One of the things that frustrated me for a long time about the agency business model, was that it wasn’t very predictable. Consider a business with:

  • Custom, variable priced products (projects.)
  • The kind of customer impacting the price and amount.
  • Smaller quantities (sell tens not thousands every year.)

Because of these factors, the income of creative agencies paints a jagged line of peaks and valleys.

What can an income statement tell you in that environment? Sure, last month was terrible, but a whale can swim into your office tomorrow and triple your revenue for the next six months.

The result of this is that many agency owners have a hard time investing in the business. You’re bursting at the seams with work right up to the moment that you’re dead as disco.

As time passed though, I noticed something odd: we hit a ceiling in revenue. Despite my efforts, every year we’d come in within a range that spanned around $30,000.

In January, if you would have held a gun to my head and said, “What’s your revenue going to be this year? If you’re more than $30,000 off I’ll shoot.” I would have guessed somewhere in that range (and been right.)

Things weren’t as unpredictable as they seemed.

In the short term, income statements can be wildly inaccurate regarding how the business is doing. Revenue, and to a much lesser extent expenses, are trailing data points. They’re the tip of the whip, not the handle.

Over the long term though, the peaks and valleys flatten out into something that makes more sense. Years will have highs and lows, seasonal shifts, and swings of fortune, and that will balance out to something that is mostly predictable using past performance.

I’ve been thinking and writing about a rubric to identify growth opportunities from the perspective of identifying the edges of capability. A couple of weeks ago, I proposed this test under “Extract predictable profit from this value“:

You can state the few variables that determine profit and their expression this week. (https://knighterrant.co/knowing-your-levers/)

To add to that, as a candidate, I would add the compliment:

You can forecast profit over 12 months relatively accurately with scenarios to accommodate fortune.

The initial test concerns managing the short term using KPI’s (handle of the whip stuff.) The new candidate test compliments this with a long term view.

If true:

  • You know your annual expenses. All those one off dings are accounted for.
  • You’re in control. You know how things will likely go and are making strategic choices that are investments with risks and not shots in the dark with unpredictable effects.
  • You’re leading the business by looking ahead and tying possible outcomes to concrete effects.

I’m not suggesting that you should be able to predict the future. No one saw the 2008 financial recession coming, or Covid, or Ukraine. There are big shifts in the market that will hurt and help you and cannot be anticipated. But to believe that the future is always unpredictable is inherently flawed. Will the sun rise tomorrow? Will you have dinner tonight? Will you watch a movie this year?

Your business has a trajectory that you can anticipate, learn from, and manipulate.

“In preparing for battle I have always found that plans are useless, but planning is indispensable.” – Eisenhower

Featured image is General Eisenhower, General Patton (standing to the left) and President Roosevelt in Sicily, 1943. Used under public domain.