't tell you how many off times I have to give that advice, and there are leaders that are amazing at it. You know, you give them the feedback, and they start implementing changes, and you start seeing and feeling the results really quickly, and then I have people who give me, you know, I've heard every single excuse of why they're a unicorn, and they can't follow the benchmarks that everyone else has been able to follow, and so to me the blind spot comes into the leader, and do you really have the emotional strength to make the tough decisions that will ultimately help the 90% of the people who get to stay within the company because of the fear of the 10% that you have to impact.
Chris DuBois 18:12
Right, yeah, there's a quote that was that the facts don't care about your feelings, but it is probably the inverse, where for a lot of people their feelings don't care about the facts, and so for those leaders, right, it's harder for them to look at their data and say, this is, I know, this is what I should be doing, but they can't separate those emotions from it.
Speaker 1 18:34
It's hard, and look, I, I'm a data-driven person, I've had to make a lot of data-driven decisions, I cannot tell you. I mean, it happens time and time again, where I am, you know, weeks or months slower than I should be in making the decision, because I just don't want to make
Speaker 2 18:52
it,
Speaker 1 18:53
you know. I love this person, I don't want to let them go, like they've done nothing wrong. They, they, they're great, but I have to live by the numbers, and I have to live by the impact, you know, those numbers are having on the business.
Chris DuBois 19:08
Yeah, there's a.. it's like the longer the business can survive and stuff, right, the more people you can potentially help. And so, being able to, like, reframe of, like, yeah, I do have to let this person go, but it means I keep everybody else and potentially help more people in the future, and so,
Speaker 1 19:23
and also, you know, like, I'll just use Rise, my last company, you know, I grew up from zero to 40 million, and I am still incredibly close, I consider them some of my closest friends, the people that were the leaders at that company,
Chris DuBois 19:39
right,
Speaker 1 19:40
and you know, we made careers for each other, you know, because if you go from a startup where most of the people did not have amazing pedigree before they took this job, and you know, by the end they're managing, you know. Potentially hundreds of people, and they're doing all sorts of cool, complex things, and you know, all of a sudden all these other people want to hire them because they have that experience, and so you know there's there's a lot of people's careers I really helped, and I would say I didn't do it alone like we all did it together, but by having such a successful business it create opportunities down the road for a lot of people,
Chris DuBois 20:23
definitely. So, how are you using financial data to time hiring decisions?
Speaker 1 20:33
So, it goes back into resource planning, and I'm going to tell you, you know, this actually goes back to my rise days, my CFO and my chief client service officer were constantly in battle with each other, and the reason why is it all came down to hiring decisions. So, imagine your revenue is a million dollars a month, and you have the right number of people for that million dollars a month, but then in your pipeline you have another $500,000 a month, and if you win it, you need to go hire, I don't know, let's just say 20 people, and if you don't win it, you don't need to hire any of them, and so you know you're always going to live in that gray area, meaning that there's always going to be what you need for your existing business, and then what your pipeline is, and then if you're going to lose any, if you're having an attrition, what you need to do, but there are a few things that you need to understand, one, what is the effective hourly rate that you want? So, if you want to charge 185 an hour, you know that will give you an idea. So, a million divided by 185 gives you an idea of how many hours you need and how many people you need. Then, from there, you need to look at your pipeline. I don't like hiring ahead of the time, which is hard, because if you're doing the client work, you know that's very stressful for that business coming in. So that's the next question, is how quickly can you hire? We got our systems down at Rise because we are hiring so rapidly to 19 days from the time we opened a position to the time someone accepted it. Then we probably had another two weeks before they started, so you know it's about a month, but you know we were also dealing with enterprise clients, and what that gave me was a window of contract negotiation, so someone gave me a verbal, I could start the hiring process, and because it took us so quickly to hire, I could get them people on board by the time we actually started the work. So, how quickly can you hire is another big factor? Then you also have to look at, you know, your renewals and who's up at risk, and so these were examples. How we leverage the financial data, we also turnover is not as big a deal today as it was for, let's just say, the first, you know, the earlier years of the of digital marketing.
Chris DuBois 23:21
Right? Yeah, I think the average was what, like 30% turnover for an agency, like
Speaker 3 23:25
it was
Speaker 2 23:26
crazy.
Speaker 1 23:26
I, you know, I can't tell you how many people who got poached where their salaries got doubled. You know, I had a 20-two year old, literally like a year out of school, he had a really nice salary for an entry-level job, and he came to me, and he's like, you know, this person just offered me a director of digital marketing job and offered to double my salary. He's like, I love it here, but what do you think I should do? And I said, you would be an absolute idiot not to take it, go take the job, I can't double your salary, but I lost a really good employee, and so we ended up using our turnover data to, we call them rolling hires to hire people, assuming that other people were going to leave and quit, and the value of doing that was it took so much pressure off of my team, so you know, imagine you're, you're on a team, and two of the team members quit. Well, everyone else has to pick up that work, unless you have a replacement, and so it wasn't apples to apples, we would be replacing them with entry-level employees, but you know, so let's just say someone's with us for two to three years, they quit, but the day they quit, a new entry-level employee starts. It allowed this, it removed a ton of anxiety. So it's another data point that we use to help think about how we can help people in those areas,
Chris DuBois 24:57
right.
Chris DuBois 25:00
Yeah, with that, I mean, you just got me thinking about, like, times with the army and stuff, where it's like you notice when, say, you get an infantry squad, it's like, if two people from your squad are gone, like, it's not just, yeah, I got to do their tasks, but it's also like, I'm sleeping less, I'm right, like, yeah, really stacks up, and you feel that burden more, unless you get a replacement quickly, but what I like about your, your model too, for like looking at the pipeline and then the financial data behind it, stuff in order to start the hiring process. It's similar to the like we want to ensure we have demand before we worry about supply, and so you're almost like testing, testing it out, and saying like, okay, I do have a reason to hire right now, rather than I think a lot of agencies go into, well, if we want to grow, we will need to hire, so let's do that right now. But then they don't have someone to like a client, right? And so they end up being cash strapped for a bit.
Speaker 1 25:52
Well, this is also going back to like resource planning. I can't tell you how many times in my current business or at Rise people come to me and said, my team is buried. I need to hire somebody, and if you don't have good data, you just listen to the person, you go hire them. But you know, let's just say it's the creative agency or the creative department, and they're getting buried, they're exhausted, and you go look, and they have 1000 hours of capacity per month, and you've only sold 500 hours per month,
Chris DuBois 26:25
right? And
Speaker 1 26:26
have a conversation with those, like, can you know, look at, I don't think hiring is the right decision, but can you help me understand, why do you feel so burned out? Like I'm looking at the data here, oftentimes it's either two things when you don't really need to hire someone, but the team is feeling burned out. I find it comes into two areas. One area is that example I gave earlier of 80 hours that the person spent when they're only supposed to spend 30, so they're going way over on the hours that they're being paid to do, and then the other one is oftentimes switching cost. If you have an employee that manages the same amount of revenue, but they're on 30 customers, and someone else is on one customer, that switching cost becomes exhausting, and it does lead to burnout, and so it, it doesn't mean you need to hire another person, but it might mean you know, maybe you need to think about your, you know, going after larger customers, where they manage fewer customers, but they still have to manage the same amount of revenue, you can think about other factors that might lead into
Chris DuBois 27:37
it, right. So, there's one question I want to make sure we get into, because I've asked a handful of people this, and I want to see your answer. The what, what is the best? I don't know if it's a percentage or just like a set amount, I guess, for size of agency or something, but the how much cash reserve should you be planning for? Like that, we need at least this in order to make sure that we're good to go.
Speaker 1 28:02
I love that question. First of all, I think there's only three KPIs that matter: how much cash you have relative to your monthly overhead, your profit margin, and your year over year revenue growth. If you just focus on those three KPIs and you can make improvements on those three KPIs, you're gonna have a great business. So, at a minimum, I want you to have two bank accounts, an operating account where you pay your bills, your employees, and your taxes, and a savings account, which is your rainy day in your investment fund. In your rainy day and investment fund, that bank account I want, at a minimum, two times your monthly overhead, so if you spend $100,000 a month, I want you to have $200,000 in cash in that bank account. If you do not, I am okay with that, and I'm not expecting a stair step, meaning that tomorrow you're going to have 200 grand in your bank account, but what I am expecting is a ramp that over, let's just say 12 to 24 months, you are slowly putting more and more money aside to get you to that number.
Chris DuBois 29:08
Right
Speaker 1 29:08
now, I want to explain why that number is so important. The first one's the obvious, the rainy day, that the next time a COVID comes, or the financial markets crash, or, you know, whatever factors, you know, you have a good amount of cash, you can weather a storm of losing some customers. The second one is, you never know when opportunity knocks. I get phone calls fairly regularly of, hey, I'm thinking about retiring, or so and so happened, we're just stressed. Would you be interested in buying my company? And if you don't have cash set aside, you don't have a real option, like the answer is always no,
Chris DuBois 29:54
right?
Speaker 1 29:55
And I just want to put this in perspective on a much larger scale. Microsoft bought LinkedIn for $26.8 billion in an all cash deal.
Speaker 2 30:08
If
Speaker 1 30:09
you have a lot of cash, you have a lot of optionality,
Chris DuBois 30:13
right?
Speaker 1 30:14
And so that's kind of the guidelines I provide people in terms of their cash.
Chris DuBois 30:19
Yeah, all right. The last, I guess, last two questions as we wind down. First, what book do you recommend every agency owner should read?
Speaker 1 30:32
So, I am going to give you a little bit of a different answer, and I'm going to say, right on a book, I'm going to give you what approach I think every agency owner should take towards reading, and first of all, I think everyone should be an avid reader, that learning and growing should be part of your mindset in general. The second one is, I recommend theme-based reading, so pick something that is really important to you that you want to worry about. Let's just say you want to get better at sales. Read five books on sales if you want to get better at client retention. Read five books on client retention, and so there isn't one book that's going to be the holy grail, like you go read this book and all of a sudden your business could be better, it's become a master of business, and when you think of business, there is servicing customers, there's sales, there's marketing, there's how to run your finances, there's all these different things, and even within those areas, you know, so I'm right now about to go on endeavor to learn all about channel partnerships and channel marketing, and I'm going to read five books on that particular topic, and I might then read, I don't know, five books on, you know, AI and coding and development, I don't know, I'm making that up, but you get the idea, it's more the approach I take and how I go deep into a specific area, and you know, my ultimate goal is I want to be an amazing CEO, and I want to turn fiscal advocate from a small business to a medium business to a large business, and it requires me constantly getting better and better at all aspects of business, but I just got to prioritize what's the aspect right now that I want to get great at.
Chris DuBois 32:26
Right, I love that approach, because the one that I can't stand is when people say pick one book and read it like five times, don't read any other books this year, it's like you're really betting on that one book, like that's. I feel like you're putting yourself behind, but awesome. The last question is, Where can people find you?
Speaker 1 32:45
You can follow me on LinkedIn. I post content three times a week, at a minimum. You can go to Fiscal advocate.com We have a great resource section. I wrote a great ebook on finance market or financials for marketing agencies, and just send me an email, Jo n@fiscaladvocate.com
Chris DuBois 33:05
Awesome, Brad John. Thanks for joining.
Speaker 1 33:08
Thanks so much for having me, Chris.
Chris DuBois 33:12
That's the show, everyone. You can leave a rating and review, or you can do something that benefits you. Click the link in the show notes to subscribe to Agency Forward on Substack, you'll get weekly content, resources, and links from around the internet to help you drive your agency forward,
Unknown Speaker 33:29
you.
Transcribed by https://otter.ai