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Creating Recurring Revenue Streams

Published by Summit Marketing Team on 01 Apr 2020

The Virtual CPA Success Show for Creative Agencies: Episode 10


At Summit CPA, we bill our clients through a weekly, subscription-based payment plan. After our early days of chasing unpaid invoices and dealing with clients who didn’t want to call us because they were afraid of the bill, we decided to move to a method of payment that is unique compared to other accounting firms.

In this episode, we are joined by Jody Grunden to discuss the possible recurring revenue streams for digital agencies, and why it’s so valuable. Listen to learn about a stress-free way to set up and collect payments from your clients for your digital agency.

Jamie Nau: Hello everybody, and welcome. Today, we are going to hit on a topic that's near and dear to Jody. We were just talking before the show, and this is a topic that Summit was started on, and it's something that when we talk with clients, and we work with people, it's very important that we try to get some kind of recurring revenue stream. So we're going to talk a little bit about what are possible recurring revenue streams for digital agencies. Why it's so important, and how it can help you run your business better in a lot of different ways helps. It can help in forecasting, helps with cash flow, and helps with a lot of things. So those are the topics we're going to dig in to hear. So Jody, let's start with you talking a little bit about how Summit earns a recurring revenue, and why we started our firm that way.

 

Jody Grunden: Yeah, it's kind of an embarrassing topic to even start with, because the way Summit was found is when we started the accounting firm, back in 2002, we really didn’t have any money. I had very little money in my name. And it was one of those things that I could not afford to have an accounts receivable. So, you know, we approached the bank for a line of credit. Didn't qualify for that because we were brand new. And so it was like, well, how are we going to do this? So initially, we started billing by the hour and sending it out. But what happened was, it just kept accumulating where people were paying late for all kinds of reasons. In being new in the business, we always want to give that client the benefit of the doubt, or we didn't want to worry the client at all by sending them an invoice and then following up with a call to collect on, because we didn’t want to lose any clients. So there was a lot of things going against us in the very beginning that really everybody listening to this podcast has dealt with at some point. And so we had to come up with a way where we could do this and continue on. So I thought, you know what? Let's try recurring revenue. No one in the accounting industry is doing it. Why can't we do it? You know, why can't we do it even though there's a lot of reasons why you can't? We were billing hourly at that time. You know, for the first couple of years that we were doing things billing hourly was kind of tough. We didn't know how to do recurring revenue without this. We thought, well let’s do flat fee. So flat fee was the way that we started it all off on. We thought, well, hey, here's what a tax turn costa. Here's what visiting, you know, once a month maybe to their office, and going through some financials, here's what that's going to cost. And we thought, you know what? Let's do this monthly. So we set up a reoccurring monthly model to hit their account every single month. And we always did it after we had done the job. So for January we would actually bill them in February, and collect our money, February 1st. That went really well until a client decided that they didn't want to pay us, and so they discontinued their recurring revenue and we were out an entire month's worth of work. Then we were like, oh, that's not going to work. So we immediately changed our model for all new clients we brought in, and over time changed the model for the existing clients that we were going to do it prior to the month. We got a little push back because it was a month's worth of work, and the clients were like, oh, what? You know, they give a little push back. So we thought, you know what? Let's not get any pushback. Let's just bill them every week. So we started doing a reoccurring weekly revenue where we would hit their account every single week. And, you know, we had zero push back, nobody push backed at all because they knew they could always discontinue the service at any time they wanted. They're only there for a week and obligated for a week at a time, and it was really great. You know, it took our receivables down from, you know, basically nothing at all, and allowed us to actually reinvest that money back into the business and really build the business we're at today. So we've done it ever since. Any new client that we ever bring on is reoccurring. We zap their account every single Monday through ACH. We don't send out invoices. You know, we don't waste that valuable time. We don't have admin doing that for us. It's just an automatic. The clients love it because it is less burden on them, and then we love it because again, it's less burden on us. So it worked out really well, but it all came from, kind of an embarrassing time, where we just didn't have the money. When we started our new business, we had to figure out a way to make it work.

 

Jamie Nau: Yeah, I think that from a project manager standpoint, I've told the story a number of times. But, you know, my background is in public accounting where I was an audit manager, and I remember sitting in audit rooms, and having this really important conversation I want to talk about with the client. You know, their rules were changing or they did something wrong. And before I could have that conversation, I'd have to say, oh, by the way, you haven't paid your outstanding invoice yet. So you just lose your credibility with that client. You're trying to have these really serious conversations with them, but all I'm worried about is when they're going to pay me next. So from a project manager standpoint, working at Summit has been really easy. I've never had to have this conversation with my clients because, you know, all I know is that their account gets withdrawn every week, and I'd never have to think twice about it. So that's one of the real advantages of the way we do it. It lets your project managers not have to do those collection calls. And the same thing with working with my clients, a lot times, my clients will be the first line of defense. We'll call and we'll say, you've paid your bill, but oftentimes when the accounting department calls, they don't care. It's that time the person who's actually a stakeholder that they'll listen to, and those are pretty difficult conversations to have from a from a project manager standpoint. So I think that's, you know, my personal experience working with this type of model really helps me as a PM.

 

Jody Grunden: And to kind of piggyback off of the experience in public accounting, you know, prior to starting Summit, I worked for a couple of large accounting firms, and one of my roles was onboarding new clients. It's kind of a cool role. I got a chance to meet the client right away. I worked with them for about a month. They contacted me, and talked to me pretty much on a regular basis. Then all of a sudden, the phone calls dried up. Didn’t think anything of it because of onboarding so many clients from these large accounting firms. Then at the end of the year, we got their tax stuff and it was a disaster. It was unreal. So I would ask, why didn’t you call me? You know, I could've helped you out and saved you a lot of struggling. And they were like, well, we got the first bill and we did want to call you. They knew they're on the clock. So it was one of those things like, well, you know, that's tough. And in any way you think about it, they’re right. You know, the first thing you do when you talk to a lawyer is, hey, I got a real quick question for you. And you're hoping that they don't send the bill afterwards, and if they do send the bill, then it's like, well jeez, I probably could've Googled it and found that out—a hindsight type of thing. When in reality you wouldn’t have known what to look for to begin with. So it was one of those things where, you know, recurring revenue, really the subscription based type model, really solved a lot of those issues and allowed our clients to freely contact us all the time. And I can imagine the wonders that would do in the digital marketing world, the creative agency world. If the shareholders knew hey, we can contact you guys all the time with questions, concern, and because of that we can get a great product, a great relationship. In my time with Summit, you know, since 2002, I don't think we've had any clients abuse it. I really don't. What what's your take on that Jamie?

 

Jamie Nau: I definitely agree. I think when I first was interviewing with Summit, that's something we talked about, and that was one of my concerns, not even them abusing it, but more of how many clients are going to walk away from you because of this model? How many clients turned you down because they're not willing to have their account drawn on each month or each week? You know, and I think that was one my the concerns, and I've been involved in a lot of sales calls in my time at Summit, and it's never come up. It's hasn't come up once in any of those sales calls, where it is a concern and the client doesn’t want to work with us because they don't want their account drawn each week. So it's really interesting that has never come up, and that it's hardly ever abused. Like I said, it takes a lot of those conversations out of the meetings you have with your clients, which is key. You want to have very important, valuable meetings with your clients. And again, the fact that it doesn't bother them and they say, oh, yeah, that's fine. That's what you guys do and that's how you work, we will make it work for us.

 

Jody Grunden: It’s kind of funny because, you know, like I always say, accountants hate change. You know, that's just a fundamental thing. They're afraid of taking risks. The biggest risk that we took at that time was potentially not getting clients when we really, really, really, really needed clients. You know, we weren't flourishing. We didn't have tons of money, tons of cash. And the reason I went to it the first place was because we didn't have tons of cash. It was a huge, huge risk at the time, and it paid off. The risk was all us. The worries were really all us, because like Jamie mentioned, we didn't go back and necessarily say, hey, everybody, here's how we're going to do. Every new client we picked up, we did it that way. Then we introduced it to the existing clients, and they pushed back a little bit, and we were like, fine, but eventually, those clients did the exact same thing. They eventually went with a weekly fee after a while. But the biggest fear was the fear that we had internally. It had really nothing to do with the clients because the way that you posture with clients is really simple. Like Jamie said, this is how we do business, and we get no pushback at all. We close about 30 percent of our opportunities, which is a very, very great closing ratio. And so it never comes down to that. That's never, never even been brought up as an issue since we started introducing it. It's just like, that's how we do it.  So then our clients didn't know any different, and they didn't care. As long as they know up front. The worst thing to do would be to surprise them after the fact, because they hate, right? And, you know, they hate getting the bill after the fact. It's like double what they thought or, has all these extra things that they forgot, and didn’t tell them because you were worried about pushback. Being upfront avoids all of that completely, which is great. So, we're never arguing about bills. We're never talking about the bill. We're never explaining the bill. We're never explaining why we had two people at the meeting and billed them for both of them. You know, all that kind of stuff is never in the discussion. It's always about their business, and how we can improve their business. You know, that's the key part of it. That's what marketing firms really need to learn how to take advantage of. And to that point, Jamie, what are some different ways that marketing firms can, you know, can take advantage of the reoccurring revenue model? Maybe not the exact same way that we're taking advantage of it with an accounting firm. But as a marketing firm, what are some of the ways that you thought of?

 

Jamie Nau: I think there's two that I see quite a bit that really are the easiest to explain, and then I'll talk about a third that's kind of a little bit more creative. But the two that we see the most often is maintenance. So anytime you're in a maintenance type agreement where it's a long term agreement, you're doing some kind of maintenance and upkeep on a product that's out there for the client. That type of thing should be invoiced weekly. It should be collected weekly, and it becomes predictable that way. You know, some weeks you're going to put 20 hours into the job, some weeks four or five hours. As long as you are planning for it in the long term thought of, okay, how long should this take per month? You know, you're going to end up coming out ahead on that. And so that's the big thing, is making sure that you're planning for how many hours you think it's going to take. And then just coming up with a flat fee, and billing that every week, or every month, or whatever time you think makes the most sense. That's the that's the easy way. The other easy way is a lot of times like outsourced work. You know, a lot of times you'll have a couple of extra employees on hand that you just keep on hand just to go and work in a company's IT department, and that type of thing is obviously another way to do the recurring revenue model. We're going to give you two people. It's going to cost you ten thousand dollars a week, or whatever that amount is, and that's how much you invoice for. Then if you go down from two to one, you’ll cut that in half. But those two are very common ways we see in this industry.

 

Jody Grunden: To add to that, I think the two key things you mentioned there was that, you know, both knew the fee in advance. You know, you knew how much you're going to charge them in advance. What you don't want to happen is you don't want to get bogged down in the administrative side. Where we've got to then automatically count hour, justify the hours, send them an invoice, or we then hit them with an account, we don't want there to be an administrative part to this. We want to take that out of it, because the key is we're trying to make life simpler for everyone—for us, for our clients, the whole works. We don't want to have to hire two administrative people just to be able to handle this new billing process. So I think you're 100 percent right. I think the two big keys there, is that you need to know the fee in advance. If you don't know the fee in advance, what's some ideas on that one?

 

Jamie Nau: So before I answer that question, one thing I want to add to that is, predictability is key in business and that's one of the advantages of doing this. So predictability is key for me as someone who's collecting cash. So it's key that I know how much I'm going to collect each, but also its to keep your customers. If they know they're paying two thousand dollars a week, it's a lot easier for them to stomach that. And it's a lot easier in negotiations because they don't think that, OK, you're going to start with two thousand dollars, but then by the end I am going to be paying five thousand a week. We've all gotten into those kind of agreements in our personal lives, where you start, you know, Netflix is only nine dollars a month and then, you know, three years from now it's twenty four dollars a month, and you're still paying for it. And just kind of forget about it. So I think that predictability is key there. And that's why you want to do that upfront. Say, hey, this is our agreement for this year. That's how much we're going to charge, and never stray from it unless there's a scope change, or something like that. But that is key. So, sorry, I went off on a tangent. What was your question?

 

Jody Gruden: How do you deal a fixed fee in the event that, it's not a fixed fee? So like how do you do the recurring revenue without a fixed fee?

 

Jamie Nau: This is again, something that we work with our clients on as well, because we really strongly believe that the recurring revenue is key, and that getting the predictability on both sides is important. So if you had a non-fixed fee arrangement where you wanted to go back and evaluate it at a period of time, what you could do is you could invoice, or charge a thousand dollars a week for the four weeks, and then at the end of the month go back and look at the overs’ and unders’ and say, okay, this month actually we worked over, so we're going to bill you an additional $300. Or we worked under, so we're going to credit the next invoice, so it's only seven hundred dollars. So you can kind of determine what that time period is and just evaluate at that time. And it can be a month. It could be six months. It could be, you know, six weeks. Whatever time period you determine that you're going to do that. But the key is you send that out as a separate invoice. You send your weekly thousand dollar invoice. You keep doing that. Then occasionally, whatever that time period you decide is, you send that extra invoice that helps get that amount trued up for the non-fixed fee types.

 

Jody Gruden: I would say the best time to do that, you know, to do all this is actually during the negotiation phase, because you've got a lot of leverage. Maybe they're trying to beat you up on price, or maybe they're trying to beat you up on something that's a little bit trickier. Well, this is the leverage that you can pull. You know, we can do this, but here's how we need to handle this. We need to handle this forward in ACH. Oh, you guys don't do ACH? What can you do as opposed to ACH? Do you wires? How does this work out so that you can actually get all this figured out while you're in the negotiation phase, especially for the big contractors, or the enterprise contractors, because some have the capability of doing it, others don't. You need to know that right away so that you can negotiate the best deal. Maybe it's like what Jamie was saying with a sprint basis, or you bill every two weeks or, you know, send the documentation later, you know, it could be whatever, but it's important to negotiate that right up front.

 

Jamie Nau: Like I said earlier, the predictability, the customers usually do appreciate that. It makes it easier in a budget. It makes it easier to forecast, they know how much they're charging you. And then they have one invoice a month, or one invoice every two months, or a quarter, that they can actually look into and have discussions with. And it's fine to have those discussions. Those lessons are good. You can talk about the scope creep. You can talk about what happened. You can make the make the relationship even stronger in those discussions. But it's a lot easier when you're having it occasionally instead of every time an invoice goes out. They don’t have to like look over each invoice and fine tooth the hours to see, oh yeah you worked that day. They don’t have to worry about that until the very end when you can actually have those conversations at a higher level, which is really important.

 

Jody Grunden: I think now it's time to probably take a real quick break. Jamie, what's the email address? If anyone any questions or wants to be part of the podcast, how would they get ahold of us?

 

Jamie Nau: Yeah, definitely, we have an email address that you can email us at. The purpose of this email is if you have any questions that you want to talk to us about, or anything you want us to talk about in this podcast, we are always looking for new topics. Or if you want to join the podcast, we are always looking for guests. So you can email: vcfo@summitcpa.net. Again that is: vcfo@summitcpa.net.  We're always looking forward to our listeners reaching out to us and making this the show better. So we looking forward to hearing from you.

 

Jamie Nau: So again, we talked about a couple advantages of recurring revenue. Jody, I wonder if there's anything else that we need to add to that. So the two we added so far is, obviously the project managers, it makes it easier on your team to manage. The second is obviously the forecasting and the predictability. Any other advantage of doing recurring revenue?

 

Jody Grunden: Well the huge advantage is cash flow. I mean, that's the basically the most obvious advantage, in my opinion, because now you've taken your cash flow cycle from maybe 60 days, or 45 days, and you brought it down, especially if the majority of your business is recurring revenue. It brings it down even more. Like, for instance, you know, we're a six million dollar accounting firm, and we have zero accounts receivable. Actually, we have negative accounts receivable because we get a lot of what we do in advance. So our cash flow is a lot better than an accounting firm of a similar size that may have a half a million dollars in accounts receivable. So let’s put that money to work now, or take advantage of it now versus later. We find that the companies with the lower risk are the companies with the higher percentage of recurring revenue. If you can get a 50 percent, or 60 percent recurring revenue, just imagine how easy your life is going forward. You know, instead of having to hunt and peck for one hundred thousand dollars of business a month, or a million dollars in business a month, depending upon your size, you know, it's going to be 40 percent of that. It just makes everything that much easier to work with, and takes so much risk out of it to where you're not having to worry about, hey, am I going to get this next job? Or have to lay a bunch people off? If you've got 60, 70 percent recurring revenue, event 50 percent, you know, the chances of that are a lot slimmer because you're taking the risk out of the equation.

 

Jamie Nau: And if you think back to the pipeline podcast that did. We talked a lot about capacity and what's under contract when you have a lot of recurring revenue, that gap is a lot smaller. You have a lot smaller gap between what your capacity is and what you have in contract because you know, at any time that even if we have no long term project work, I still have two hundred thousand dollars a month coming into recurring revenue, which just makes it a lot easier to feel good about your outlook, and also manage your business. You can say okay, I can take a little bit more risk, and charge a little bit more to this project because I have so much recurring revenue, and so it helps you run your business a lot better.

 

Jody Grunden: Yeah, and also when you get to that point in your life cycle, and maybe you're the business development person, you know, and you want to say, hey, I need somebody to take this position over because it’s just wearing on me. I need to do something a little different. Well, if you're recurring revenue is high, it's a lot easier to transition out of that position if you're not having to fill an entire booking business for your team. And the risk isn't is there. The risk is you'll hand it over to the next person and they fail miserably. Well, now you're in a bad situation. Now you're in a situation where you've got to lay people off. Scrounge a bit, maybe jump back into a fire drill type of situation.  Whereas if the recurring revenue is high, it's not as big a deal to maybe lose a client, or maybe not to get one client, because the margin, their gap, like Jamie saying, is a lot lower there. So, you know, recurring revenue does a lot, and basically solves a lot of issues that you're having that you maybe make the big rocks look very small, which is the key there for sure.

 

Jamie Nau: So Jody, one thing that we've talked about a couple of times in this podcast, and I think to a non-finance person this might sound a little intimidating, can you talk about the process of setting up an ACH? How complicated is it, and what goes into setting up an ACH with a client?

 

Jody Grunden: Yeah, it's a fairly simple process. The key though is you have to have a bank that has that ability, or have a vendor relationship. There's vendors out there that can actually set this up for you. You know, the “bill.com” of the world. You know, you might go to work through them or, you know, any other vendor for that matter. But with that, the banking relationship is easiest. So as part of the engagement, when you send out the engagement letter, or the SOW to be signed, you should always attach the recurring revenue form to it, giving authorization for you to take money out of their accounts. If you can do it through an automatic means, that's great. That's even better than the old paper away. And you get that information set up and then it automatically feeds right into the bank. So at that point, it's just a matter of, you know, getting the authorization, having then sign off on it. Then the ACH automatically starts coming in on Monday. They have the ability, you always want them to have the ability to terminate it. That's the part that's the good part about it. So they've got control over it. You've got control over it. But there's no need or worry. Again, we're looking at most, looking at a couple of weeks, or a month, depending upon how often you want to set it up. We recommend weekly. But, you know, some people want to take the baby steps and do it monthly, and that's cool. Just that weekly is a better way of doing it. And with that, you've got a really easy method. It does not take long to set up recurring revenue. The key, though, is that when you do get that baking relationship, make sure that the recurring revenue is set up where it's an automatic monthly pull so that your firm administrators’ not going in and having to do that manually every month. That's really important. So the key is making everything as automatic as you possibly can. Like I said there is software out there can do that for you. I would definitely look at two or three different ones to get some ideas on what the pros and cons are. But that's one way. The other thing is that you can offer credit card payments as well. I don't endorse that method necessarily, but it may or may not get you a client—maybe a smaller client. The problem there is you're always giving up a small fee to the credit card agency, or as an ACH cost you may get a dollar transaction, that fee may cost you 1 to 3 percent depending upon the credit card company. So you can have it set up in different ways, you know, basically through the same means. But again, try to keep it as electronic as possible. You don't want to house their banking information anywhere. That's going to be very important. Soon as that baking information is entered it’s real tempting to keep it in case something happen you can add it. Making a phone call (for that information) is a lot safer, especially if someone were to break into your system. You’re then calling them to explain to them how you had a security breach type of thing. So it's important that if you do the paper means, that PDF gets shredded or destroyed after the payment setup. If you're doing it electronically, which is what we recommend through a bank or a software where they've got that already down in that information you can sleep at night, you know, in the event that something does happen.

 

Jamie Nau: Yeah. I think the key there is, I mean, I think it sounds complicated, but overall, if you just called your bank, or call your accountant and have them set it up, it wouldn't be a lot of work. And I think that's the key. And again, it's definitely worth it. We talked about a lot of pros during this podcast. I would say, you know, it's one of my favorite things about working at Summit is that we have this model. And, you know, I've been part of forecasting calls. I've been a PM, and every direction I've seen this from, I've seen a lot of advantages. So I definitely think it's something worth implementing into you organization. So any final thoughts, Jody? We're going to close on time here. Any other final thoughts of you didn't touch upon?

 

Jody Grunden: No, I don’t think so. I think recurring revenue is what really saved our business from the very beginning. We were very small, you know, under a million dollars in revenue. I call that very small for us, because we were with the idea of growing really big. And I know we couldn’t have done it, we couldn’t have even gotten to the half million dollar mark without having the recurring revenue model set up. Financially, it just wasn't something, we just didn’t have a ton of cash. So it really helped us out there and it really helped us learn, you know, the importance of it, it's amazing. You know, we have weekly meetings, and the clients always  show up. And, you know, like Jamie mentioned before where, there was always a bill that they were behind on, or if they felt that, oh, wow, I am behind three months, I feel guilty about showing up. They quit showing up. And that's when we really need to talk to them the most, is when they were having the difficulties. So this took that completely out of the ballpark. You know, they show up. You know, it's not automatic. There's no issues with that. As Jamie was saying, it really solves a lot of the forecasting issues. It solves, you know, a lot of the risk issues that we talked about. It's very well accepted. I mean, it's not something that's not accepted anymore. You know, all software companies do it. You know, why not have service companies do it? And that's what we set up a long time ago. Well, over 15 years ago, and have been doing it successfully ever since.

 

Jamie Nau: Great. I appreciate your time today, Jody. And again, we'll be back soon with another awesome topic.


Creating Recurring Revenue Streams


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