The Financial Audit Results Are In - Chaos Log 03

The results are in!

As you know, I had a closer look at BIGSEO to understand what this company is made off.

So today I want to share some of the insights of the financial audit.

I tried to keep the post as short and non-technical as possible, as I fear a full financial analysis would be boring for you to read. It turned out to be harder than expected. The combination of not trying to get into details and still showing some relevant results is tougher than I thought.

This is my take on it. Let me know if it works for you.

Ok, buckle up. This is going to be a wild and fast ride into the inner core of this company with valuable lessons along the whole way.

I spend the last couple of days hidden in a corner of the office trying to make sense to the numbers and documents I examined. So yeah, that pretty much sums up how I felt at the end of the week.

While time consuming, this internal inventory was long over due and crucial for the decisions ahead of us. If nothing else, I achieved a basic understanding of the current situation of the company, financially, organisation wise and operationally speaking.

Before we dive into it, I want to shed some light on what it is exactly that we are doing here at BIGSEO, as it doesn’t seem to be 100% clear.

*Enter 60 second introduction*

BIGSEO in a nutshell

Basically, BIGSEO is a team of roughly 20 people, who work in four main areas:

  • online marketing for clients such as Glovo and Danone with focus on SEO
  • monetisation of websites we own in the health, education and food sector via Google Adsense, Amazon affiliation and lead generation and selling
  • creation of online marketing products for investors and business owners that help to dominate a certain niche. Look up MBNs if you want to know more.
  • brand building for Romuald, in particular building and maintaining a Youtube channel

All of that magic is happening in this old manufacturing hall that was turned into a hip office over the past six month. More on that in one of the following posts.


*End 60 second introduction*

My goal is to treat each individual area of BIGSEO as an own independent department, while using synergies between them. Eventually each of the areas should be profitable by itself and grow sustainable.

Where are we standing right now? Are we there already or is this experiment meant to fail before it has even started?

Well, the answer is: a bit of both.

Audit results that show the long way ahead of us

My final report consists mainly of four different parts:

  1. Financial Analysis
  2. Organisational Analysis
  3. Operational Analysis
  4. Workflow Improvements

In this blog post I will share some of the results of the financial analysis. The results from the other areas will be published in the next article.

Here is why:

My understanding of my role within BIGSEO is to make sure that a) have a vision and a derived mid- and long-term strategy for the company, b) build and maintain a top-performing team and c) make sure the company has enough funding at any given time.

With my focus on the financial part I simply want to make sure that we don’t run out of money before we have the chance to think about a mid- and long-term strategy or its execution.

Show me the money

Disclaimer: I will be as transparent as it is possible for me, without revealing any sensitive information. All financial numbers presented here are masked by being multiplied by an arbitrary factor. The relations however are correct and representative. While there are many more learnings one can take out of the data I present here, I focus on the revenues of the company for illustration purposes.

First off, I found some basic accounting and administrative problems:

  • No reliable financial records prior to December ‘15
  • No standardised accounting
  • 50+ misclassifications of incoming and outgoing invoices
  • No cost and revenue tracker
  • No overall performance indicators
  • No profitability analysis
  • No financial forecast

It’s never a good thing if you read a report starting with too many no’s. Nevertheless, those things can be easily fixed by introducing financial reporting workflows as well as revenue and cost trackers.

The real findings are hidden inside the top- and bottom-line of the P&L (profit and loss) statement and everything that lies in between. Take this excerpt of the P&L statement I put together.

Numbers are altered with multiplication key

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The first thing that caught my attention is the high volatility in MoM (month-over-month) growth in terms of top-line revenue. Naturally similar volatility can be observed in the monthly EBIDTA margin. Moving from negative three percent EBIDTA margin to positive 37% in one month is a first indicator for an unbalanced sales pipeline. It seems that there are peak months, in which revenues doubled, followed by weak month with significant less sales.

Following, I decided to have a closer look at the monthly revenue distribution between the main income sources.

Observation 1:

65% of the overall income in the first quarter of 2016 originated from MBN (Money Blog Network) and Ads & Affiliate sales. For a company called BIGSEO, this came somewhat surprising for me. Only one fifth of all revenues was actually produced by SEO services we offered.

The importance of that distribution lies within the implied cashflow. While MBNs are project based products that are sold once and then build over a time period of 3-6 months, our SEO services are ongoing partnerships with monthly retainers. In other words MBN sales generate one major bump in sales, while the SEO retainer serve as a constant and predictable stream of income.

Don’t get me wrong.

This build-up can be ok, if you have the sales infrastructure that ensures a fully packed pipeline and ongoing lead-generation for MBNs at all time. That however is not the case. Currently there is virtually no sales process in place whatsoever. No-one is responsible in outgoing sales or at least lead generation. All MBN sales generated are either referrals or resulting as an up-sell from existing SEO customer.

Huge red flag.

Observation 2:

Ads & Affiliate earnings, that account for more than 25% of our revenue, have taken a major income hit from February to March of almost 30%.

The passive income of BIGSEO plays a crucial part in both revenue as well as costs, as we have 4 people employed who are exclusively working in this area. To see how volatile and seemingly unpredictable this part of the revenue equation is, renders a second red flag.

Taking both observations into consideration we do get a first good understanding as of why monthly revenue is fluctuating as much as it is.

Observation 3:

After learning that the SEO part doesn’t contribute as much to the overall revenue than originally expected, I conducted a profitability analysis. I needed to understand how it performs compared with the more cash-giving parts of the company. As no real cost tracking was existing I made a rough estimation based on the data available to me. I knew how much money we spend on text generation, link building, software, infrastructure and other areas relevant to fulfill our services.

With that in place I was able to subtract the COGS (Cost of Goods Sold) and OPEX (Operational Expenses) from the overall revenue generated by either area.

This analysis revealed that the MBN department was more than twice as profitable as the SEO area (which in some months didn’t even break even).

Not looking too good for the SEO part, is it?

A company that is build up-side down

Without going into detail on the cost side of BIGSEO, this is how the company should have been build.

ideal-bigseo-buildup

The retainer-based SEO part of the company produces so much income that it covers all operational and administrative costs of the organisation, including personal, infrastructure and marketing. Sales of MBNs and income form Ads render the profit of the company.

With an ideal structure like this you can grow your core business, namely the SEO part in a sustainable way. You basically lay out a strong foundation with predictable income and clearly defined work load and KPIs. The main profits of the organisation would be generated from more volatile revenue stream, such as MBNs and selling ad placements. Like this, the survivability of your company does not depend on unpredictable sales.

The reality looks somewhat different. The current revenue model can be described as follows:

current-bigseo-buildup

Income from the retainer model are not sufficient to cover all running costs and the company relies on the constant sale of their marketing products and stable income from Google Adsene, Amazon Affiliate and other affiliate partners.

Those structures however, are not implemented. The effects are visible in highly volatile growth and revenue numbers. Normally this indicates either the lack of a clear vision or bad execution. In this case, it’s a combination of both.

Uff, are you still with me?

Let’s quickly summarize:

  • Majority of revenue is generated by sale of marketing products and online ads instead of by conducting SEO services
  • The profit margin within the SEO area is significantly lower than with MBN products
  • No active sales process of such MBNs is in place
  • Income from passive streams is volatile
  • In month in which no MBNs are sold the company is spending more money than it makes

So what to take from those findings?

Well, with the SEO area being less relevant and much less profitable than the other departments thoughts of getting rid of this area and fully concentrating on the MBN and passive part of the company arose.

What a pickle. I am here for a bit more than a week and maybe the best solution for the company is to close down one of the name-giving parts of it. To be able to make the best informed decision I have to also understand the results of the operational and organisational audit of the company.

The strategy that I will propose in order to turn this up-side down business into a sustainable one, depends heavily on the resources and talents we have at our disposal.

Do we have them? I fear you have to wait until the next episode. But fear not, just subscribe to my newsletter and never miss a post again.