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…