The 10 financial KPIs all design agencies should monitor, and how to manage them
A carefully selected set of Key Performance Indicators (KPIs) should form part of any agency’s toolkit.
Setting, tracking and reviewing these is a way to easily demonstrate how well your agency is managing its objectives and targets, and can help you and your leadership team make effective, timely strategic decisions.
Whilst there are many KPIs which can be considered, here we focus on the financially driven ones. These can help you understand where your business’ numbers are today and where they should be in the future, to enable your agency to succeed and deliver the outcomes it is seeking.
Gross profit margin
The profit retained after subtracting cost of sales from revenue, expressed as a percentage.
The gross profit margin is a good indicator of how efficiently money is being made from products and services sold, and signals if pricing is too low and/or if the direct cost of sales is too high.
This margin allows you to track how much value is being added and will flag when you need to take action. For example, if your sales are increasing but your margin is decreasing, it will indicate the cost of sales are not being managed effectively or project costs are not being recharged or marked-up appropriately.
Net profit margin
Profit divided by revenue expressed as a percentage is referred to as the net profit margin.
It is a strong indicator of agency performance in each time you are analysing.
However, net profit margin should not be reviewed in isolation.
Increasing profit ultimately comes from widening the gap between expenses and revenue. Often, when revenue increases so do the costs and therefore, the margins remain the same or decrease. This is frustrating, as you are working hard with no substantial gain.
Reviewing both gross and net profit margins allows you to see the impact of fixed costs and therefore seek to eliminate unnecessary expenditure and improve operational efficiency, through tighter cost control or pricing strategies. Alongside this, it can also inform objectives for your marketing and business development strategies, in terms of bringing in an increased number of profitable projects and new clients.
The amount of money you hold in your bank account will often depend on your risk profile and the life stage of your agency.
As a benchmark, you should aim for at least three months’ worth of your average monthly expenses (a safety bank balance). And anything less than a month’s worth of expenses — unless you have a bank overdraft facility — could mean cashflow will be at the front of your mind, creating unnecessary concerns and pressure.
Cashflow management should be tightly controlled with a disciplined process in place to ensure your bank balance stays around the “safety” level.
This is the average number of days it takes to receive payments from clients from when the invoice was issued.
It acts as an indicator of an agency’s liquidity (how quickly assets can be converted to cash). High debtor days can put pressure on cashflow as there will be less cash in hand to meet financial obligations.
It is important to review your payment terms with debtor days, ie if terms are 45 days and debtor days are 90, then it is taking twice as long for the debtors to pay you, which will significantly impact the management of your cashflow.
Good internal processes can help keep debtor days in check. Examples include;
- Timely invoicing
- Agreeing favourable/reasonable payment terms
- Ensuring finance team are aware of all the client procurement requirements when invoicing
- Timely delivery of projects
- Proactive credit control
Fees per person
Fees or net revenue per person (the definition varies across agencies) is revenue, less costs recharged to clients, divided by the number of full-time employees or equivalent. The DBA Annual Survey Report calls this Income per head, and includes freelancers in the headcount too.
Fees per person demonstrates how well an agency can utilise its team and a higher value suggests a greater level of productivity. The larger the number, the more money an agency is making without having to increase its team. It can also indicate investments are being made to develop a highly productive team or a specialist service is being provided, so higher fees can be charged.
However, it is also worth bearing in mind that a larger number could indicate your team is being overworked, which in turn could affect other parts and KPIs of the business.
Staff cost to fee ratio
Reflects the relationship between staff costs and fees as a percentage.
Staff costs are likely to be the biggest costs within the agency and fee levels need to correlate correctly with staffing levels to maintain the financial health of the business. This ratio allows you to understand if you are spending too much money on talent or if you have the right mix. It also allows you to look at future staffing levels compared to forecasted revenue and put in place a plan to ensure a sustainable level is maintained with the correct mix (i.e permanent employees v freelancers).
Percentages achieved by different agencies vary depending on their stage in the business lifecycle.
Is the proportion of the team’s time spent on paid client work.
It is unlikely that every minute of every team member is billed to clients, but with recovery rates you can see how much time is spent working for “free”.
The recovery rate helps the leadership team better understand why the profit levels are what they are and to put in place corrective actions. It can help identify inefficiencies, correct any areas of the business where the staffing level does not match the fees, and ensure appropriate pricing of projects.
The DBA Annual Survey Report details how most agencies are “working for free on a Friday”.
Staff utilisation rate
Is the proportion of the team’s time spent on client work (billable time)
The utilisation rate helps a business understand how the team are spending their time and flags if there is insufficient client work. It also identifies if too much time is being spent on admin/non-billable work and shows whether project scoping was accurate.
The overall rate needs to be as high as possible, without it diminishing employee satisfaction and morale. Individual rates vary depending on the role and seniority within the agency. See the DBA Annual Survey Report for benchmark utilisation rates across numerous job roles.
Utilisation rate and recovery rates go hand in hand and often recovery rates can be increased if utilisation rates are increased. A large gap between the two rates indicates too much time is being spent on tasks which cannot be billed.
Careful consideration of utilisation rates when setting charge out rates can help you improve your recovery rate and impact positively on profitability.
Fees by client
An analysis of fees by client.
It is not unusual to find agencies relying on one or two or three key clients for most of its fees, but this level of dependency has risks including:
- Losing a client can significantly impact on revenue, profit and cashflow
- Negotiating pricing and contracts can be more difficult
- One client can consume a disproportionate amount of staff time and impact on employee engagement and development
- Lenders/investors will look on this negatively, which could decrease the value of the company
- It can make it more difficult for a business to diversify over time.
A business may start with only one client, which is ok, but as it grows it should actively look to improve the mix year on year, mitigating this risk by spreading the revenue targets across clients.
Compares current assets to current liabilities.
This ratio shows how solvent your agency is and if it is able to meet its financial obligations by being able to pay its short-term debts due within a year.
The higher the figure, the more short-term liquidity there is. Values less than 1 indicate an agency could have challenges in being able to pay its current liabilities.
Conclusion – setting and managing your KPIs
The importance of setting and reviewing meaningful KPIs cannot be overstated. What is measured can be managed, and what is managed can be nurtured and will grow exponentially.
To do this effectively, there are some key considerations:
Relevant & achievable
KPIs need to be realistic and relevant to where the business is and its aspiration. A KPI target which is suitable for one agency might not be suitable for your’s due to organisational strategy.
KPIs need to be easily understood and easily measurable. Ensure there are the correct processes and systems in place for achieving this and that the team know how they can affect a KPI.
KPIs need to be reported on an agreed timely basis. They should be reviewed regularly by the senior leadership team in a dedicated, regular time-slot. This enables any corrective steps to be actioned in a timely manner.
In most instances, these KPIs will be reported by the finance team but they are not accountable for that. The senior team need to be accountable for the KPIs. They need to be agreed and understood by the leadership team and communicated to the wider agency.
Successfully imbedding the right KPIs into your business processes and culture will boost data literacy across the whole team, provide your agency with insights into its performance and aid confident decision making to navigate challenges and drive your business’ growth.
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