Key Performance Indicators (KPIs) can be financial or non-financial gauges for your agency. You can use them to determine how successful you are at any given point in time. By keeping a close eye on your KPIs, you can control them and use them to affect the profitability of your company.
They can also help you answer questions like, does my agency have enough cash in the bank right now? Do I have the proper resources to hire someone? Will I be able to afford a new staff member? Questions that are often unknown.
While many business growth strategies exists, the following 4 KPI metrics can help take your creative agency to the next level quickly and efficiently.
- Build a cash reserve – As a business owner, you have to build up cash. The overall goal for a business is to have a minimum of 10% of the company’s 12 months of revenue as cash in the bank. We recommend that you strive for 30%. Why? When you’ve got cash in the bank, taking risks and making decisions is a lot easier. Keep in mind, this is outside of the cash needed for taxes and we recommend having a tax reserve of 40% of the forecasted net income.
- Production – Here, we look at pricing and how production is driven. We calculate the effective rate, utilization percent, average bill rate, annualized revenue per employee, annualized revenue per producer, annualized net income per employee and annualized net income per producer. The effective rate is a critical KPI for service-based businesses. You need to measure the success of your production team
(the team that is producing the work product being delivered to the client). For every hour you pay your production team, the effective rate is how much revenue was generated over that same timeframe. While the effective rate is the most important production KPI, it is derived from two other metrics: utilization percent x average bill rate.
- Net income – Net income takes into account the gross profit, production expense, and overhead expense (including administration, sales and marketing, facility and owner’s compensation).
For a typical service-based business, you want the net income to be about 15 - 20%.
- Pipeline – Always be looking at the pipeline and consider whether you have a pipeline big enough to substantiate growth. If not, you’ve got some work to do, either on the marketing side or making staffing adjustments.
Keeping an eye on these four metrics can be a game changer for agency owners. Ensuring you have sufficient money in the bank can help you make solid business decisions, take risks you wouldn’t otherwise be able to take, and it can even help float your business if you go through tough times. Making small adjustments to production and expenses can have a significant impact on your bottom line. And keeping a solid pipeline will ensure you always have the new business coming in that you need in order to grow.
Summit CPA Group is a distributed virtual CFO firm with a non-traditional approach to accounting. Their amazing team of CPAs and accountants provide professional Virtual CFO Services and 401(k) Audits for companies all over the United States—many of which are remote companies as well. The Summit team fully understands the accounting, bookkeeping, cash flow management, and business tax nuances that come with being distributed, and they love helping clients overcome these challenges through their own experience and expertise.