Budgeting 2025: beware growth target traps - and how to set a realistic budget

Is it possible to set a 2025 budget that will prove both accurate and achievable?

This is the time of year to plan and set 2025 agency budgets, alongside striving to get last minute revenue opportunities over the line before year end and delivering business as usual.

Is it possible to set a 2025 budget that will prove both accurate and achievable?  Just one example of how budgeting assumptions can be exceptionally difficult to get right is the Employer National Insurance rises announced by the Government which will increase firms’ people costs next year, putting pressure on margin and thus the need to boost revenue or cut spending.

But a sure yet avoidable way to cause financial stress in the year ahead is setting a revenue target that proves impossible to achieve.

Here are two budget growth traps to avoid.

The first growth trap is to assume that year on year double digit (10%+) revenue growth is perfectly reasonable in all circumstances – which often seems the default position of companies’ financial modelling. Particularly with inflationary pressure on costs it’s understandable that on paper, strong revenue growth is ideal.

But data on agencies’ financial performance shows that this is not achieved by most firms. This year’s PR Week Top 150 agency rankings show that just 40% of small to medium sized (SME) agencies achieved double digit growth in 2023 (I’ve categorised SMEs as the 100 firms ranked 51-150, which had annual revenue of under £10m - £2.5m). Meanwhile the data shows that 29% of these SME agencies grew revenue between 1-9%, 10% recorded flat revenue, and an unfortunate 30% saw revenue decline.

This means that for six in ten SME agencies, stressful conversations about the revenue gap will have been a recurring theme through the year. Mid-year budget re-forecasts and most likely cost cutting will have been made as H1 trends and H2 outlook became clear.

And unless 2024 has seen a dramatic improvement on 2023, for the majority of SME agencies, the same scenario has probably played out this year. A stressful and demoralising situation.

The second growth trap is probably an underpin of why most agencies’ annual revenue growth is below 10% - which is to not acknowledge the impact of revenue that you are likely to lose next year. Even the most successful agencies experience some client loss against their 1st Jan confirmed revenue. My long term experience is that this is typically around 15%. This dramatically impacts the new revenue that you need to secure to not only match but grow year on year revenue.  For example, if you target 10% growth on this year’s £5m that is £5.5m next year, but if you lose 15% you are down to £4.25m, so actually need to gain £1.25m to reach £5.5m. In percentage terms that is in fact about 30% new revenue growth, treble the ostensible target of 10%!

So how can 2025 budgeting be any different? 

If you’re an SME agency, you need to assess the level of growth you’re likely to achieve next year by understanding thoroughly the reasons for your current performance, and what is likely to make a difference over the next year.  I recommend looking thoroughly at each of the following aspects of your performance:

• Analysis: review what has impacted your agency performance this year and assess forward trends

• What are the factors behind where are you winning, and why are you losing

• How are economic or market issues impacting your numbers

• What was your pattern of revenue gains and losses during the year

• Business model: with the insight from analysis consider the key elements of your business and how the strengths and weaknesses of each will make a difference next year

• People

• Proposition

• Pricing

• Investment

• Growth objective: from clarity on 1 and 2, set a revenue target that reflects  

• Can you grow next year

• By how much can you grow

• What phasing of growth during the year is realistic

With clarity of your performance and forward strategy and grounded assumptions to your financial model, you’re more likely to start 2025 with a budget that you can be more confident of delivering and have a far less stressful year too.

Good luck!

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