Advertising – It’s an Easy Business!

People ask us all the time how to measure the financial success of their agency. When we respond, many seem disappointed. “That’s it?” they ask. “Those are all the numbers you track?” The truth is, the agency business is a pretty simple business. Following are our ideas about the most important metrics for agencies.

INCOME STATEMENT

AGI (GP)– Shoot for 40-45% of billings based on how much media you place in ratio with billings.

Payroll – No benefits or employers’ FICA included, but factor in what a working owner takes in regular pay. Payroll should be no more than 40-50% of AGI. Remember to count your regular freelancers in employee salary metrics.

People– One person per $125,000 in AGI

Net Operating Profit – 25% of AGI

BALANCE SHEET

Assets – 15% in cash or equivalents
Accounts Payable – No more than 35% of liabilities

Accounts Receivable – 50% of assets Fixed Assets (furniture, cars, computers, etc.) – 25% of assets

Net Worth – 30% of total assets, but may vary in an “S” corporation.

Long and Short-term Debt – No more than 15% of liabilities

Liquidity – about 2 to 1.

AVERAGE COLLECTION TIME

Average collection time for invoices should be no more than 34 days.

CLIENT DISTRIBUTION*

No more than one client that comprises more than 25% of your AGI.

No more than two clients that each comprise more than 12.5% of your AGI

No more than four clients that each comprise more than 6.25% of your AGI

No more than eight clients that each comprise more than 3.125% of your AGI

* This formula may be a little too rigid, but you get the point.

CLIENT PROFITABILITY

Look at each client on a monthly basis the same way you look at the total financial statement. Each client is presented each quarter in the following way:

Total Billings minus Direct Costs equals AGI,
minus Apportioned Overhead
Based on Volume, equals Client Operating Profit

The old adage is still very true; 80% of your agency’s income comes from 20% of your clients. Think carefully about every client you want to do business with.

JOB COSTS

Scan individual projects to see if estimates and actual prices are close. Most agency management software enables you to do this very easily. If you take care
to estimate your projects and post estimates to the billing worksheet, then record all hours, buy-outs and miscellaneous costs, you will begin to see the estimate v. actual trends. Principals don’t have to look at every project, but account executives should. In fact, it is a good practice for AEs, creatives and the traffic manager to review financial status on projects at the morning traffic meeting, and to ensure the estimating and billings categories are aligned.

EMPLOYEE PRODUCTIVITY

Because hours billed are the keys to employee success, you should use an employee productivity tracker. Such reports will give you a look at each employee’s productivity each month. When you see employees fall below a certain level (75% billable—1600 hours per year), you should have a conversation with them.

MARGINS

Margins on outside services such as printing, photography, illustration, etc., should be in the 20% to 30% range. We know this is difficult to achieve in today’s procurement-driven client environment, but fight for the extra value your agency provides and your right to be paid for providing it.

MEDIA BILLINGS

A smaller agency should have no more than half (50%) of their billings in media sales. If more than half of your billings are in media, your AGI margin begins to slip. If you do a lot less in media billings, you are not taking advantage of adding some fairly easy dollars to your income.

In 1988, an advertising executive with twenty-five years of experience in owning and managing smaller advertising agencies and design studios inaugurated a new concept— an organization supporting smaller and midsize advertising and design firms. That adman was Tony Mikes, and the organization is Second Wind.

The content of this blog was provided by Tony Mikes and Second Wind. Thanks Tony for the great information!

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To learn more about how Function Point can help you achieve the KPI’s above, book a demo with a friendly fp. Account Executive by clicking on the button below. We can help. Honest!