Running an inbound marketing agency is one thing, running one that makes money is something completely different.
The type of businesses we’ve chosen to be involved in are labor intensive and require a commitment to both driving efficiency and driving results for clients.
There are a number of key financial measures you need to be aware of and more importantly you need to be tracking on at least a monthly basis.
Here are five of the most important ways to measure inbound agency finances. While there are others, if you focused on these five, you’d have a very good idea of how healthy your business is from a financial perspective.1. Net Profit Margin
Quite simply, the money left over after you pay all your bills, including your compensation. If you’re not taking a pay check and you show a 10% net profit at the end of each month, you just kidding yourself. You’re net profit is something other than the 10% your reporting.
Agency experts say that agencies should be able to show a 20% to 25% net profit on a monthly basis. My experience with inbound agencies is that they produce a much lower net profit. Keep in mind that if you’re in growth mode and investing back in your agency your net profit might be lower, but inbound agencies should be expected to show a net profit of at least between 8% and 12%.
So shoot for 20% but accept a little bit lower net profit if you’re in growth mode.
2. Gross Profit Margin
This is the money left over after you pay to deliver your services. So this would not include rent, electric and the money you pay to run your own marketing. Based on my experience, you want to be looking for a 50% to 60% gross profit margin on your services.
You might have some services that deliver a lower gross profit and some that deliver a higher margin, so across all your products or services the numbers above should be your target. If you’re seeing lower gross profit margins, then the best bet is you’re not charging enough to deliver your current set of services.
3. Percentage Billable
You could argue this an operational metric, but I’ll tell you it’s so directly related to your financial results that it’s at the very least both financial and operational. As an inbound agency, the only asset we have to sell is time. You pay your people for 40 hours and your goal is to optimize those hours by getting clients to pay you for them.
If your team is only 50% billable, you’re only selling half your available hours. So knowing this number and making sure this number is as high as reasonably possible directly correlates to how much money you’re going to make.
In my opinion, you want your production people to be billable at 90%. This means of the 40 hours, you leaving them with 36 hours for client work and 4 hours for meetings, training, and admin work. That seems reasonable to me.
Keep in mind you’ll have some people who are less billable. People like marketing strategists who participate in new business development or senior developers who might be doing research for complex client projects. Set a companywide target for your team to be at least 70% billable across all roles.
4. Average Monthly Revenue Per Client
Most agencies start with small retainer engagements. Quickly they realize that smaller engagements take almost the same time as larger engagements. So the gross profit margin on smaller engagements is low. This means you’ll want start actively increasing the average retainers you sell. By knowing your average monthly retainer per client you can proactively push up your profit margins.
Keep in mind that for every dollar you charge above your average, most of that drops right to the bottom line. Don’t misunderstand, larger engagements cost more for you to deliver, but in most cases the administration of these engagements remain the same regardless of the retainer. Our average monthly revenue per client is $12,500 and our goal is to increase it every single month by $500. Set improvement goals for your agency and you'll see a correlation to profits.
5. Revenue Realization Rate
This number is total available billable hours times your hourly rate minus your monthly invoices. This number is going to show you how much over servicing you're delivering. Over servicing is a habitual challenge for inbound agencies and it’s worth monitoring.
You get paid a flat retainer, but when clients are unhappy or ask for more services, often your team obliges eating into your profit margin, stressing the teams and causing you to over staff without realizing the benefit of the extra revenue.
By knowing your revenue realization rate you’ll have a good idea of how significant this situation is at your agency and how dramatic you need to be with the solutions to correct this situation.
Keeping track of these numbers makes you a better agency owner and it puts you in a better position to grow your agency. It’s very challenging to grow when you don’t have a handle on the financial metrics. Start with these basic metrics and add to them over time until you have a financial scorecard that helps you make solid decisions to help your agency grow over time.
Start Today Tip – Get these number for your agency. If you’re uncertain your accountant or bookkeeper should be able to help. Turn these into your starter scorecard. Track them monthly, quarterly and roll them up to get an annual measure of financial success. After you start with these numbers, keep adding financial KPIs to your scorecard. Over time you’ll have a pulse on the financial performance of your agency and you’ll be in a position to impact the numbers to make your agency even more profitable.
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