Running a business takes everything you have. Entrepreneurs pour their creativity, passion, effort, savings — their everything — into their work. And five years after they start, half of them are out of business. A decade later, two-thirds have called it quits.
For marketing firms, I believe it comes down to a lack of diligent measurement. Sure, measuring and tracking may not be the sexiest part of running an agency, but it’s the only way to ensure you’re not throwing money away.
Commit to tracking these five things in 2017, and you’ll have your most profitable year yet.
5 Metrics Your Agency Should Measure in 2017
1) Adjusted Gross Income per Full-Time Equivalent Employee
Determining your number of full-time equivalent employees (FTE) is a convenient way to measure labor. To do this, denominate employees into 40-hour-a-week units. A full-time employee is equal to one FTE. A 20-hour-a-week employee is 0.5 FTE.
Your target should be $150,000 of adjusted gross income (AGI) for every FTE. That amount should cover salaries, benefits, and overhead while leaving enough profit to reinvest in the business or offer bonuses to high-achieving team members.
Years ago, the target AGI for each FTE was $100,000. Inflation accounts for some of the increase, but marketing agencies are also hiring expensive people to fill positions on growing digital teams.
In short, the world has changed. It’s gotten more expensive.
Many marketing agencies haven’t adjusted their billing rates to keep up — and that’s a big problem. If you’re only earning $100,000 per FTE, your agency likely isn’t very profitable. Those thin margins carry extra risk when an unexpected tax bill comes due, equipment breaks down, or you need a retention bonus for a key team member.
No, I’m not talking about the score in tonight’s basketball game. I’m talking about how often you are over or under budget.
When agencies complain to me about how hard they work and how little they make — which is often — I always go straight to their over/under. How often do you go over budget? What are you writing off? How often are you under budget? By how much?
After they answer these questions and start tracking the numbers, they’re usually horrified by what they find.
Companies are willing to write off thousands of dollars’ worth of time on jobs in which they overservice their clients. Those are hours that could be spent on other clients, finding new business, or marketing your services.
The solution to this problem is often a process change. Typically, the problem is that budget estimates are too low. My advice is to add an additional 50 percent to any job estimate. Initial estimates always assume a perfect world where everything goes according to plan. How often does that happen in reality? Adding 50 percent to perfect-world estimates usually brings them firmly into the real world.
3) Profitability by Client
Agencies always keep track of their overall profitability, but seldom do they get as specific as how much profit they earn from each client. That number can hide some ugly truths.
Most marketing shops have a mix of clients. Some are easy to work with and contribute handsomely to the bottom line. Others are difficult. Some might actually be costing you money. You won’t know until you start tracking.
Once you have the numbers, decide what the minimum is you’re willing to accept. For some agencies, it might only be a 3 percent profit margin. Others might want 20 percent. It’s up to you. I personally only want clients that have at least a 10 percent profit margin.
If you see that you have clients that aren’t bringing in the profits you’d like, figure out why and what can be done to fix it. Sometimes, the problem is simply that you’re not charging enough. If that’s the case, raise your rates. If you lose the client, so be it.
Other times the problem might be subtler. It might require a conversation about how to streamline work processes and avoid delays. Insist on a solution. They’ll either cooperate and become a good client, which is great, or you’ll lose them. Again, so be it.
Losing unprofitable accounts is not a bad thing. Yes, your cash flow will take a hit. Don’t be trapped by that. Accumulating clients that provide cash flow but not profit will eventually choke your business.
4) Minimum Client Engagement
Clients come in all sizes. Some are going to be too big for your agency to handle well, and others will be too small to be worthwhile. Some will hit the sweet spot. But you won’t know the difference unless you track two things for each client: how many hours you bill and your adjusted gross income.
Once you track your gross billing and AGI for each client, establish a minimum amount they need to provide of each for you to retain them. The threshold will be obvious once you look at your data paired with the profitability percentages.
You’re going to see some clients that have few hours billed, bring in little income, and generate low profitability. These clients are too small. Some clients will be too big. Your team will spend a lot of time on these clients, but the time will be eaten up by written-off hours for redone work and overdue deliverables. This client likely won’t be happy, and the account won’t be profitable.
So how do you know what your sweet spot is? Usually, it’s when the client is big enough to generate income and small enough to service effectively and keep satisfied. And it will have a healthy profit margin to prove it.
The goal then is to move all your clients to the sweet spot. If they won’t move, let them go. Armed with your new knowledge, you’ll be poised to find perfect-fit clients.
This last item ties all the previous four together. Everyone hates timesheets, and there are some consultants who say they aren’t necessary. I couldn’t disagree more.
Timesheets are central to running a data-driven, profitable agency. Indispensable. Everyone needs to do them. Even you. Your employees are your biggest expense and your biggest asset. If you don’t trace it, how are you going to know whether you’re managing it well?
Moreover, you can’t track the other metrics without time sheets. If you don’t know the hours worked, you can’t calculate FTE or AGI per FTE. If you don’t know how many hours you put into a project, you can’t know whether you were over or under your bid. If you don’t track time spent per client, you can’t know profitability per client or income or billable hours, which leaves you guessing what your minimums should be. You’re left running everything with a hunch and a guess.
Measure Your Way to Success in 2017
If you track all five of these metrics, you’ll be able to leave guesswork behind. You’ll be able to act decisively to improve your job estimates and profitability. You’ll know which clients to move resources to and which clients to jettison. You’ll also recognize new clients that are good fits and worth pursuing and ones that are bad fits.
You’ll make informed, strategic decisions. You’ll run your agency like you’ve always wanted to.
This article was written by Drew McLellan for HubSpot.