Article - How to Hit Vital Financial Benchmarks for a Successful Agency
READ: 2 mins
AUTHOR: Janusz Stabik
You likely began your agency because you’re a digital-guru who knows their onions: web design and build, copywriting, marketing…you’ve spent energy and time in the business, delivering an efficient service, producing quality outcomes and creating happy clients.
But you never went to business school. And you’re not alone.
According to entrepreneurship data, 46% of small business owners don’t have any form of business education.
Only 9% of entrepreneurs have a Bachelor’s Degree in business.
In our experience working with hundreds of agencies around the world, the highest performing KNOW THEIR NUMBERS: spreadsheet input and analysis is as important as the creative output.
So as you reflect ON the business, what are the key metrics you need to know to indicate if all that work is securing long-term success and profitability?
This week we look at the numbers you need to know to hit the benchmarks that will keep your business batting its A-game.
PROFIT FOCUSED (EVEN IF PURPOSE DRIVEN)
Whilst you might be driven by the motivators of building communities, workplace culture or delivering an awesome product, you can - YOU MUST - also focus on profit.
Bottom line: your business needs to generate profit to pay great people market-rate salaries and have longevity.
The leaders in the highest performing agencies check in with the metrics and measure where they’re sitting - and do so AT LEAST monthly.
Let’s look at what you should be measuring and the numbers you need to aim for…
Core Capital Target
The fundamental benchmark of a safe and healthy business in financial terms boils down to:
2 - 4 months of cash in the bank
No debt
Your pay, your staff - and yourself - market rate salaries
Your earnings before interest and tax (EBIT) are greater than or 12% if you're a larger agency (50 employees plus)
If any of this isn’t true: your business is at risk and hitting these targets should be your first priority. Take a look at our blogs on simplifying your offer for a route to greater profitability.
Gross Margins (contribution margins)
Simply worked out by how much revenue you get in to deliver your service and how much you pay out to get it done - in salary or contractor fees.
In which threshold does your contribution margin sit?
>60% = awesome
50%-60% = great
30%-40% = work to do
<30% = stop, reflect and act
If you’re hitting above 60% then you’re doing well: and will be hitting 25% net profit at the end of the day. Below 30% and you’re just not going to be able to cover your overheads: something needs to change…if you haven't already, consider specialising / working a niche (more on that here).
Hours and rates
One of the most challenging parts of building and scaling an agency is figuring out the right pricing model that suits both you and your clients and understanding how to price your services properly.
In fact, a study by McKinsey found that:
...a 1% improvement in price, assuming no loss of volume, increases operating profit by 11.1%. Improvements in price typically have three to four times the effect on profitability as proportionate increases in volume.
So what are you charging? How do you know if you’re hitting the right price point?
Let’s caveat what follows with this hard truth: if you’re still billing on an hourly basis (in any other sector than web design and you’re selling sprints - see our blog for more on this) then you need to move on.
Hourly billing inhibits your ability to scale - if you secure more clients, you need to recruit more staff to deliver the service. You actually pocket very little reward for landing that contract.
Equally, as you improve your skill set and can deliver the same quality of service in less time, you lose out. The only one who benefits from your proficiency is the client and your developing skills go unrewarded.
However, it can be useful to think about the benchmarks in hourly billing as a strength test on your pricing. You might well be selling yourself and your services short.
>£120 = wow
£90-120 = where it needs to be for a prosperous agency
£70-90 = can do better
<£70 = growth is going to be hard
EBIT
EBIT simply means Earnings Before Interest & Tax.
EBIT is a method that is often used to find the potential profitability of a company. It’s not indicative of the precise profit you’ll accrue (obviously), but it’s a solid benchmark as to how you’re performing against others in the sector AND for monitoring your agency’s trajectory…hopefully upwards.
How do you work out your EBIT:
EBIT = Net Income – (Interest + Taxes)
The benchmarks of a healthy EBIT - one which speaks of a successful agency - have shifted upwards during the pandemic as agency owners became more adept at running more profitable businesses.
A solid EBIT score is now around 25%...but it’s worth stating that some highly successful, growing and profitable agencies are looking at EBIT scores north of 44%: there’s always room for improvement.
If you’re looking at the numbers and see trends you’d like to address, or simply want to push the envelope further, get in touch with GYDA: our unique peer-to-peer Mastermind programs, guided by industry experts, could give you the insights and accountability you need to deliver on these crucial KPIs…and help you work smarter across your business.
