Having worked with agencies for some years now, I have seen a wide-ranging approach to data and KPI’s from tracking nothing to data overload.
Data is powerful when you track the right things and use it properly. The first step, therefore, is working out what you should be tracking.
But before we go there, I just want to get clear about what I mean by KPI’s.
KPI’s should be something that you can address directly to improve financial performance. The financial performance itself is a result of KPI’s working effectively.
For example, the net profit margin, revenue growth, liquidity ratio are all financial metrics. They are not what I would call a KPI because they can not be directly affected. Revenue growth can only be affected by increasing the number of clients that pay you or their average spend. Net profit margin can only be affected by increasing price, efficiency or overheads. Liquidity can only be affected by improving working capital days, profitability, capital investments or securing funding.
KPI’s sit beneath financial performance and can be directly addressed, to drive better financial performance. That’s why they are sometimes referred to as key drivers.
The Right KPI’s
Agencies can get caught up in the multitude of KPI’s that they get told about. Efficiency could be measured through effective utilisation rate, the average price per hour, recovery of chargeable time, revenue per person and profit per person. Whilst each of these measures has their merits, by focusing on too many you end up really focusing on none. You will end up spending more time talking about all the things you could be tracking and not enough on improving the results.
Build a 4 column table as follows:
List all of the clients that generated revenue for you in the last quarter.
This list can not be easily extracted from Xero but if you’re using MAP’s Revenue Forecast tool (download here), you will have access to this information.
Enter the amount of revenue earned from each client
Note that his is revenue earned. It’s not contracts signed or billed. It’s revenue actually earned because you have performed the work. It will require your month end accounting journals to have been posted to adjust the billed sales to earned revenue.
Enter the amount of profit earned from each client.
Profit per client is accessed through your project management system. It takes the revenue earned from Column 2 above and deducts the cost of delivering that revenue. The cost of each team members time will need to have been built into your system as the “base cost” which will be multiplied by the hours/days spent on the client for each team member.
Other costs are borne on behalf of the client including outsourced resource (freelancers, other agencies, etc), media spend, software subscriptions etc will also need to be included in the costs of servicing the client.
The revenue journals made in your accounting systems in column 2 above will need to reflect the revenue earned in your project management system for this to work. This is a good example of the importance of getting your project management and accounting systems working together.
Enter the profit margin %
Divide column 3 by column 2 to give profit per client.
With this table complete you have a full analysis of where you are making and losing money across your clients base.
You can pull all of this data together to give a healthcheck on your clientbase overall.
Your total profit from client work is made up of:
Number of clients^
Average Profit margin+
^total of column 1
*calculated by dividing the total of revenue earned in column 2 by the number of clients in column 1
+calculated by dividing the total of profit earned in column 3 by the number of clients in column 1
So what’s the point of all this?
It might seem simple to swipe a template with a 4 column table but if you think this is going to be easy you might be in for a shock. The vast majority of agencies we’ve worked with don’t have the data to put into the table. It takes time to get this right.
Once you have the data and you follow the above process, you will:
- Understand how profitable each client is
- Know your biggest and smallest spending clients
- Work on improving the 3 KPI’s above to drive profit into your agency
Too often businesses obsess over getting more clients in the door, but there’s not much point in doing that if it’s not making you money.
When your profit margins increase you can build the agency with fewer clients and less staff to manage yet make more profit. Then you have the choice of enjoying an intimate sized business that makes you lots of money or scaling up with the cash to do so. If you need help, book a discovery call here and start your journey with us to take back control of your agency.