4 KPIs to Predict Your Agency Financial Future
What key metrics are you tracking for your agency? Do you know which KPIs are crucial for making proactive decisions to benefit your agency? There are 4 key metrics that enable you to see into your agency’s future and make smarter growth decisions. Today’s guest runs a CPA advisory firm that provides agencies with the tools they need to come up with original solutions for their unique challenges. He shares the four key metrics every agency should be tracking to predict their future moves.
Jody Grunden is the founder of Anders CPAs + Advisors, a virtual CFO group focused on the creative agency space. His team serves as a catalyst for those striving to achieve their highest potential and carry this mentality on to their clients and community.
In this episode, we’ll discuss:
- Crucial metrics to track for your agency.
- The target average utilization rate for agencies.
- Assessing profitability and gross margin to make adjustments to your prices or staff.
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Dot & Co: Today’s episode of the Smart Agency Masterclass is sponsored by Dot & Co, client management specialists that will help digital marketing agencies keep their clients happy. With the help of their knowledgeable account managers, agency owners can step away from the day-to-day and focus on driving results. Check out dotandcompany.co/smartagency and get 20% off your first month working with them.
The 4 Crucial Financial Metrics You Should Be Tracking for Your Agency
Jody and his team help their clients focus on their goals and achieve their highest potential. They help improve their client’s business by teaching them to focus on four main metrics:
- Cash metrics
- Production metrics
- Financial metrics
- Pipeline metrics
Keeping track of these metrics makes a huge impact on your agency allowing you to predict your cash position every month and make key decisions ahead of time rather than being reactionary.
1. Cash Metrics
This is annualized revenue; something all agency owners should have knowledge and control over. Keeping track of how much cash you have in the bank determines your next steps in the business.
The goal is to have at least 10% of your annualized revenue in the bank at all times. So if you have a $3 million agency, you should have $300,000 in the bank. Why ten percent? This amount covers 2 months’ worth of expenses for a service-based business. Of course, this is the minimum. It’s better to strive for 30% or six months’ worth of expenses.
There’s no right or wrong answer. Some agencies are fine with 4 months’ worth of expenses in the bank, some need less. How do you decide on the percentage your agency requires? Just look at your different risk factors. Are you focusing most of your resources on just one client? Do you have older, retiring partners? In those cases, there is high risk and you need a higher percentage. Do you have high recurring revenue? If so then 10% is fine. Anything over 6 months might be overkill and money you could be using to reinvest in the agency.
Why You’ll Need at Least Three Different Bank Accounts
Jody usually advises clients to have three different bank accounts; a tax account (for 40% of net income); an operating account (money to pay bills), and a cash reserve account (a money market account or a high-interest savings account). Just keep in mind that if that money is sitting in your operating account, you’ll be losing opportunities. The name of the game is making money on your money.
Jason and Jody agree that you should also get a line of credit when you don’t need it. Treat it as a safety guard and preferably have it renewed every two years instead of annually. It’s not designed to be used on a daily basis. That’s what your cash reserve is for.
2. Production Metrics
This is the metric agencies use to build a solid forecast. This forecast should be dialed into your non-financial metrics and may change every month. There are two very important metrics to getting that forecast right:
- Utilization Rate – what your team is working on and the percentage of their total hours spent on billable work.
- Average Build Rate – which is not what you’re charging clients but rather the work being done. If you charge by the hour and you’re not accurately tracking the time spent working that reduces your average build rate.
These two metrics will help build a dynamic forecast because it’s all based on people. You’ll be able to build a month-by-month forecast and break down exactly what your agency should do on a monthly basis to achieve your revenue goals.
Average Utilization Rate for Agencies
How many hours does an agency typically work? This varies from agency to agency but on average they expect to work 30-32 (billable) hours per week. This is a benchmark of the number of hours you expect your workers to put in each week.
Basically, the number of billable hours (work hours minus culture hours) divided into the number of available hours will give you your utilization rate. The average utilization rate for agencies is around 60%. However, your agency should strive to achieve your forecast projections.
3. Financial Metrics
Assessing profitability and gross margin. Compare your agency to the competition and to your forecast. Comparing to everyone else will give you an idea of whether you’re in the ballpark but more importantly, how well you’re forecasting.
To assess your overall profitability, first look at your net revenue. This is basically revenue minus hard costs. Once you have that, subtract all costs associated with production (anyone who works in the business), including fully-burdened costs like 401K and health insurance. Your goal as an agency should be about 50% net revenue.
Additionally, your overhead costs like marketing expenses, business development, and facility costs should be no more than 35%. So, net revenue (50%) minus overhead (35%) = a gross margin bottom line (15%). Ideally, you’ll want to get gross margin up from 15% closer to 25%.
Try to focus not only on things you can cut back but also if it’s time to increase prices. Planning to increase staff by 5%? Then you should probably also raise your prices or your margin percentage will shrink.
4. Pipeline Metrics
The cash, production, and financial metrics will help you build a great model to predict exactly how much you’ll hit each month. However, it can all crumble pretty quickly without the pipeline metric. This metric helps keep an eye on what you have under contract for the next three months and when you’ll need to make adjustments according to the amount of work.
For instance, if you have 65% under contract for the next three months that’s fine and it’s the typical number for your agency. However, if you’re at 80% or 20% capacity then you’ll need to make some adjustments.
Do You Want to Transform Your Agency from a Liability to an Asset?
If you want to be around amazing agency owners that can see what you may not be able to see and help you grow your agency, go to Agency Mastery 360. Our agency growth program helps you take a 360-degree view of your agency and gain mastery of the 3 pillar systems (attract, convert, scale) so you can create predictability, wealth, and freedom.