The 10 metrics that run your agency

Hey there,

Welcome back to the Agency Finance Letters. This one will be a 4 min read.

I’m considering a benchmarking service/overview just for agency finances. If you’d like something like that lmk and I’ll share it for free with you if we launch it.

If you don’t want to keep receiving these finance nuggets, you can unsubscribe at the bottom of this mail.

Story time:

I spoke with an agency owner last week. They said they were at capacity.

They said they were growing fast and needed to hire more people.

But they felt like they were already paying a lot for staff.

So we looked at the numbers.

Turned out their Revenue per Employee was below the industry standard, and their current team costs were already above market rates.

Meaning: they either were not super efficient, their pricing was too low or they were paying above market rates.

Conclusion: something was off. And simply adding more bodies would not be the smartest way forward…

Ofcourse there is much more to this than numbers alone.

But numbers are a great non-biased way to know where you should pay extra attention to.

That’s why I wrote this this edition…

After working with dozens of agencies, here are the 10 metrics that matter most:

Make sure you know these for your agency every month.

1. Revenue per Employee: how effectively you use your team to generate/manage revenue. Aim for $100K+ per head.

2. Payroll to Revenue: how much of revenue goes towards payroll. Keep this under 50%-60%, or profits disappear fast.

3. Lifetime Value (LTV): how much the agency is earning per client. This drives every growth decision. The higher the better.

4. Gross Profit Revenue: This indicates your profitability per client. This is what is left to cover your operating costs.

5. Net Profit: what you actually keep after all things are paid. Can be anywhere from 15% to 45%, depending on how involved you’d like to be.

6. Customer Acquisition Cost (CAC): how much it costs to sign a client. Ideally calculated for each lead source. The lower the better.

7. Churn Rate: killer of many agencies. It’s the % of clients you lose each month. Benchmark for this is 5% to 15%.

   

8. Cash to Cost Ratio: this tells you how many months of costs you can cover with your current cash balance. Benchmark is 2 months. This is your safety net.

9. Average Retainer: what the average client is paying you. Again ideally split per service line. Important to remember that higher isn’t always better, as sometimes being a “fly on the wall” is much easier to manage.

10. Monthly Lead Flow: how many leads you get per month. This is the ultimate KPI. No leads = no growth (unless you can constantly grow current retainers).

There isn’t a scenario in which it’s fine to now know these numbers about your business.

It’s peace of mind. It’s clarity. It’s safety. It’s just being a good entrepreneur.

If you need help calculating any of these, just reply to this mail and I’ll answer any questions.

Btw… the conclusion from that story at the top was that they decided to hold off with another hire and first invest more into their project management processes to actually get visibility on what’s going on.

Track those numbers,

Joey