With 50% of small businesses failing within the first five years, ad agencies are no exception. While there are lots of reasons businesses fail, one of the most common is not paying enough attention to an agency’s productivity and profitability. Smaller agencies tend to focus on landing the next big client or finding the next hot-shot creative talent — neither of which solves the underlying problems.
Agencies that survive year five and beyond keep a close eye on certain numbers and look at them regularly and frequently. Why? Reports with the right metrics act as an early warning system. They scream when something’s wrong early enough that you can head off trouble at the pass. The bigger you are, the more details you’ll need(you’ll also have the bandwidth to provide them). But for the average small agency, here are six key metrics to track that can help keep your agency healthy:
1. Adjusted Gross Income (AGI)
This tells you if you’ll make a profit. There’s a lot of detail behind reporting this number correctly, which is why you need a solid system and someone responsible for tracking all those transactions. (Average agency’s AGI is around 30% of total non-capitalized billings.)*
Few agency owners enjoy tracking and crunching numbers. They’d rather talk to clients or create great work. We get that. But if you won’t do it, hire someone you trust who will.
2. Client Income
A report showing how much you’ve actually billed each client, month by month, versus how much you predicted you would bill by the end of your fiscal year. If you’re behind on billings, go figure out why. What’s up with the teams? Is invoicing lagging? Is work taking too long? Has the client shifted gears? You may need to adjust talent on the account, help the client unravel strategy, or find new clients to plug the income gap.
3. Accounts Receivable Aging
This reveals the health of your cash flow – an important number for making payroll and paying your bills. Review it monthly. It shows how promptly (in days) your clients are paying you. You want clients who pay promptly. Better two small clients who pay on time, than one bigger client that always pays late. (Average agency’s collection time should be no more than 34 days.)*
Many agency owners are afraid to rock the boat, so they ignore this report, hoping things will get better if they just keep the client happy. Smart agency owners nip late payments in the bud — even to the point of stopping work.
4. Jobs Summary
Review this weekly to see a comparison of actual versus projected: billable hours, unbillable hours, direct expenses, and days to completion. You’ll want to look at this data by type of project, by client, by account executive, and by creative team.
Is each client on track? Over the projected hours / expenses / days? Under? As expected? If over or under, then figure out why? These are warning flags to dig in and figure out what’s going on. Is the client exceeding scope of work? Strategy shift turmoil? Sales down? Budget cuts? Reorganization hell? Whatever the reasons, fix them or watch your profits go down the drain.
5. Billable vs. Unbillable Hours, Per Employee, Per Team
Yes, this means timesheet tracking, even if it’s using Google Docs. Whatever you use, you’ll want to know how many hours each employee has billed for each project per client they’re assigned. In a perfectly productive world, each employee has seven billable hours per day (not counting paid time off and weekends). Every 15 minutes they don’t bill costs money. And if they go over the allotted time for a task or project, that also costs money. (Each employee should be billing three times their salary.)*
Reviewing this report monthly shows which teams and employees are more productive than others. It gives you insight into figuring out how to configure your creative teams for maximum productivity. It also shows where someone might need more training or coaching. Or that it’s time for him to be reassigned a new role, or even to join another company.
6. New Business Forecast
Your sales forecast, its pipeline, and predictive accuracy is crucial to growing your agency and weathering the bad times. Depending on growth goals and new business generation strategies, look at this report weekly and certainly no less often than monthly. At minimum review it by account exec and be sure it includes the prospect’s name, title, company, industry, email, phone, website URL, most recent contact date and result, stage, close probability, projected contract value, projected close date, actual close date, actual contract value, next action and its date. There are lots of great tools out there to help you do this well.
Make Friends With Your Numbers
Rather than fight, ignore, deny, or gloss over your metrics — embrace them instead! Seriously. It’s not all that difficult. You don’t have to be the one to collect, massage, or manipulate the numbers. Delegate that to qualified folks you trust. But you must know your metrics inside and out if you want your agency to reach or exceed its goals. The sooner you put them in place and use them to steer your agency, the sooner it will begin to thrive.
* These statistics are sourced from Second Wind Online’s 2012 Small Agency Report.