Discovering Hidden Insights in Your Agency Metrics
Over the past few articles, we have explored financial statements and their importance in improving financial literacy. We have probed into the inner workings of the income statement, balance sheet, and statement of cash flows. Finally, we know how to read these statements—but how can they help us in practice? Let's look at how you can use agency metrics to answer your most pressing financial questions.
Question 1: How much money are we making?
Here it is—the money question. To answer this query, there are two metrics that we can use: revenue and gross income. Both numbers can be found on your income statement.
Revenue represents the total value of all invoices sent to clients. This number usually includes services that have been performed by another firm (media buying, video production, web design, etc.) and are bundled as part of your client deliverable. These pass-through costs inflate your revenue and do not accurately reflect the economic size of your business. It might be simpler to think of this as total billings.
Gross income, on the other hand, is the revenue earned from work performed by your agency minus client-related expenses. This metric is a better measure of the money available to pay overhead expenses—such as salaries, rent, and technology.
Question 2: Are we profitable?
To determine profitability, we can look at the net profit on the income statement. This is the amount left over after all costs of goods sold, overhead expenses, and taxes are subtracted.
As you know, profit is a key metric for measuring your return on the risk of running a creative business; but this number doesn’t excite your team, as they do not directly benefit from it. Your team usually gets more excited about top-line results if they have visibility into how the firm is doing.
Question 3: How long are clients taking to pay us?
Days Sales Outstanding (DSO), or Aged Accounts Receivable, is a common metric used to determine the average time taken by clients to pay their invoices. To calculate DSO, we need both the income statement and balance sheet. The formula for DSO is Accounts Receivable divided by Daily Revenue.
Example:
Total revenue: $3M
Daily revenue: $8,219 ($3M / 365)
Accounts receivable: $500K
In this example, the DSO would be 61 days. In other words, it is taking this agency about two months to collect payment from its clients. A DSO of 45 days or less is ideal, as anything more than that will affect the cash flow of your business.
Question 4: How well are we utilizing our staff?
Employee utilization rate, also known as billable utilization, is a measure of how much of your employees’ time is spent on revenue-earning activities. This metric provides insight into whether your employees are focused on billable client work, or sitting around entering prompts into ChatGPT.
Employee utilization is calculated by dividing the billable hours by the total hours worked. One way to determine agency utilization is to divide the Gross Income by the number of full-time equivalent employees on staff.
A Gross Income/FTE ratio of $150K per employee is considered a good benchmark for a well-run agency.
Anything below $120K indicates that a business is covering expenses, but is not very profitable.
Anything above $150K is a sign of good financial health.
Note: I wrote a Guide to Calculating Employee Utilization so you can better understand the formulas and calculations.
Key Takeaway
Understanding financial statements and their metrics is crucial in making informed decisions and achieving your financial goals. Having the answers to these four key financial questions provides valuable insights into your financial performance—and ultimately, it should also help improve your bottom line. If you want to get a clear picture of your agency’s financial health, then reach out about our agency scorecards. I’ll ensure that you have a complete understanding of your agency's performance and are equipped with the insights you need to make smart decisions.