This week on the Boagworld Web Show we are joined by Rob Borley from Dootrix to talk about managing your finances as a web design business.
Paul: Hello and welcome to Boagworld.com, the podcast for all those involved in designing, developing and running websites on a daily basis. My name is Paul Boag and joining me today is Marcus obviously.
Paul: What was that?
Rob: Hello. Illustrious? That’s a new word. I need to get a Thesaurus or something.
Paul: Well recently you wrote nice things about me in an email so I felt I had to big you up too.
Rob: Thank you very much.
Paul: A mutual appreciation party.
Rob: It’s a pleasure as always Paul
Paul: So what ridiculous time of the morning are we doing this podcast? It’s just wrong. Nine o’clock on a Monday morning is not podcast time.
Marcus: No it’s not. It’s your fault Paul.
Paul: Well actually I was just going to blame you.
Marcus: I got it infirst.
Paul: Because you’ve been away on holiday for a week, haven’t you?
Marcus: Yes. I’ve been taking it easy. I’ve been a rock star the weekend before.
Paul: How did that go? Your big gig?
Marcus: Well two gigs. No it was brilliant. It was playing in front of hundreds of people again—not one hundred—who were really into it. It was like going back in time. It was lovely.
Marcus: No, the rest of the week I’ve been doing home-busy type stuff. So yes, it’s my fault. We were meant to do this last Friday, but I said no.
Paul: Well, what can I say? Just used to it being your fault now. That’s fine. Rob was very happy to join us at 9.00am on a Monday morning, which was good news.
Rob: I don’t know about happy… I was given a time, and I generally like to do as I am told so…
Paul: Yeah, right…
Rob: Well such a big opportunity to come and star as part of the illustrious—again I am using that word—panel of Boagworld, I mean you don’t turn these opportunities down, Paul.
Paul: Well no. Obviously not, which is good and proper. Actually you are just a stand in, to be told.
Rob: Yes, I figured that. It’s the summer. It’s the dead time.
Paul: Yes, you know. Well actually because we were talking about finance—I was going to get you in at some point, obviously—but we were due to be talking about finance in this show. Well we are talking about finance in this show and the obvious person to get on was Chris Scott, who is the other founder of Headscape.
Marcus: Who is sat no more than ten feet away from me. But there is a glass wall between us.
Paul: But he will never come any closer. He really hates doing the podcast, doesn’t he?
Marcus: Yes. I could hear the fear in his voice, when I asked him.
Marcus: I couldn’t make him. So…
Paul: So…there you go. But it’s a shame because he would have been the perfect person to talk about finance. But actually it’s also quite interesting to get another companies perspective and how you’ve gone on and dealt with that kind of stuff. I like your attitude Rob, which is ‘Get rid of it all’. Which we will come onto more later, obviously.
Rob: It’s interesting this is the topic today, as it sums up my career. I end up doing things I know nothing about.
Marcus: Join the club!
Rob: So we’ll see how this goes.
Marcus: Definitely. Yes, we are talking about finance today. Oh I know so much on this subject.
Paul: This is not encouraging me ab out the quality of this week’s podcast. Because I’ve got quite into all this stuff.
Marcus: Then you can lead Paul.
Paul: No, only in a ‘Please somebody help me!’ way. Not in a ‘I know anything about it’ way. But there we go.
I said that I was going to get you on the podcast Rob, because we met up recently at the Big Do.
Rob: Yes we did, in Oxford. Very nice I think.
Paul: And a very nice conference as well. So it was a conference about Project Management and then once again we were completely out of our depth weren’t we, because neither of us were Project Managers.
Rob: No. I really thought I had dabbled over the years, but that’s not…
Marcus: That’s a bit unfair Paul. Rob used to be a Project Manager at Headscape.
Paul: Yes, but it was never a proper one, was it?
Rob: No, it’s was always more luck than judgement really. It was interesting. It was an odd one Paul, because I was opening, and you were closing but neither anyone of us had anything to do with Project Management but things seemed to go quite well really.
Paul: Yes, which was remarkable wasn’t it. So there we go. We spent most of the day in the pub, didn’t we? Truth be told.
Rob: Is this why you enjoyed the conference?
Rob: Because you rocked up at midday and spent the afternoon in the pub and then somehow reeled off your talk at the end. That’s impressive.
Marcus: I was going to go to this one. And now I realised I really missed out if it was one of those talks where you go and just spend the day in the pub.
Rob: There was some amazing material during the day, between myself and Paul. There were real Project Managers talking about how you actually do things. So to take us off of both ends, the rest was brilliant. So next time it’s definitely worth a look, I’d say.
Paul: Because they do workshop-y stuff. So instead of a series of talks, there was actually get-in-there-and-do workshop stuff which was good.
Marcus: I’m doing a workshop at this year’s IWMW. Which is slightly worrying.
Paul: Because you haven’t even thought about it yet, have you?
Marcus: I know all the topics, but I don’t know whether it will be ten minutes or ten hours.
Paul: Oh that’s the thing, yes. That’s workshops for you. Because you are so dependent on other people to participate. But you should be fairly safe at IWMW…
Marcus: Yes, no-one will come to our session anyway. It will just be me and Leigh talking to each other.
Paul: Oh is Leigh coming too? Oh good. I am looking forward to this then.
Paul: If it had just been you obviously…
Marcus: Yes. You wouldn’t have bothered.
Marcus: Anyway, let Rob talk. I am going to sit back and listen to Rob.
Paul: No! Don’t let Rob talk. Let’s talk about the sponsors. Because that’s what we’ve got to do at this point.
Marcus: I mean ‘Yes! Brilliant!’
Paul: Oh you are so rude. I love the fact that we are being sponsored by Template Monster because they are providing us with half of the questions, so I need to think less. And how cool is that? So anyway. They are also helping to pay for the transcription for the show, so even better! So stop being rude about my sponsors, Marcus.
Marcus: No, course not.
Paul: Otherwise I won’t let you be a sponsor next season.
Marcus: Oh I want to be a sponsor.
Paul: I know. Do you know, I’ve been working out the sponsors for the next seasons’ show and filling up all the slots? And I’ve deeply resented the five slots I have given you. Because you’re not going to pay me. And that’s no good is it.
Marcus: I’ll pay you with my time, Paul.
Paul: Pay me with your love.
Rob: Is this Marcus the Rock Star sponsoring, or Marcus the Entrepreneur?
Marcus: Oh that’s a great idea! Can the band sponsor?
Paul: You can use your sponsor slot however you feel is appropriate, Marcus.
Marcus: Oh that’s fantastic, because I have to give you information each week, to talk about something different.
Paul: I presumed you would.
Marcus: Oh, I’ve got to do the talking? No it would be much better if I give you stuff that you have to talk… ‘This week’s sponsor is…’
Paul: Oh is that how we’re going to do it? That’s awesome.
Marcus: No. I don’t reckon we will. But we’ll try.
Paul: Because I was thinking that if you did it, then I could be the person sitting in the background moaning about sponsor slots.
Marcus: Being bored?
Marcus: One week we will do it like that, at least.
Paul: All right. So anyway. Template Monster. Please do check them out. I do appreciate the fact that they support the show, and I hope you do too because it does help feed my child. And that’s an important thing.
So they’ve got the largest template library on the web. So just in terms of sheer scale, you have to respect these people. With forty-six thousand designs. And I have to say before I started poking around the site, I was somewhat sceptical about whether the quality would be good. And it actually is. There is some really nice stuff on there. Not everything is my personal taste, but the vast majority is really good. They’ve got seventeen different categories of content from sports to automobiles and then they’ve got sub-categories and all kinds of stuff. So if there is a particular kind of template you are after, chances are they will have it. They’ve even got some weird and wacky experimental stuff which is worth checking out. It’s also worth saying that they don’t just provide website templates. They’ve also got Facebook templates, newspaper templates, fl…fl… flaccid assets.
No, flash assets. And even PowerPoint templates. So you can find out more about them at Boagworld.com/TemplateMonster. Please check them out.
Discussion about finances
Paul: Ok. So. Finances. Are we ready guys? To show our expertise in this area?
Rob: Yes. Yes we are.
Paul: The confidence is just overwhelming.
Rob: What do you want to know, Paul?
Paul: Ok, so we’ve got a load of questions that have been sent in by Boagworld listeners and also by the Template Monster community.
First one. How do I work out the expenses for my business? So how do I not add up as they come in, because that’s fairly easy, but how do you predict and calculate and work out what your expenses are on a monthly basis? Rob, give us an overview—before we get into that specific question—how have you in the past have you approached your finances, and how are you approaching it now? Did you use to do it all yourself?
Rob: Yes. When we first started Dootrix I tried to do everything myself and the main reason for that was because I didn’t want to get in a position where I handed it all over and just didn’t understand any of it. So in terms of filling in the forms and doing a Tax Return and working out what VAT is and all that kind of stuff. You hear these stories where Directors end up in Court somewhere because they’ve got a dodgy accountant who’s done something they shouldn’t have done and their only defence is ‘Well I didn’t really understand what is going on!’ which turns out to be not much of a defence.
I didn’t want to be in that position so I wanted to understand enough about how these things would work, but very quickly it got to the point where it was taking up far too much time and apart from me also not having the skills and the understanding to do these things in the most efficient way, it was just—as I said at the beginning—it’s not what I do, it’s not what I am good at. I ended up doing it because I was a Director of the company. So my general philosophy now is to try and outsource as much of it as possible so we can get on doing the things that we do.
Paul: So how much do you out-source? Because most people would have an accountant. In fact, if you are going to be a Limited Company it’s almost impossible not to, unless you are going to spend your whole life doing accounts. But you go further in terms of invoicing and debt collection and that kind of thing?
Rob: Yes, well obviously the first thing to go normally is Payroll. As soon as you get employees, that takes up quite a lot of time working out payslips and doing all that kind of stuff, so all that stuff is out-sourced. Then you’ve got Invoice generation, and hopefully as a business you are doing some work, but the paperwork involved in making sure Invoices are right and sending them out and making sure that they’ve gone to the right people and they’ve been received, and that kind of stuff. Again that was taking up far too much time, so that’s been outsourced as well. I am not sure I like the term ‘Debt Collection’.
Marcus: Yes… that implies people aren’t paying you.
Paul: Alright, Payment.
Rob: So chasing people is interesting. One of the things we’ve learnt quite quickly is that people generally don’t like paying bills. And as a small business, one of the difficult things you’ve got to balance is that you’ve got a relationship to maintain with your customers and so often some stuff like money, whether it’s a late payment or just sending bills in general, can start to act as a barrier between you and your customer. After all, your customer has come to you because they want you to build a mobile app, or solve some digital problem or build a website, that’s what they want to talk to you about. They don’t want to talk to you about whether or not there is an Invoice coming, or whether or not Accounts Department has paid the previous Invoice. So by moving that to a different department, or individual, it takes that potential tension away from the relationship.
Paul: So are all late invoices chased by this third party company you use, or is it only ones that get seriously late?
Rob: There is a whole bunch of automated reminders that go out, as payment dates approach. It’s a bit of a strange one. Payment terms we’ve discovered – you put something on the contract, whether it’s thirty days or forty-five days or fifteen days or whatever it is, that seems to be the minimum. So if it’s a thirty day term, that’s when they start thinking about paying it.
So you need to be a little bit careful. Again, protecting the relationship, you don’t want to get too heavy too soon, because ultimately you are working with people that you want to keep working with over time and you don’t want to fall out with something that’s ultimately irrelevant to the thing that they have brought you in to do. So no, as soon as a payment falls late, we don’t send in the heavies. But it does, and it varies from person to person, it’s a judgement call to be honest, depending on the size of the company, the relationship you have with the company. Is it a big sector, is it a small start-up? You have to judge what the best way to follow it up is, I think.
Paul: I agree, but I think the automated emails work quite well. They certainly do for me, because obviously I am nowhere near dealing with the scale you are, but one of the things I like about Freeagent which I use to run through all my invoicing is that you can set it to send out an automated email. I have one that is sent out seven days before an invoice is due, just reminding people gently, then I have one that goes out when the invoice is due and then every seven days until they pay it. But I flag those, or I certainly flag the first few as very much ‘these are just automated emails – I am not hassling you, it’s just the system sending out an email’. And then I will wade in if things get more complicated further down the line. But I do know it is a balance. It is a real balance and I can totally understand the desire to have someone separate that does that kind of chasing.
Marcus: I’ve said on previous shows that how lucky we are that we very rarely have late payers and I’ve just realised it’s because we’ve got Liz.
Paul: I was going to say, I thought you did have late payments.
Marcus: No, occasional, but it’s not the norm which I think, from what Rob was saying is that it might be the norm. We do tend to be paid more or less on time. Yes, of course there are exceptions to that and I am joking about Liz. But Liz basically helps with our Invoicing and late payment chasing and that sort of thing and she’s very good at it, so maybe there is a correlation there.
Rob: We found that the bigger the organisation, the slower they are to pay.
Marcus: Well certain very large organisations that we work with, we have to accept their longer terms, and tough, basically.
Rob: Yes, exactly. That’s what really difficult about it. It’s tough. There is nothing you can do about it. You just have to wait and hope.
Marcus: Fingers crossed.
Paul: I am almost ok with longer terms if they really do pay at those longer terms. Because from a cash flow point of view it’s better to know what’s coming and when it’s coming than ‘hope it might turn up when it’s supposed to but it never does’. You can plan around one, but not the other. It’s like this weekend I met up with some other Web Designers and one of the reasons one of them has recently moved on to a full time position is he just got fed up with the cash flow challenges. Fed up of people paying late and him having to fret about whether he’s got enough money to cover himself, even though he built up a reserve behind him and all that kind of stuff, and so I can totally sympathise with that.
So let’s get back to the original question, sorry that was on a huge tangent. It was a question about expenses wasn’t it, about how to deal and understand what you’ve got going out of the business and how you manage that. Is it just like ‘Let’s open and Excel spreadsheet and do it that way, or is there anything more sophisticated to it?
Rob: Excel is a very sophisticated piece of software.
Paul: It is, I am not criticising Excel. I have to say, since leaving Headscape after years mocking Chris for his excitement over Excel, I can now begin to see the appeal. Only begin…
Marcus: I can’t believe you said that and I was recording.
Rob: I have that on loop.
Rob: Yes, well there are some obvious expenses that you know are coming if you’ve signed up for various services, monthly subscriptions, obviously you’ve got salaries, all that kind of stuff and then there’s the other stuff that you don’t necessarily know that’s coming and is dependent on sales meetings you are going to – travel, all that kind of thing. So I think that there is some you can plan for and there are some that you are aware of. It’s a prediction rather than knowing exactly. We use Expensify to just handle the whole team’s expenses when they are out of the office. Train tickets or buying coffee or buying lunch when they are out. That’s really just a tool because it keeps your receipts together which makes the accounting easier at the end, but it’s not much of a prediction tool, it’s just a way of tying it all together, which we’ve found works really well.
Paul: Again, I use Freeagent which has the ability to add in expenses to it and that kind of stuff, but the other thing I do is use a tool which actually I use for my personal finances, which is called You Need A Budget (YNAB). Which sounds like a very Mickey Mouse tool, but actually it’s really, really good because what you can do is set your different categories of expenses that you’ve got. You obviously put in the ones you know definitely but each of the categories is essentially a bucket of money in different areas that as the month goes on, you can then pay out of these different buckets. But what’s nice about it is that you can make predictions about how much you are going to spend in each one of those categories, for example Travel. You don’t actually know. And then you are obviously taking money out of your Travel bucket, and when that reaches zero it starts to go into minus figures and you can see how off your prediction was but if you don’t spend all of it on a particular month then you can carry it over to the next month if you end up spending more that month. Then also it gives you reports and things like that so as time goes by you can say ‘Ok for last year I have spent this much on average per month on travelling’ so you can actually get a sense of how much you’ve got going in and out on those different areas.
You’ve got to put a stake in the ground. You’ve got to say ‘Ok well I think I will be spending about this much on travel’ for example, because otherwise it’s just this completely open ended thing and if you don’t have a guess at what your expenses are then you can’t guess at how much you should be charging out.
Rob: Yes, this is where our situation is obviously a little bit different. You are effectively a one man band at the moment. Our accountant gives us monthly management accounts so that goes through what we spent in each category in the previous month. We can use that to benchmark and predict going forward. So it’s a slightly different set up.
Paul: Yes, a different set up, but same principle, isn’t it. That you’re recording what your expenses are, so you can predict what they are going forward. But it amazes me how many people don’t do that kind of thing. One of the things I am doing now is a lot of mentorship with people, both small agencies and individuals and a lot of them just don’t do this kind of basic tracking of expenses and working out how much they have actually got going out of the business, which just blows my mind. But there you go.
Rob: It’s easy to look and to keep one eye on the bank account and say ‘Well ok, we are in the black still, so I will just keep spending’. But obviously if you don’t have a view of that going forward, you can get yourself into trouble quite quickly.
Paul: Absolutely. Also, it’s not like you don’t have to track expenses anyway for getting the tax back and that kind of thing as well. So…
Right. This is a good question. ‘I worked out my expenses, and from that I calculated what my charge out rate is or should be but I am still not making money. What am I missing?’
Marcus: The time you are not working.
Paul: Yes. Go on Marcus.
Marcus: Basically people are only productive only realistically 50% of the time. I think everyone aims for 75 – 80% but they are not. So you need to factor that in as well.
Paul: And also, alongside that, when you say not productive, are you saying literally sitting around looking at Facebook, or are you including non-chargeable work?
Marcus: Yes, absolutely. It’s not an exact science. So you have to allow for the fact that it’s not an exact science. Especially if —Rob you do a lot more time and materials work than we do, we do a lot of fixed price work—and sometimes you win, sometimes you lose on that. So that is a really good indicator of the fact that you can’t calculate these things exactly so you have to make sure that you give yourself leeway of 20–30% and work out your rates based on that.
Rob: I am not sure that expenses are the way to define your charge out rate, but perhaps you are changing the wording of the question Paul?
Paul: No, and I am glad you picked up on that.
Rob: No, I mean I could spend a lot of money on a new boat and I am not sure my charge out rate would cover that, I would still lose out. Obviously your expenses are a factor, but you have to be realistic about that. There are all sorts of other key measures like what the market will actually pay for whatever it is you are doing – it’s kind of important. So there is a balance and it’s important to do some research around that. We all have a number in our heads that we think we should earn and what we think we are worth and if you are Paul it’s really, really, really high.
Paul: Yes, I am worth millions more than what I am actually charging because the market won’t support it.
Rob: Of course there are a whole bunch of people out there with the money that need to pay you and if they don’t agree with your rate then they won’t pay it. So it is of course to do some research around what other people are charging, what people are willing to pay for specifically what you are doing. And it may be that you are actually spending too much and you need to cut your expenses down.
Paul: I remember when we had Chris Sanderson on the show – was it the very first week Marcus? I think it was?
Marcus: It may well have been. It all flies by so quickly.
Paul: It does, doesn’t it. He quoted a website that he found, a UK website that provided standard rates for Designers doing the kind of thing he was doing, so there is ample material out there to find out that kind of stuff. I know A List Apart do a regular thing on that as well where they publish rates. Now obviously it’s dependant on region, the type of work you are doing, but it’s difficult to work out what the market will bear.
Paul: So how do you stay on top of that?
Rob: We keep an eye on what the recruitment agencies are doing, to be honest and they generally add 20% on top of what they are actually charging out. And all our rates are based on a day rate, that’s the lowest denominator we go to, so it’s quite an easy comparison for us. So if someone is looking for a good JS Developer we can get in touch with recruitments, we can find out what they are charging them out for, take of 20% and basically that’s what companies are willing to pay for a day rate.
Paul: Oh, I like that. That’s a cunning tactic you have there.
Rob: But it does depend on your business and how you are doing it, but that works for us.
Paul: I’ve been trying to work out the value of recruitment agencies for years, and you’ve now just given them to me. Before that, they were just an annoyance.
Rob: Yes. Unfortunately they own the market and they dictate the rates, and as the supply and demand changes, the actually individuals charged out don’t get any more or less money, it’s just the recruitment agencies make more or less on their cut. So if there is a shortage of a particular type of skill they will just put their cut up. So as long as you can get a handle on what they are charging out at, then you can normally end up back to what the individuals are paying. So if you take the recruitment agents out of the loop, that’s the saving you can make to the companies. As your initial introduction, no matter how much value added you think you have got, it’s the price that will get you through the door, more often than not and then you can work the relationship after that.
Paul: So another question that Marcus has already semi-answered but I would be interested in your perspective Rob is, ‘How much of your time can you expect to charge out? How much do you plan around?
Rob: Well it’s slightly different for us, similarly to Headscape I suppose with the number of people that are charged out are more than others. I am charged out at very little to be honest, I have no real value but we are in quite a good position that we were up at sort of 85% of our staff are chargeable and because of as Marcus said, a lot of our stuff is T and M effectively, they are charged out a majority of the time when we are busy. So that’s how we do it. It’s more difficult if you are a Freelancer or if you are on your own. I don’t know how you manage that, but obviously while you are doing the work, you still need to allow time to go and find the next piece of work, whereas with a bigger team, you’ve got dedicated people to go and do that.
Paul: I’ve basically split it 50/50. I reckon about 50% of my time is either non-chargeable in some way or other, whether it’s me doing my Admin work or whether it’s me doing Sales and Marketing or whatever else. Which is quite a scary thought I think for a lot of Freelancers and individuals, that so little of their time is actually chargeable.
Marcus: Yes, that’s the point that I was making. You need to make sure you factor that into your costs and into your charge out rate, but also adding on Rob’s comments on about you have to be realistic. But quickly going back to that, I’ve been told every year that we’ve been in business by one client that we’re really expensive, and by another that we’re really cheap. So it’s a bit of a lottery really and I love the fact that you are working it out on an ongoing basis Rob, because I suspect we probably look at our rates every year maybe but certainly not ongoing, so I am impressed with that. I think it’s realistic, and you are absolutely right. I think we’ve missed opportunities because we haven’t kept up along the way. But I think we are doing better now than we were.
Rob: If you are looking to build relationships with customers then the first project that you do with them you don’t want it to be the last. The first project is where you put your very best in and you’ve done all the business development and managing the relationship up front, to get your foot in the door and then consequently going forward, you make more money on each project because you don’t have all of that extra stuff. You’ve already made your relationship.
So our view has always been ‘As long are you don’t lose any money going in, generally it will work out over the long run’.
Paul: The way I approached it as an individual was that I took my expenses, the minimal set of expenses I thought I could get away with. I factored in the salary I would like to pay myself, I factored in the pension I would like to pay myself and the various other bits and pieces and that calculated my outgoings per month. I then worked on the basis that you’ve got a potential of twenty days a month that are chargeable or thereabouts. Halve that because I thought that I would only be working half that time in chargeable work and that became my base rate. But that doesn’t mean that’s what I charge. That just means that’s my break-even rate for want of a better word. And then my actual charge out rate will fluctuate from there upwards depending on a) the type of work I am doing and b) what I think I can get away with.
Rob: You know your customers listen to this Paul?
Paul: I do, I do, I do. But what I mean by that is essentially what you just said. You just said it in fancier words. It depends on how the market fluctuates doesn’t it. And that basically is what you can get away with. It’s what the market will bear at that particular time. And I also know that I bring more value in some situations than I do in others. There are times when I am working in a sector I don’t know quite so much about or that I don’t have so much experience over so I tend to have a slightly lower rate than I would in a sector where I can look at their problem and know exactly what they need to do and how to solve it.
And also they gain the value I bring to the company. So there are some situations where I know if I give them this piece of advice, it’s going to increase their revenue substantially and in which case I would charge a little bit more in that situation. I wouldn’t go as far as saying value-based pricing as that’s all a little bit more convoluted than maybe I would undertake, but that same basic principle I think applies. Anyway, that’s my justification.
Marcus: Sorry, I was checking out a joke. I realised I had to have a joke, but I do now.
Paul: That’s ok then. So we’ve already talked about the next one in some degrees which is ‘Do we need an accountant? Isn’t there software that does this kind of stuff?’
It depends on two factors really, doesn’t it? It depends on the scale of your business so there is no way that a company the size of Dootrix or Headscape is going to want to do all of their own accounting, but even with a smaller company like mine, which is just me, I think there is huge value in having an accountant really. Especially when you become a limited company and all the additional stuff that goes alongside that. A good accountant, as they say, should pay for themselves.
Marcus: That takes me back. I’ve got a music business story though. We used to have dedicated Music Business accountants, who were really, really expensive. But they basically sold themselves on the fact that they would save or find you many, many thousands of pounds a year. But it soon dawned on me, well after about three years that even though they were very vocal about ‘We’ve been approaching your publishing company and we’ve got them to find an extra ten grand..’ but every single penny that they’ve saved us, they were charging us. So you have to be a bit careful on that one.
Paul: Yes, that’s a fair comment.
Marcus: No names mentioned.
Paul: No, you’re safe. Let’s talk about cash flow and managing cash flow. A lot of people find cash flow a huge issue. What can you do about that? I mean, I know that both Headscape and Dootrix have had cash flow problems in the past. I know that I haven’t yet, because I haven’t been doing it long enough, but it’s going to happen to me sooner or later. How do you mitigate that risk?
Rob: So for us, I think there are two approaches really. You can either build yourself in some kind of safety net and that’s either that you’ve been trading and profitable long enough that you’ve saved enough in the bank or you go to the bank and some other kind of financial services institution or system to give yourself a safety net. Whether that’s an overdraft or some kind of debt facility to cover the expenses that you can’t pay for. That’s one approach.
The other approach is the way you balance your invoicing. So we’ve had a balancing act to do as we’ve tried to grow the business over the last eighteen months. We’re looking for bigger and bigger contracts as they are the ones that are more profitable as they’ve usually got work for our chargeable team and the cost of sales is less and they tend to run for longer and the rate is better, so all round its good. Except when they are taking up 85–90% of your team and then they may be late paying on an invoice and it presents you with a cash flow problem. Because you still have to pay all your expenses but the invoice you’ve put out for your whole team has not been paid.
So what we are trying to do is always balance those larger projects with also some smaller ones where you can send in quicker invoices more often, which hopefully get paid quicker to keep you ticking over. So it’s a balancing act between those two.
Paul: I do like that. It is important to have a mix of clients. I am just beginning to realise that now. I have a potentially really big client that I may be doing in August that will basically take up the entire month and I know that if they pay late, that will be a pain in the arse. And that’s even at just a micro level and the way that I am dealing with that is that I am offsetting it and actually doing more than I would normally do in a single month, just so that I know I have some cash coming in if they delay for whatever reason. So yes, that kind of works at whatever level you are at.
Rob: It just means you shouldn’t go out and buy a Ferrari.
You need to keep some money for a rainy day, because you are not always going to have good months.
Paul: This is hugely important, although I do want my Ferrari. I am not in the slightest bit interested in having a Ferrari.
Marcus: But there is probably an equivalent Paul?
Paul: Not of that level expense, no.
Rob: A Winnebego or something?
Marcus: Yes exactly. A huge gold Winnebego with diamond studs on it.
Paul: Yes, no that might do it, maybe.
Marcus: I’ve accepted many years ago that I won’t be getting a Ferrari, which is fine, but this is where I have to big up Chris. Chris is ultra-sensible. When we were talking earlier about when you’ve got to put a stake in the ground as to what your expenses are going to be, Chris has always said for every item that they are going to be way more than they’ve actually been, which means over the years we’ve gradually built up a bit of a cushion. I mean, we used quite a bit of it up last year because things weren’t so great. But we’re still alright. We’ve never been in debt so basically repeating Rob’s first point, which is try and get yourself in a position where you’ve got a cushion and something to fall back on when things aren’t so great. And I have to thank Chris Scott for doing that.
Paul: And I have to thank him as well, because he’s rubbed off on me and so in setting up this new business, I have been so just tight over the last few months because I have been obsessed with getting that cushion behind me. And that comes from Chris. And he’s totally right. You have to have that behind you. As I am digging into more of the details of the finances and seeing the things that could potentially go wrong, you need that cushion there to deal with those clients that pay late and to enable you to deal with those unexpected expenses that suddenly catch you out.
I had one recently which is that I might be taking on a client in America and suddenly my business insurance is going to quadruple. So it’s things like that, isn’t it, that can catch you off guard if you’re not careful.
Rob: The chances are with a small business, it’s not going to be your inability, your lack of capability. It’s not going to be you not delivering on a project or upsetting a client. They are not the things that are going to send you bust. It’s going to be cash flow. Cash flow is the biggest enemy to any small business. And any small business owner will probably say the same thing. So you need to just accept that and prepare for it from day one and be aware of it.
Paul: Ok, one last question before we wrap up, which is about the most important question on the list ‘How do I get away with raising my rates without upsetting my clients?’ I like this one. So the one thing that I wanted to say about this—because Marcus and Rob are going to have a lot more experience of doing this than me—the one thing I wanted to say is for those of you that are in this luxury position, don’t undervalue yourself from the start. I think a lot of people when they start a business are so desperate to win work, that they undercut and use price as a way of differentiating themselves starting out the gate and I think that comes back to bite you later because Clients get certain expectations and if you get those repeat Clients that as Rob said a minute ago, are so valuable, that can then be problematic because they expect those rates, they don’t want to see them change, etc. So that was just the thing that I wanted to throw in. Marcus, we had thirteen years—well you’ve had thirteen years of experience—of gradually raising rates, how do you do it?
Marcus: You don’t do it unreasonably. I think we’ve gradually upped our rates every couple of years and I don’t think I can remember a time where anyone’s complained about it because it’s been in line with inflation in which case people just go ‘Yeah, alright then’. But I am interested to hear Robs reply on this, because if you are changing your rate depending on the market, I assume that’s down as well as up?
Rob: Yes, but it’s dependant. It’s normally the first engagement that sets the rate. I think it’s very difficult to raise rates without upsetting people. I think you are going to upset people even if they are not really upset, they will try it on, because everybody wants to pay less. Paul’s point is interesting because we have discounted at times to get a foot in the door, but the way we’ve done it is to make it explicit that that is what we are doing. So on whatever the initial contract, whatever it is that goes out, we will say ‘Well ok, here’s your 20% or 10%. This is the normal rate, this is what you should be paying. This is what the project is worth, but we are applying a new relationship discount of this much’. And then that way, they are not surprised when you apply the full rate for the next project.
Paul: Yes, sorry. I would totally agree with that. I didn’t mean to imply that you should never discount, I just meant that when you set your base rate from the beginning, not to set it too low. There is nothing wrong with discounting for a new relationship or indeed for ongoing relationships if they are willing to commit to a certain amount over a certain time. And I definitely do that kind of thing. It’s an interesting one, isn’t it? Has anybody ever tried the thing of giving an existing clients warnings, so that you raise a rate for new clients and then the existing ones you say that ‘We’ve raised our rates but we will continue to honour the old rate for x period of time’?
Rob: Yes, we have done that.
Paul: And does that work or not?
Rob: It’s difficult to say, because we didn’t try it the other way. They paid the higher rate and they grumbled about it, but they paid it. I just think that’s normal, I mean Marcus has much more experience about this than me. But I think people will just grumble when you ask them to pay more.
Marcus: The point I was trying to make was that we’ve never gone ‘We’re going to hike our rates up by 50% or even 10%’. We’ve never done anything like that. It’s always been more or less in line with inflation. But when it comes back to it, if we are going for a fixed price project and there is a budget we will be taking a view as to what our rate actually is for the work that is required to deliver on that. So it does change from project to project.
Rob: It’s a bit different for us, because we do generally charge on a day rate, but I think the key thing is to be confident in what your pricing is. I think this comes back to my original point is. You need to understand what your market value is. Because if you are confident then it takes the pain out really, because someone isn’t going to go somewhere else on price. It’s actually going to cost them a lot more to change supplier. And it adds all the risk on them, because they know you and they know you can do a good job hopefully by that stage anyway so I think we make more of this than it needs to be. As long as we know what the market rate is and we are confident that we are value for money, then I think as long as you stay within those boundaries there shouldn’t be a problem.
Paul: I like that as a good way of wrapping up the discussion. If you understand what the market will bear, if you understand your expenses, if you understand your finances, then you can be a lot more confident in your charge out and the way you do your business. That’s a good one.
Paul: Cool. Alright, thank you very much for that guys. Before we wrap up I just want to mention another of our sponsors which is Lynda.com. Thank you very much Lynda.com for sponsoring the whole season of the show, which is great.
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Marcus: I need to thank Darrell, again for this week’s joke – who keeps sending me jokes, thank you Darrell, some of which I can’t use.
‘Things were going very well with my new girlfriend and I was going to ask her and her four-year old son to move in with me. She explained however that her son was terribly scared of my dog.
“I’ll get rid of him if it helps our relationship” I told her.
“Really? That’s so thoughtful and kind” she beamed. “I think that will be the answer”.
“Right-ho” I replied. “If you just take Snoopy for a walk around the block I will be sorted by the time you get back”.’
Paul: That’s just quite disturbing. I don’t find that funny. Has anybody reported this person to the police?
Marcus: It depends on what you mean by get rid of him…
Paul: You are talking about hurting a four-year old child. A little cute child. How old are children Rob?
Rob: I have two three and a half year olds, and an eight month old.
Paul: Two three and a half year olds. You are talking about getting rid of Rob’s children, Marcus.
Marcus: He’s also got a lovely dog.
Rob: I do have a lovely dog. He’s a Beagle Hound.
Paul: Which would you pick?!
Rob: Depends on the day.
Marcus: Ok, it’s a bit sick, fine.
Paul: Disgusting. Not the kind of content we want on this show, young man! Or old man, whatever you are!
All right. Thank you guys for joining us this week. Finance doesn’t sound the most sexy of subjects, but hopefully you got something useful out of it. I really appreciate you Rob, for coming on and being so honest about your business and how you run things. So that’s great.
Rob: I just hope your audience don’t judge me for talking about finance and being dull.
Paul: Yes, I should put one of those disclaimers, ‘Rob Borley might talk about finance, but he talks about other subjects too. Terms and Conditions apply’.
Rob: Thank you very much.
Paul: Because what were you talking about at the Big Do? You were talking about failure.
Rob: Yes, I was talking about failing as a Project Manager. I keep getting set up for these things.
Paul: Yes, you keep getting all the sexy topics. What would you talk about if you could talk about anything you wanted?
Rob: Ferraris. Winnebego’s…
Paul: See you don’t really know, do you.
Rob: I don’t know. I don’t have any real skills anymore.
Paul: No exactly. So you have to talk about these soft areas, or whatever they call them. I was very upset. Marcus, you don’t know this, but at the Big Do—we should be finishing this podcast but I have to rant about this—at the Big Do, Rob brought up the Muppet award. And in particular my incident where some kind Twitter follower called the Fire Brigade on me. Transcriber edit: Do tell!
Marcus: Yes. That wasn’t the only one though, was it Paul?
Rob: That was also mentioned.
Paul: What was the other one you mentioned then?
Rob: Just all of them. Basically my entire talk was making fun of you. It was brilliant. Never short of material when you hang around with you Paul.
Marcus: Quite right.
Paul: Unfortunately we have run out of time to go through all of those.
Marcus: No, we are saving them up for next week.
Paul: Are you? We’re going to get them all next week? So next week on the show we are going to be talking about marketing your business. Now who is that with? I can’t remember who I invited. I invited someone amazing. Oh I know! We have the CSS animation guy, called Donovan and Donovan is going to be joining us because he has been doing some marketing stuff to promote various things that he’s doing so it’s going to be a real great opportunity to dig in to some marketing at multiple levels. From marketing your own little product all the way up to marketing an agency. So it should be a really interesting show next week. Not that this show wasn’t!
Marcus: I was going to say, there’s an implication there Rob. Did you hear it?
Rob: Yeah, it’s fine. I am never coming back.
Paul: Well we could have invited you on to any of the shows and you would have had something to say because you are almost as opinionated as me aren’t you?
Paul: So there we go. Thank you for listening to this week’s show. Talk to you again next week when we will be talking about marketing in business.