How to Measure The Financial Success of Your Agency

By | September 20, 2012
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Below is an excerpt from Second Wind's 2012 Small Agency Report—reprinted with permission.

Purchase the full report for a detailed overview on average billings, direct costs and expenses; profit ratios and statistics; owner's compensation data; average salaries by position; and average hourly billing rates. Data is compiled from surveys of Second Wind's membership of 800 small and mid-size advertising agencies.

It's an Easy Business

People ask us all the time how to measure the financial success of their agency. When we respond, many seem disappointed. "That's it?" they ask. "Those are the numbers you track?" The truth is, the agency business is a pretty simple business. Following are our ideas of the most important metrics for agencies.

Income Statement

  • Agency FinancesAdjusted Gross Income (AGI) — Shoot for 40-45% of billings based on how much media you place in ratio with billings.
  • Payroll — No benefits or employers' FICA included, but factor in what a working owner takes in regular pay. Payroll should be no more than 40-50% of AGI. Remember to count your regular freelancers in employee salary metrics.
  • People — One person per $125,000 in AGI.
  • Net Operating Profit — 25% of AGI.

Balance Sheet

  • Assets — 15% in cash or equivalents.
  • Accounts Payable — No more than 35% of liabilities.
  • Accounts Receivable — 50% of assets.
  • Fixed Assets (furniture, cars, computers, etc.) — 25% of assets.
  • Net Worth — 30% of total assets, but may vary in an "S" corporation.
  • Long- and Short-Term Debt — No more than 15% of liabilities. 
  • Liquidity — About 2 to 1.

Average Collection Time

  • Average collection time for invoices should be no more than 34 days.

Client Distribution*

  • No more than one client that comprises more than 25% of your AGI.
  • No more than two clients that each comprise more than 12.5% of your AGI.
  • No more than four clients that each comprise more than 6.25% of your AGI.
  • No more than eight clients that each comprise more than 3.125% of your AGI.

* This formula may be a little too rigid, but you get the idea.

Second Wind is a powerful information resource designed with one thing in mind—helping smaller and midsize advertising agencies, design firms and related businesses to be better. The organization was founded by former agency owner and entrepreneur Tony Mikes. Tony owned and operated design studios and agencies for twenty-five years before launching Second Wind in 1988.

Image Source: 401(K) 2012