Robert Kennedy on GDP
Why you need more than a P&L to understand Agency profitability – Part 2
Part 1 made the point about how you need a broader set of metrics than just a P&L to order to understand why an Agency is profitable.
Beneath the comforting familiarity of the revenue and costs of a typical Agency P&L there are forces at work which will influence long term success. A Finance Director needs to measure these factors in order to help manage long term Agency profitability.
I covered the importance of the pipeline and conversion for new business success and longer term revenue generation. Keeping tabs on the reasons for staff churn can help retain client and agency knowledge and keep recruitment costs down.
Beyond these metrics there are some other really useful measures that will help you understand the shape and direction of your Agency.
Something as simple as an Excel Invoice register will enable you to analyse your revenue in a number of really interesting ways. It’s easy to get carried away but here are a few simple but powerful measures that will add depth and insight to your monthly reporting.
i) Building long term, profitable client relationships is vital but if you don’t measure it how can you manage it? Average client tenure is a simple way to track if your clients are still happy enough to continue paying you.
ii) What percentage of the total revenue do your 5 biggest clients contribute? It’s always easier to grow off the back of a single, strong client but the trade-off is over dependence on one relationship. Having a wider spread of clients is always safer. A sensible target is having about 50% – 60% of revenue from your 5 biggest clients and no one client accounting for more than 20% of total revenue.
iii) The split between retainers and projects is easy to track too and tells you a lot about your agency. This is a nuanced area and will vary from sector to sector but generally speaking it is helpful to have a solid base of monthly fees topped up by additional project activity. What the optimum split should be is something that needs a little thought – I’ve seen 80:20 both ways work OK.
iv) Measuring growth in revenue between new business and net organic growth is also pretty straightforward. Winning new business and then growing that business through performance is the goal. Having both contributing equally to growth is ideal – a year on year 50:50 split is a good target.
The above are by simple to measure. Simple organisation of revenue in a click and filter spreadsheet and a few Sum if formula can make a powerful difference to the insight you can bring to bear on the monthly reporting.
I’m an experienced FD of marketing services agencies. If you’d like an initial chat about how I could help your agency be more profitable then please contact me on firstname.lastname@example.org .