Finance

Analysing your agency's performance: top financial KPIs

When you’re on a journey and you stop midway, what do you do next? Do you look back over where you’ve just been? Or do you look at where you’re going?

You look at the route ahead from the point you’re at. Not from where you started. And exactly the same principles apply to your agency. No business can be successful simply by looking at year-end accounts to see what they did last year. Yes, you can get a view of where you were, which can help with growth planning. But for the true picture, you need to look at where you are right now and where you’re going, so you can move in the right direction. Forward.

This is especially relevant as we’re seeing such big, fast-moving changes in the global economy. Pandemic aside, things move far too quickly these days for last year’s financial performance to be of much use or interest. Back to my journey analogy: you need to be looking in your windscreen, not in your rear-view mirrors. There’s a reason the windscreen is so big!

At the end of each month (or beginning of the next month), you should be reporting your actual figures against your targets, so you can see any variance and address issues quickly.

If things aren’t on plan, you don’t need to panic. Revenue can fluctuate month on month. You could have a super-high month, followed by a lower month, so overall they balance out. By tracking the trailing 12 months (TTM) – the past 12 consecutive months – you can see if this is a trend or an anomaly.

Tracking actual year-to-date (YTD) versus your target for each month too, will show you if you’re on course for the year. If things aren’t going according to plan, readdress your forecast on a quarterly basis.

Here’s what I’d recommend breaking down to look at each month:

1 - Income

The gross profit (aka sales profit or gross margin) from existing and from new business. And the fact it has so many names just adds to the fun/confusion! Gross profit is the revenue (aka turnover, sales or invoiced) minus any specific job costs or pass-through expenses, such as media buys, printing, job-specific contractors/freelancers or materials for a shoot etc. Don’t include your salary costs here, as they are an overhead. Split this by existing business and new business, so you see where it’s coming from and that you’re on track against your target each month and YTD.

2 - Costs

Break these down into salary costs, overheads and freelancer costs, so if any issues arise you can quickly see where.

Salary costs and salary ratio. As a service business, people are the biggest agency cost. Obviously, we need to make sure salary costs are below gross profit, so we’re earning more than we’re paying out. This should include directors pay and regular dividends – if you are working in or on the business this cost need to be included to normalise the profits – and any long-term contractors or freelancers. I usually recommend a ‘salary-to-gross-profit ratio’ of 55-65%. If your salary ratio is higher than 65%, you’re not making enough money. Either you have the wrong staff mix, inefficient processes or you’re not selling enough. So your profit is going to be down. If you have a lower salary-to-income ratio, your staff are probably overworked or underpaid. Remember, retaining the best people is a key part of agency growth.

I would also break out the non-revenue generating headcount, if your non-revenue generating headcount is more than 10% of your employee base then you need to look at the structure.

Overheads (minus salary costs). These are all the costs to run your business that can’t be traced to a specific job. Although salary and freelancer costs are officially overheads we take them out for reporting, so we can track any overspend.

Freelancer costs. This is really important, as we don’t always plan for freelancers. While you might be bringing in freelancers to keep your revenue high, your profits will go down because it’s an additional cost. By keeping track of freelance costs and numbers each month, you can quickly spot if you need to make changes because of IR35 or need to recruit permanent employees to improve profits.

3 - EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation)

Another one with many names, this is also referred to as ‘operating income’ or ‘operating profit’, because it’s found by deducting all operating expenses from sales revenue (income-costs). It’s an indication of how much profit you’ll be able to retain in that period, before corporate tax deductions and removes the factors that business owners have discretion over, such as debt financing, capital structure, methods of depreciation, and taxes (to some extent). You can use this to showcase your agency’s financial performance without accounting for capital structure.

If directors are taking monthly dividends, it’s equivalent to monthly salary, so I’d include this as an operating cost to give you a clear picture of retained profit.

EBIT (Earnings Before Interest and Taxes) is a variation of EBITDA. The key difference between EBIT and EBITDA is that EBIT deducts the cost of depreciation and amortization from net profit, whereas EBITDA doesn’t – making it simpler to calculate.

4 - EBIT percentage

Dividing EBITDA by sales revenue gives you your operating margin/profit, expressed as a percentage. You can then use this to evaluate your agency’s operating performance. If you want to benchmark performance, you can compare this margin to past operating margins or to those of other agencies. I recommend that agencies should be ambitious and aim for 20% EBIT or operating margin.

5 - Revenue (gross profit) per head aka profit per head, or revenue per employee (rev/FTE)

Don’t you love all these names? It’s a great metric to track your teams’ overall productivity and you can use it to measure the performance impact of improvements over time. It’s calculated by dividing revenue by your full-time equivalent (FTE) number. If someone works full-time, they count as 1.0 FTE. If someone works half-time (eg 20 hours in a 40-hour workweek), they’re 0.5. Be sure to include any contractors who do work on a regular basis (eg someone who works 10 hours every week would be 0.25 FTE, but you wouldn’t count a contractor who’s paid for a single-brief project). For most agencies, you should be aiming for £100,000 gross profit per head. If it’s lower, you should try to increase revenue without increasing your team, increase staff utilisation and/or decrease your team size.

6 - Recoverability

This tells you how much you’ve billed against how much you could have billed each month. First you need to calculate your total number of chargeable hours each month, keeping it realistic. Multiply that by your average hourly rate to give you a revenue value. Next, compare this to your actual income to give you a percentage recoverability figure. Ultimately, the higher the rate, the more profitable your business will be. So if you’ve targeted £80k gross profit with 90% recovery, have you achieved this? If recovery was below 90%, you’re not going to hit your target for the year. You can then look to pinpoint why recoverability isn’t on track, such as underutilisation, overservicing or underquoting.

These six core practices give you the ultimate finger on the pulse of your business. You can see what profit you’re forecast to make, where you’re heading and what you can do to improve things. It’s about making the right decisions right now to transform your agency’s future fortunes.


How to accurately calculate an employees' cost rate (aka profitable cost per hour)

As an agency, you’re selling people’s time. And understanding how much this time really costs, honestly and accurately, is important if you’re to make a profit. Fortunately, there are some tips and tricks to getting these calculations right.

The simple calculation would seem to be to take each employee’s salary and divide it by the number of hours they work. Bingo, there’s their hourly rate. But obviously that’s not really going to work. You need to get an honest and accurate picture of what it costs your agency to deliver a piece of work, or a service.

Clients aren’t just paying for one person’s time on a job. They’re paying for the full cost of servicing.

Employees cost a business more than just a salary. There are individual extras, like pensions, and overheads like computers, office equipment, software. Plus, there are other costs to your business, such as non-chargeable resources, rent and utilities.

For effective pricing, you need to calculate each employee’s true cost rate. This means understanding the cost of their time to your business. And getting it right means you can make a profit on each job or service and each client.

I’d recommend you start with four calculations:

1. Total salary cost for each employee

Take each employee’s gross salary (total before taxes and deductions), including any additional benefits such as car allowance or bonus payments. Add the employers’ National Insurance contributions (NIC) and pension contributions. This gives you their total salary cost.

2. Annual cost of your business overheads

Take your total business overhead costs, excluding chargeable staff salaries, NIC and pension contributions but including your non-chargeable staff salaries and associated costs. This will give you the total overhead you need to recover. If you have departments with significantly different overheads, you could calculate the overhead per department to give a more accurate reflection. Otherwise, I’d recommend keeping it simple.

3. Overhead charge for each chargeable resource

Now you’ve got your overhead costs, you need to apportion this across your chargeable resources. Divide the total overhead figure by the number of chargeable resources* to see how much extra each employee needs to recover on top of their salary to cover the business overheads. You can also divide by the total number of employee to give you the total employee cost to the business.

*For an accurate picture, you need to use the full-time equivalent (FTE) here, to account for part-time resources being able to recover less. To do this, calculate a full-time worker’s annual hours, assuming 7.5 hours per day x 5 days per week x 52 weeks = 1,950. Next calculate their actual hours, for example 7.5 hours x 3 days per week x 52 weeks = 1,170. Then divide part-time hours / full time hours to get the FTE. In this example FTE is 0.6. Therefore, if you have 9 full-time people and one part time, you’d have 9.6 people as opposed to 10.

4. Total charge-out cost for each chargeable employee

Add this apportioned overhead recovery figure to your total salary cost per employee. This gives you the final figure the employee needs to recover each year. Then you can divide this by the total number of workable days and hours to get the charge-out cost per day or hour for each chargeable employee.

To calculate the number of annual workable hours, first calculate the number of workable days in a year.

For example, 5 workable days per week x 52 weeks in a year – 20 days’ annual leave – 9 bank holidays = 231 work days per year.

From here you can calculate the number of workable hours each year = 231 workable days x 7.5 workable hours in a day = 1732.50 workable hours per year. You may also allow want to allow for non-recoverable time such as 1-2 sickness days and any company days.

It’s a good idea to review at the end of each year, as your overheads costs may change through the year. But I’d only recommend recalculating if changes are significant.

Using these figures for accurate costing

Once you have the cost rate by employee, you can calculate average cost rates by level, such as junior, intermediate, senior, director. Or by role, such as account manager or art director, for example. You can then use this in your estimating process to gauge profit before quoting a job.

You can either use a system like Synergist, as shown above, which does this for you, or set up a spreadsheet as below:

ResourceCharge-out costHours soldTotal charge-out costHourly rateQuote to clientProfitProfit margin
Resource type/name£53.4610£534.60£70£700£165.4024%

While it’s a nice idea, as you probably know projects don’t always go to plan, so you should be tracking time spent vs time estimated. Using individual cost rates you can accurately track costs and profit during a job to make sure you maintain good profit margins.

Plus, you can discover the actual cost of delivering each job, phase or task within a project and see how you could be more profitable next time. For example, did you use an expensive resource, which reduced the estimated profit? Did the junior take more time than estimated? Using these insights, you can also create templates to drive more accurate internal estimates and delivery processes.

It’s worth putting in some time to calculate your figures upfront, as they can really help you avoid profit pitfalls and make sure you’re charging accurately for each specific job.


Agency benchmarks: the eight financial foundations of a great agency

From the outside, an agency may look great, have lots of important clients, a big team, a posh office. But under the surface, the foundations aren’t always strong. It’s what I call vanity over sanity...

To create a successful agency, you need to build a strong financial base and make the right decisions for the business. Sure, you want to look good. But remember the old saying: it’s what’s inside that counts. For agencies to operate successfully and to grow, you need to get to grips with some fundamental financials.

Here are eight KPIs that can help your agency perform at its best: 

1. Aim for £100K+ gross profit per head

A challenging target, maybe. But it’s one that great agencies achieve. Depending on the type of work you’re delivering, this figure may even increase. For example, strategy-focused work may deliver £120K per head. This is a good KPI as it keeps your recruitment policy in check and directs you to ask the right questions around retaining and recruiting the correct resources. Even non-chargeable resources should be taken into account here.

2. Keep salary costs at 55% of gross profit

This is an extension of the £100K per head metric. If you’re carrying excess resources or have incorrect resource for the services you’re selling, this percentage will increase. Salary costs should take into account along with all additional costs such as cars, pensions and bonuses. If directors are taking monthly dividends, it’s equivalent to a salary. For a small agency it’s tough to keep salary costs at 55% of revenue but if you can then it’s a winner for the bottom line.

Rising salary costs make this another challenging KPI. But it can also help you focus on making sure your charging structure reflects your proposition.

3. Make sure employee turnover is below 20%

A high staff turnover can have a negative impact on an agency. The recruitment costs associated with finding new talent continue to increase, and there’s the disruption factor to account for, too. Even the best new recruits can’t hit the ground running.

Aiming for staff turnover to be below 20% is a metric that can stabilise both salary and operating cost ratios. And having an agency with a clearly defined vision and culture helps in achieving this.

4. Achieve 20% operating profit

If salary costs are being controlled to 55% of gross profit then that leaves 25% for the rest of the agency’s overheads and 20% operating profit. When you’re planning your agency’s profitability it’s critical that cost forecasts are accurate. And while it’s tempting to go for high profit forecasts, you absolutely must be realistic. Consider new business costs, office moves/refurbishments and recruitment fees in your planning. And remember, increases in salary and overheads will have a negative effect on operating profit.

5. Show year-on-year revenue growth

It’s important to demonstrate year-on-year growth. If you’re in an ‘aggressive growth’ period it may also be a challenge to control staff and operating costs. Under these circumstances, I’d recommend forecasting out the agency growth and profitability over ‘X’ period of time.

In growing revenue, you also have to consider the balance across clients, revenue streams and existing clients versus new business metrics.

6. Don’t derive more than 20% of gross profit from one client

You need to ensure your agency has a balanced revenue stream from a range of clients. A good measure is to make sure you’re not getting more than 20% of your gross profit from a single client. (Another old adage about eggs in baskets comes in here).

As well as a good spread of clients, you ideally need more than one vertical. The pandemic has shown that agencies who specialise in one particular market sector can be hard hit if the economic landscape changes. That said, you also don’t want too many clients. Tail-end clients often take up a disproportionate amount of client service resource for the amount of gross profit they deliver. Look at spreading your gross profit across 10-15 key clients that you can develop and grow. It’s all about balance.

7. Look to achieving 75% income from existing clients

Growing existing accounts and uncovering new opportunities within those accounts is the most cost-effective way of growing gross profits. However, agencies thrive on new challenges and exciting accounts, so new business will always be a part of agency life.

But the cost of driving new business can have a big impact on controlling overhead costs. There is also an effect on recoverability. If you spend an excessive amount of time on new business pitches this can quickly eat into time that was planned revenue from the delivery teams. Costs for new business and the time associated with winning it should all form part of your agency planning.

8. Keep three months+ of overheads in cash reserve

Having a cash reserve will help stop decisions that are made to just ‘cover costs’. I’ve seen so many agencies take on work that is wrong for them just to be able to cover the monthly costs. This creates a wheel of doom where the same mistakes are repeated month after month. And it usually leads to unhappy clients and an unhappy team. By having cash reserves you can withstand a short period of reduced profit/loss and can focus on the overall medium- to long-term agency plan.

Following these KPIs can help you build firm foundations from which your agency can thrive and grow. In my experience, putting these figures and target down in your planning can really help you focus. And focus is what drives profits...


Understanding your agency’s profit levers: cost forecasts

When agencies grow, their profits don’t necessarily go up. Many make the — understandable — mistake of chasing increased revenue, without taking costs into account. In some cases, this can lead to increased growth and reduced profits, not a scenario any agency wants. But, with some effective cost forecasting, you can get a far more realistic picture, helping you to plan accordingly.

You’re expecting an extra £200k in new business, which is brilliant news for your agency. But while you’re thinking about the revenue, don’t forget about the costs. You won’t be able to deliver this level of business without some extra expenditure. Once you consider pitching costs, travel, freelancers or new recruits, IT, office space, coffee, milk... you literally need to think about everything you’re going to spend and make a cost forecast.

A cost forecast is a realistic plan of costs for each period — month, quarter or year — based on what’s needed to achieve your objectives and plans. Once you know how much it’s going to cost you to run your business, you’ll also get a realistic idea of how much profit you could make. This helps make sure you have enough money upfront to deliver the business.

Most agencies know roughly how much it costs to run their agency each month on average. But costs vary quite significantly month-to-month. For example, some months will bring bigger bills than other, and costs will change as you grow.

It’s important to get right down to the granular detail of your costs. Look at all overheads line by line – salaries, freelance costs, recruitment, rent, insurance, utilities, rates, milage, travel, entertainment, marketing, etc. Then make your forecast line by line.

Remember, you still have to pay your staff even if you don’t make sales, so I’d recommend including these as an overhead. For freelancers, if it’s for a one-off job these can be classed as a cost of sale, but if they’re on a contract include them as an overhead.

Impacts and scenario planning

Effective cost planning helps you understand the impact of any big purchases, such as taking on new staff or moving to a new office. It can also be used for scenario planning, creating plans based on different scenarios. For example, you can compare the costs of hiring a new staff member vs using a freelancer and then make an informed decision.

There are two ways for agencies to grow their profits and earnings before interest and taxes (EBIT). You either need to increase revenue and keep costs the same, or keep revenue the same and reduce your costs.

It’s a good idea to do a detailed cost forecast at start of the year. Break it down into salary costs, overheads and freelancer costs, so if any issues arise you can quickly see where. Then track your actual costs against your forecasted costs each month to make sure your projected profit and salary ratio is on target for the year (I usually recommend a salary to gross profit ratio of around 65%).

If things aren’t going according to plan, readdress your forecast on a quarterly basis. Sometimes things happen that are beyond your control, like your landlord giving you notice or an increase in costs from a utility provider.

Agencies can see a period of growth and their profits dip at the same time, which can be disheartening. But by making an accurate cost forecast which you regularly review, you can see how and where you can build efficiencies. As with most things agency-related, it’s all in the planning...


Understanding your agency’s achievable revenue targets

Agencies sell hours. So it makes sense that the income you can achieve directly correlates with the number of hours people work.

It would also then make sense that the number of hours available multiplied by the hourly rate would give you your weekly, monthly and annual target income per person. But it’s not quite as simple as that.

Forecasting like this would be unachievable – and you’ll be setting yourself up to fail because:

  1. People don’t spend 100% of their time on paid/client work
  2. Agencies don’t charge / recover 100% of their billable time

For example, if you have 10 people working 35 hours a week that’s 10 x 35hpw x £70ph = £24,500 per week. Fantastic! Under this equation you’d get a great gross profit.

But you have to be realistic. It’s highly unlikely that all 10 people spend all 35 hours on paid work. Think meetings, admin, new business, pitches, tea/bathroom breaks and so on.

Plus, it’s also very unlikely you actually charge 100% of their time onto the client – see six common reasons for reduced recovery rate.

Calculating achievable revenue

It’s extremely tempting for agencies to be over generous with their forecasting. It’s more exciting to think big. But as it becomes clear that these figures won’t be realised it can quickly lead to demoralised teams and out-of-whack budgets.

What you need to do is calculate your ‘achievable’ income or revenue. This means taking into account your utilisation and recovery over a given timeframe (weekly, monthly, yearly etc).

Recap:

  • Utilisation rate: the percentage amount of time someone spends on work the agency is paid for versus work it isn’t paid for. Their ‘billable hours’.
  • Recovery rate: how much of this utilisation time you ultimately charge the client for

Total fee revenue achievable= Total number of hours x hourly rate x average utilisation rate

Realistic fee income/revenue target= Total achievable fee income x average recovery rate

Recovery rates vary from agency to agency, but they’re normally 90-95%. Looking back at your previous figures can help with your forecasting here.

If you’re looking to increase revenue and gross profit, you can push up your recovery rate by charging your clients for more of the hours you deliver. By this, I mean looking at what exactly you’re giving your client and what they’re paying you. Clients often have a habit of asking ‘could you just...’. And these could-you-justs all add up in terms of extra amends, moving away from the original brief, an added presentation and so on. Sometimes agencies just absorb these and take the commercial decision to take the hit in their recovery rate. But it’s certainly an area to have in mind. Essentially, if a client is asking for a service they place a value on, this should be reflected in your costs.

How to use your achievable income calculations

Let’s go back to where I started. Agencies sell hours. Your achievable income is potential, but can only become real when there is enough work for those hours and the right number of people to do this work. Compare your achievable income to your sales forecast. If there’s a disjoint then you either have too many people or not enough. What changes can you make?

From here, you can break down by department. How much revenue is forecast for brand, digital, PR etc vs achievable revenue target for brand, digital, PR? This tells you which services you need to sell more or less of — so you don’t have one team rushed off their feet while another has nothing to do. This can be tricky if one department or individual delivers multiple revenue streams, as it can be harder to tie down their specific time for each. But in general, it’s a good approach.

If you get to a point where you can’t sell any more of a service, then you need to look at your people mix in that department. Or if you need to sell more of a service, you may need to bring in freelancers, or recruit if this is a long-term trend.

There’s nothing wrong with pushing boundaries, with being ambitious, with wanting to achieve more. That’s what good agencies are all about. But you do have to look at what is realistic within the resource that you have. And if you want to go further, how do you resource this?


Understanding your agency’s profit levers: recovery

In part one of this blog series, I talked about how utilisation rates can help grow profits. Here, I’m going to look at the next step in the profit chain: recovery.

Or to put it another way, billed versus billable.

Your utilisation rates can tell you how much time someone realistically spends on work you can bill versus work you can’t (like internal projects or new pitches). Taking this a step further, your recovery rate is how much of this utilisation time you ultimately charge the client for.

And if you look at your historic data, you’re probably not 100% recoverable.

Which probably sounds a bit alarming. But there’s no need to panic.

As long as you know what your recovery rates are, you can calculate how much revenue you could achieve in a year.

Calculating your average recovery rate

Look back over your last year’s invoices and timesheets per job and individual. Here, you can see how much time was spent on a job, how much was billed, what the utilisation rates for that person were, and what your actual costs were.

# of hours hourly rate utilisation recovery rate = realistic turnover for year.

Once you’ve got this figure, you can use it as your target for your agency, teams and individuals.

If you’re not happy with this as a target, then you can introduce some new levers to increase utilisation rates or recovery rates. But you can’t feasibly just say ‘I’m increasing your utilisation rate’ – there’s a reason it was there in the first place. To raise this figure, you’ll need to look at how to achieve this, such as reallocating admin or internal projects.

Essentially, knowing your recovery rate is often enough, if you’re performing to the level you need/want to. But if you want to grow revenue without increasing cost, then you need to look at getting your recovery rates up to increase your bottom line.

How? First you need to get to the bottom of what is driving your rate down.

Here are six common reasons for reduced recovery rates:

  1. Loss leaders. You’ve decided to do this work as a lead in to future, more profitable work.
  2. Extra time. An individual doesn’t have anything else to work on, so they spend longer on a project than they otherwise might — or than they really need to.
  3. Perfectionism. Some people simply get so into a project they spend longer on it to get it perfectly right.
  4. Inaccurate timesheets. It’s fairly common for people to log more time than they spent on a job, to make sure they hit utilisation target.
  5. Underquoting. Once you’ve quoted, a client won’t usually accept a higher bill.
  6. Training. A new starter or someone less experienced might take longer on a project than an established employee.

Understanding your recovery rates

Even if you don’t want to change your recovery rate, you still need to understand it. Ultimately, the higher the rate, the more profitable your business will be. You can use it to build both company and department-level targets, understanding how much revenue each can turn over.

You can use the recovery rate in tandem with utilisation rates to set business targets and establish if you have the right mix in your workforce to achieve your ambitions.

Tracking recovery as a key KPI

At end of each month, finance teams can look at recovery in total e.g. if you’ve targeted £80k gross profit with 90% recovery, have you achieved this? If recovery was below 90%, you’re not going to hit your target for year. This is where you can then look to pinpoint why this job wasn’t on track, such as underquoting, overservicing or inaccurate time logging.

You can then take actions to stop these in the future, by looking at more realistic quoting or establishing why overservicing is happening. If your teams don’t have enough to do and are spending longer on projects than they need to, it could mean you need to start getting more new business in.

Recovery can sometimes be a tricky topic as essentially it means admitting that you’re not making as much in the way of profits as you could be. Which is why I can’t emphasise enough how important it is to get a handle on your recovery rates. Once you understand them, you can see if you’re still performing at the level you want to, or if you need to take action to drive them up.


Agency owner: more profit, less stress

A world without timesheets?

There aren’t many people who look forward to filling out a timesheet, and I’ve wondered for a while if there’s a replacement.

First of all, let’s look at why agencies initially don’t like to track time. Often, agencies are created by an agency person who decided to go off and start their own agency. But they want it to be different, to free themselves of the shackles of the processes from their previous place, to have a better working life.

And at first, it’s great. But then, they realise they’re working 70 hours a week and not earning any more than they were before. Which is when the penny usually drops. They need to track where their team’s time is being utilised.

It’s my view that most agencies don’t pay enough attention to non-chargeable time, but it’s a huge amount of money in the business that you’re not going to recover.

A designer might be spending, say, 10 hours a week on internal projects or new business. But to know this, you need to track it. And this is where the ‘do we really have to?’ comes in. And the answer is ‘yes you really do’.

Time sheeting and utilisation rates might not be the most glamorous-sounding tasks in the creative world. But it literally benefits everyone in the business. Otherwise you could have creatives working all hours to complete a job that then goes over budget — deflating for all involved. And you can find yourself scratching your head wondering why you aren’t growing as planned — when you’re asking your teams to spend half their time on new business instead of fee-earning work.

What to track?

I usually recommend five internal categories of: admin, meetings, new business, marketing and non-recoverable client time. Then add in sickness and holidays. I think keeping your categories top level is a good idea — the more granular you make them, the more open they are to interpretation.

This can give you a good idea of what the demand is on your agency. If you know how much time is spent on new business and marketing, for example, you can figure out how long it will take you to grow by your desired amount. There’s no good or bad, right or wrong — it’s simply working out how you can grow over time.

It’s also a good control mechanism in the agency. Sometimes a canny account manager wants to make sure their job doesn’t go over budget, so asks a team member to log time as ‘admin’. You can see then who is doing over and above the amount of admin — hiding the costs of a project is ultimately not doing anyone any favours.

Calculating your achievable income

Ultimately, tracking allows you to see which clients and what type of projects are the most profitable. As you move on from there, you can start to look at capacity forecasting to see what revenue’s achievable with your current staff.

You need to do some basic maths to start with. For example, if you have a design team with 10 people working an average 40-hour week with a 75% utilisation rate, that’s 300 chargeable hours a week. Multiply that by your hourly rate and then by 47 (for working weeks) and you’ll have your projected income from that team.

But... then it can become a bit more complex. To make this figure recoverable, you need to make sure you’re selling 300 hours a week. Otherwise, each designer might be working at 75% utilisation on client work, but you might not be getting paid for it.

Ask yourself: does your proposition enable you to sell 300 hours, week in week out?

You then move on to driving capacity and growth. If you want to grow your business by a third, some of your key people aren’t going to be doing client work, they’ll be doing new business or pitching. And only by planning and accounting for this can you realise this growth.

Consider your agency’s DNA

I’m often asked about ‘average’ utilisation rates. But this doesn’t really translate into the agency world. Some places have a very relaxed culture, teams chatting over breakfast and so on. And this can be really motivating and get the best from them. You could flog them to achieve an average, but who’d want to work there? You don’t want to fundamentally change the culture of your agency - otherwise you’ll be waving goodbye to your talent.

Be realistic

When you get a brief, regardless of the client budget, ask yourself how long it will take to deliver and what will it really cost. If the client budget is below your calculations, you have to look at which of the ‘three Fs’ the job fits into. Fun, fortune, or fame. Less money is obviously not fortune. But maybe you think it will be great project to work on, or good for reputation. Crucially, never reduce your estimate of hours to equal their budget. This will just throw your capacity out of kilter, creating a cycle of negativity for anyone working on that job, as it will inevitably go over budget. Better to say it will take longer than their budget allows, and take a commercial decision based around this. The skill here is to then make sure you don’t go over your own allocated hours!

Is there an alternative to timesheets?

If you’re happy to run your agency based on gross and net profit and KPIs, there’s an argument you could do it. But for your agency to grow you need deeper understanding so you can make strategic change.  Who are your best clients? Which are your most profitable projects? Without monitoring, you won’t know any detail here. Using people’s time wisely is one of the best, and ultimately most profitable, things you can do.


Understanding your agency’s profit levers: utilisation rates

Essentially, agencies sell their people’s time. So the more hours you sell, the more revenue you make. Easy. Yes, so far. But there are, naturally, complexities.

And this is where you need to know more about your team’s utilisation rates.

Utilisation rates are much mentioned in the agency world. But what exactly do they mean?

Utilisation is the percentage amount of time someone spends on work the agency is paid for versus work it isn’t paid for. Their ‘billable hours’. To find the utilisation rate of an individual, divide their billable hours by their total number of working hours, and you’ll get the percentage. From here, you can work out how much revenue you could effectively bill over a period of time.

Navigating billability

So why would someone be doing work an agency isn’t paid for? In terms of account managers, finance teams, sales etc, the answer is obviously that their hours aren’t billable. But for creatives, you have to take into account admin time, loo breaks, tea breaks, lunch, internal meetings. At best, the most you can expect is seven hours billable time in a seven and a half hour working day.

Senior staff, too will have other management responsibilities, leading to higher internal time and lower utilisation.

What else? You also need to look at special internal skills or one-off projects. For example, you might be revamping your website so your designers will partially be working on that, instead of for clients.

In fact, the only people you can expect to have a 100% utilisation rate are freelancers, who you only pay for their output.

It’s a whole melting pot of whats, ifs and maybes. And in my experience, the best way to boil it all down and get some real answers is to look at each person within each agency on an individual basis. A midweight designer in one agency is not necessarily completely equitable with their counterpart in another agency. So it’s not a case of utilisation by role, but by person.

Three steps to calculating accurate utilisation rates

There are three steps to understand where people spend their time and following these will help you create a realistic pattern of utilisation.

1 - Staff interview

Or as I prefer to call it, talking to people. Ask them how much time they spend on client work. What else are they doing? Speaking to their manager often takes you to a dead end, as they don’t always know the minutiae of everything every team member does. Yes, you want your client billable time as high as possible. But you also have to be realistic that there is a certain amount of non-client facing time for each role. This can be a real incentive to employees, too. They’re essentially setting their personal targets and owning them.

2 - Look back, look forward

To get an accurate picture of time spent, you really need to look at a full working year of timesheets. If you just do a month or two you could catch someone in holiday season, or when they’ve been temporarily working on an internal project. The broader the timeframe, the better.

Remember too, you need to communicate the importance of accurate timesheets to your teams. Creatives might feel compelled to log time they’re not spending in order to justify their working day. Account managers might want to make their project look good.

But it’s not about looking good or justification. It’s about planning realistic capacity, estimating properly and not overservicing. As well as looking back, you can plan ahead. Have you got any major internal projects coming up which will divert certain people’s time? This goes back to the ‘individual’ aspect. Which of your team are you likely to use most for non-client work?

3 - Make a spreadsheet

A good old spreadsheet comes into its own here. You can map each employee’s utilisation, taking into account things like part-time hours and holiday allocation. You obviously can’t plan for sickness, but do allow for admin, new business, meetings, training and so on. Then you can share with each team member for their sign off and agreement.

Once you’ve got the utilisation rate for everyone, you can calculate the expected revenue per person, per team and for the agency overall.

Total number of hours per year x % utilisation rate (% chargeable) x hourly rate = target revenue per person/team/agency per year. Divide by 12 to get your monthly average.

Remember to use workable hours per day and year for each person, taking into account their working hours, holiday allowance and public holidays.

Using your utilisations

Now you’ve got the figures, you can start doing some planning and analysis. Are these forecasts acceptable, or do you need to increase revenue? If so, how will you do this? Did you meet your targets - and if not, why not?

Utilisation rates might not sound exciting for a creative agency. But teams soon get the picture when they realise their talents will be used to best effect. People will shout up if they’ve nothing to do or ask for support if they’re overloaded. You’ll be able to see accurate revenue targets and strategically plan ahead.

And above all, you’ll stop stagnating and start seeing some real profits.