Key Metrics Every Agency Should Monitor
Creative and marketing agencies are exciting companies for us to work with. We love to see the amazing content they create for some wonderful brands.
Accounting is probably not on an agencies list of what they’d call exciting. However, our goal is to help transform numbers into a story about the business and work with leadership on tactics that will give them control over that story.
We do this by measuring key KPIs that yield actionable items that encourage healthy growth. The most important of all is profitability. Let’s recap some key financial terms before we dive in.
Profitability Primer
Here’s a simplified Income Statement, or Profit & Loss, so you can see how Gross and Net Profit is calculated.
Reporting at the Company vs. Project-level
We recommend breaking things out into chunks. When thinking about metrics and KPIs, we like the think of them as company-level and project-level.
Company-level
Your business needs to perform well as a whole. The Income Statement for example is a “company level” report. It is the 30,000-foot view of your business. Although revenue is nice to look at, you should focus on your margins.
Gross margins for a service business should be at least 50% as a very rough goal. Every industry is different, but if you are below that you may need to think about some changes. More on that later.
Net margins should be above 10%, again, as a very rough estimate. If you get too close to break-even or flip negative, (a loss) your business may be in danger.
Company-level metrics are easier than project-level. If you don’t have reliable, accurate, and consistent financials, you should focus on that first.
Here’s are a few of the top company-level KPIs you should be tracking with your accounting team:
Gross Profit & Margin
Net Profit & Margin
Revenue per Employee
AR Turn
Average Invoice Value
Project-level
Managing your business at a company-level isn’t always enough. What if your Gross Margin is declining? What will you do? You can increase prices across the board as a fix. You can lower your labor costs, but those are global changes that are not easy, or practical, to implement.
You need to dig into the details to find out “why” a number is changing, you’re now dropping down to 10,000. To dig into Gross Margin, you need a project tracking application like WorkflowMax, Harvest, or QuickBooks Online’s Project Tracking capabilities. This is where you’ll find what projects are killing it and what projects are dragging you down. Do more of the “killing it” things and stop doing the things that drag you down.
Work with your project leads to understand why and come up with a solution. It may only be a few projects that are hurting your company-level profit. Let the project managers hold accountability into these project-level metrics. Tie it to their compensation if you can.
Having laser-sharp insight into each project is what sets superstar agencies apart from those who prefer to wing it. Most agencies struggle to get past $5M in annual revenue without systems in place to monitor what’s important.
Here’s are a few of the top project-level KPIs you should be tracking with your accounting team:
Project Profit & Margin
Write-Downs
Utilization
Realization
Effective Hourly Rate
Next Steps
Don’t be overwhelmed if you are not ticking all of these boxes. Take it one step at a time. Get your company-level accounting in order first. Once that’s running smoothly, tackle the project-level reporting.
Work with an experienced team that knows the industry, can help implement the tools you’ll need, and support you. Be prepared for some cultural changes; to break some bad habits and deal with resistance. That may mean you’re doing the right thing.
“If it wasn't hard, everyone would do it. It's the hard that makes it great.”- Tom Hanks
