Five key financial metrics for digital agencies
Run a digital agency? If you’re not eating, sleeping and breathing these FIVE metrics you’re leaving money on the table
Operating a digital agency can be hard - projects to manage… people to hire, train, and fire… software to implement… the occasional angry customer or ticked-off employee. Your plate is full - and that’s before you even get to the all important question… ARE WE PROFITABLE? (Scroll down for the interactive tool with the answer for your agency.)
The average agency owner leaves that question for last, have you? No you say? You know you’re profitable because you pay your team $X per hour and bill your projects $Y per hour. But come on… are you really confident, and at peace with the financial health of your agency? Do you really know how much money you’re making, what your cash flow is, how much you put in or took out as an owner of the business? Do you know which projects are profitable? Which lines of business? Your break-even? How long current cash will last?
These can be intimidating questions for the non-finance brain, but they don’t have to be. If you can get a handle on just five metrics, you can maximize your profitability. Start by implementing the right processes and tools to track and report on these metrics - that will get your agency on the right path to better financial management and healthier profits.
In the tool below, enter your agency’s numbers to understand where you stand financially. Then tweak them to see the impact on profit. Don’t know your numbers? That’s how you know it’s time to contact us.
Some additional details and considerations for the five key metrics for any digital agency:
Billable Rate: Weighted-average rate per hour you bill your clients for work. A lot goes into just that one number - you’ll have different hourly rates for different staff and tasks, and they may vary by client or project. You may have fixed price projects that don’t necessarily have a billable rate. The best way to boil it down to just one number is to divide your revenue by the total billable hours worked in the month.
Revenue: make sure you exclude any “other” revenue (software resale, referral fees, etc.). You should add this back in to your total revenue since it doesn’t vary with the hours worked.
Total billable hours worked in the month: Assuming your team is tracking billable hours this should be easy to get. If you’re not tracking hours (start!), you’ll have to estimate it per person based on total capacity and percent time that is billable versus non-billable. Make sure to exclude holidays, vacation, and sick leave hours from total capacity.
Cost Rate: Weighted-average rate per hour you pay your production team (those doing billable work). Use a “fully-weighted” cost, meaning you should any benefits or perks (e.g. health insurance, transportation reimbursement). Analogous to the billable rate above, you can calculate this by dividing the total cost of production personnel by their total hours worked in a month. This is easy if you’re booking all these costs to Personnel COGS on your income statement. If you’re not (start!), you’ll have to do some spreadsheet-ing to aggregate these costs for the appropriate team members.
Billable %: Percent of hours worked by your production team that are billable to clients. It’s nearly impossible to have a 100% billable resource - you’ll always have some down-time for switching tasks, internal meetings, training, and the occasional hours you have to eat to keep a client happy.
Hours: Total hours worked in a month by your production team - this is the denominator in the Cost Rate metric above. This is “all-in” hours so it should include any vacation, sick or other “off”time, and of course non-billable time. Typically for a full-time employee, you can use 40 hours per week (2,080 hours in a year).
Operating Expense (aka Opex or Overhead): All costs not captured in the Cost Rate calculation above. If you’re being diligent and booking all your COGS appropriately, you should be able to just pull the total expenses number from your income statement. These are all the indirect/non-variable costs of running the business (rent, utilities, legal fees, marketing spend, etc.), including non-production personnel costs (administrative, management, marketing and any other non-production salaries, benefits, bonuses, etc.).