On any given day – agency ownership is akin to riding a roller coaster – the highs are exhilarating and the lows are terrifying. While the highs and lows are triggered by a variety of factors (clients, technology, employees, etc.) the net result of those highs and lows are almost always financial.
It’s pretty tough to be excited about owning/running a business that isn’t making any money. And yet, many agency owners I meet don’t really have a handle on their company’s financial picture.
As the results from Hubspot’s Agency Pricing & Financials Survey show, 15% of respondents don’t even know what their average profit margin is, which means they’re out there, operating in the dark.
I’m equally concerned about the agencies that reported 41-51+% profitability. I see the financials of over 250 agencies (from 1 FTE to 300 FTEs) a year and I’ve never seen an agency’s profitability exceed the low 30s. My guess is that either those respondents don’t understand the term profit margin or their books are a mess.
Bottom line – there are some metrics that every agency owner needs to understand and track. It’s how you know when you hire, if you’re prices are appropriate and if you’re making any money.
Every month, you should be tracking:
- AGI (Gross billings minus cost of goods sold)
- How the AGI is being spent (Between loaded salaries, overhead and profit)
- Profitability by client (are you paying for the privilege of working for some clients)
- AGI per FTE (Goal should be $150K per FTE, anything less than 100K is serious trouble)
- Estimates to actuals – how accurate are your estimates and how much are you writing off every month
Without these basics metrics, you can’t possibly run your agency well and you can’t make smart decisions. Every accounting software from the simple to the agency specific/more complex is capable of giving you this data. Get in the habit of gathering this information every month and plugging it into a spreadsheet so you can track trends and see if you’re moving towards your goals.
Running an agency is hard work. There’s no reason to make it riskier or more difficult than it already has to be. You don’t have to be a CPA to monitor your agency’s financial health. But you do need to know what metrics to watch and do it every month, not just when you think you’re in trouble. By then, it’s typically too late.