Which areas of Digital Agency financials should you be focusing on?

The area of agency financials is one that we get the most amount of inquiries about. It seems like getting solid advice from people who have run a profitable digital agency, can be a challenge to find. When we work with our agencies, it's the starting point for our consulting and the one area that, when you get it right, has a significant impact on the overall health of your agency. So what sets of numbers should you have to be in control of your business?

1. Because you are in the Professional Services industry your Agency Profitability numbers, the key for you to measure is the profit generated per employee. You get this by knowing these components:

Pricing x Volume (retainers vs. projects - Market you are in vs. Market Share)

Costs (Variable vs. Fixed) ⅔ are your staffing and ⅓ others - location/office rent

2. Utilization or Efficiency per employee. You'll find this by tracking the output of each staff member (billable vs. non-billable hours). Time tracking tools are an essential element to taking the guesswork out of these figures.

3. Average retainer value per client, lifetime value of each client, gross margin.

4. Your Sales Pipeline - how much revenue do you need to generate every month for you to hit your quarterly & yearly numbers? What are your conversion numbers from visitors to marketing qualified leads to sales qualified leads? What are the conversion rates in your sales process from the first email to the proposal and your number of days to close?

5. Customer Profitability - what is your most profitable client and your least profitable client? When you do this exercise for every client, you will then be able to diagnose which clients you need to protect to make sure that feel they see value in your services. Then there are clients you need to develop and the ones that are at risk of leaving because they are not getting results, and perhaps you are spending too much time servicing them at a cost to you?

6. Your costs for each service that you offer - in-house and outsourcing costs by the hour. Your cash position including - receivables and payables.

7. A complete profit & loss statement.

Once you have these numbers, it is great to build them into a dashboard and explain the overall business metrics to your team. One of our agency partners even has their key metrics, updating hourly on a screen in their reception.

When everyone understands the importance of time tracking, providing services within scope, why you should not discount and how it relates to your overall bottom line you are well on your way to having a happy and healthy agency.