As you grow your agency it’s always going to come with an increasing number of challenges. More people, more clients, more projects, all resulting in more potential headaches.
The reason you go through all that is to deliver on the personal life that you want for you and your family, whether it be a certain level of remuneration, the way you’re spending your time, or an ultimate exit that you have in mind.
Those things are very specific to you, but what is consistent is that your business has to be set up in a way that it can deliver those for you.
Amongst all the noise and distractions involved in running a business, it can be increasingly difficult to know if you’re on the right track and if the decisions you’re making day to day are leading in the right direction.
The KPI You Must Be Tracking In Your Agency
They’re a series of quantifiable metrics that cover all areas of the business across marketing, sales, operations, people and finance. They’re there to give you the indication that the business is performing as you want it to, and they’re ideal for when you want to start delegating some responsibility to your team and still want the luxury of being able to sleep at night.
By consistently tracking KPIs each month, you can review the trend and compare them to the targets that you have in place.
One Financial KPI that should be at the top of your list is Revenue Per Head (RPH).
How To Calculate Your Revenue Per Head
Calculating the figure is nice and simple. In any given month, take your Monthly Gross Profit (Total Revenue less Direct Costs) and multiply it by twelve to give you your Annualised Gross Profit. Then divide that figure by your total headcount. The figure you’re left with is your Revenue per Head.
Two things are important here:
The first is that it has to be Gross Profit rather than Total Revenue used as the initial figure. The reason is that we want the figure to be based on the fees earned by your team. If we use total revenue, we’ll be factoring in any costs recharged to clients such as ad spend and media licences. It would result in an inflated and inconsistent RPH figure.
The second important point in calculating your RPH is that your headcount has to include all staff, including non-billable people. The rationale here is that if you’re an agency which has more non-billable support staff, then that should be freeing up your billable people to earn more fees. For that reason, your admin staff, your sales team and your directors all have to be included.
What Does It Mean
Revenue Per Head is such a strong KPI because it’s all-encompassing:
- It considers how strong your sales are as the work has to be won in the first place
- It factors in your pricing as the stronger that is, the more fees a smaller team can earn
- It considers how operationally efficient you are as for revenue to be recognised the work has to be done
At present Manchester, agencies are averaging around £65k RPH and at that level, based on average salaries, you would be a profitable business. The top agencies are at around £85k RPH, and because it directly relates to Net Profit, they’re the ones that are hitting a profit margin of 25%+. It’s always useful to benchmark against other agencies, but the most important comparative is to your own financial plan.
If you’re at £60k RPH now and your budget tells you that by June this year you want to be delivering £58k of monthly fees with your team of 10, then your target annual RPH is £70k.
The final two points on the list above are the key drivers. Do you have something different about your offering which means you can charge more? Is there something which gives you a competitive advantage that clients would be willing to pay more for?
Finally, once you’ve won the project or retainer and it comes into the studio, do you have the right people, systems and processes to ensure that it’s delivered on time, within budget and to the highest possible standard?
If you can tick those boxes, you’ll be well on your way to driving up your Revenue Per Head and ultimately the financial performance of your agency. Not sure where to start? Book your discovery call here to find out how one of our FD’s can help you.