10 important key figures that you as an agency owner should know in 2022
“Oh, I would have to ask my confidant, he takes care of our finances. I’m more responsible for the creative.”
Hand on heart – financial management is not the favorite activity and core competence in many marketing agencies. It doesn’t have to be – but you should already know a few key figures in order to be able to quickly assess how you are performing in comparison to the competition and where you should start to become even better.
In order to sustainably improve both the company valuation (e.g. for a possible sale) and the creditworthiness of your marketing agency, you should definitely know the following 10 key figures:
Relevant financial figures for marketing agencies
- Income vs Adjusted Growth Income (AGI)
- AGI per full-time employee
- EBITDA (Earnings before Interest, Taxes and Depreciation of Assets) margin and profitability
- Operating cost
- Labor costs vs AGI
- Debt vs Assets
- Utilization rate
- Customer focus
- Liquidity ratio and solvency
- Customer payment deadlines
1. Income vs Adjusted Growth Income (AGI): the adjusted revenue
Calculation of AGI for advertising agencies: gross revenue – revenue from third-party services
In marketing agencies, statements about the gross turnover achieved have almost no significance, since third-party services (Google, traditional media) and customers are often passed on. In such cases, the agency’s bank account serves purely as a pass-through point.
In order to be able to really assess whether and by how much your agency has grown, you should factor out these third-party services.
2. AGI per full-time employee: Productivity
Formula employee productivity at advertising agencies: AGI / FTE
The Adjusted Growth Income on its own also says little. In order to be able to make statements about productivity per employee, put the AGI in relation to the number of full-time positions (FTE – Full Time Employees). The formula for this is AGI / FTE.
Example: Agency A generates an AGI of CHF 2,800,000 per year with 20 employees. Agency B is only half the size with an annual AGI of CHF 1,400,000 and employs 8.75 full-time staff. If we now compare the AGI / FTE ratio, agency A is CHF 140,000 (2.8m / 20 FTE), while agency B is CHF 160,000 (1.4m / 8.75 FTE).
3. EBITDA margin: profitability
Formula EBITDA margin at advertising agencies: EBITDA / AGI
EBITDA (Earnings before Interest, Taxes and Depreciation of Assets) is an important key figure because, unlike profit, it is not optimized for taxes and is not influenced by any interest payments. However, this key figure only becomes really meaningful and comparable when we put it in relation to turnover, in the case of agencies in turn to the AGI.
If you’re toying with the idea of selling your agency at some point, you should definitely optimize this metric.
Incidentally, the global benchmark for the EBITDA margin for medium-sized marketing agencies is 12-17%.
4. Operating Expenses
The operating expenses include rent, insurance and running costs for the infrastructure.
Make sure that these do not account for more than 20-25% of the AGI.
5. Labor Costs
By far the biggest cost driver for most marketing agencies is personnel costs.
These, set in relation to the AGI, offer you a strong lever to run your agency business profitably in the long term.
The personnel costs should ideally be around 50% of the AGI.
6. Leverage and equity ratio
Leverage formula: Debt / Equity
In a well-run business, raising outside capital can be an exciting lever to grow faster than purely cash flow-driven.
The debt ratio (borrowed capital / equity) should be < 2:1.
7. Utilization rate
Utilization rate formula: billed hours / total hours worked
The Utilization Rate (UR) is a very important variable in every consulting business: it shows how much time your consultants actually spend with the customer and what proportion of the working time is spent on internal tasks (administration, customer acquisition, strategy meetings).
To put it very bluntly, in the consulting business those consultants who actively work on customer projects have to “feed” the rest of the company. The lower the workload of your consultants, the more pressure there is on the “productive” consultants, and the more they have to bring in per hour billed.
It is advisable to measure the UR both at consultant level (benchmark: 80-90% is very good, the more seniority and thus strategy and acquisition tasks your consultants have, the lower the UR tends to be) and at company level. In larger companies with a team structure, it also makes sense to track the UR level of the individual teams.
8. Customer Focus
Many agencies initially grow with individual major customers. That’s ok in the start-up phase – in order to avoid being too dependent on individual customers as much as possible, you should definitely make sure to diversify as soon as possible. Industry blog Marketingagencyinsider recommends aiming for the following easy-to-remember formula:
- Max. 1 customer with > 25% of the AGI
- Max. 2 customers with > 12.5% of the AGI
- Max. 4 customers with > 6.25% AGI
- Max. 8 customers with > 3.125% of the AGI
9. Liquidity ratio and solvency
Formula Quickratio: Liquid funds + receivables / short-term debt
Make sure that your quick ratio (= liquidity level 2) is at least 100-120%. Anything below that is an indication that you may be in serious financial trouble.
10. Payment deadlines of your customers
Formula for calculating the average customer days:
((customers previous year + customers current year) / 2) / revenue x 360
It is critical to your agency’s survival that you distinguish between cash flow and profit.
According to a survey by HubSpot, cash flow management is the most urgent challenge for 1/3 of the marketing agencies surveyed.
One of the most important drivers in the cash conversion cycle of every marketing agency is the customer payment deadline. Some tips to improve this:
- Insist on payment terms of < 30 days (10 would be ideal, but 30 days have become the standard in Switzerland)
- Make your bills as fast as you can! In the heat of day-to-day business, many agencies forget to issue their invoices, or only do a monthly invoicing run – make sure to issue your invoices regularly, but at least weekly!
- Cash flow before profit – with new customer projects, make sure you also focus on the cash flow (= when and at what time intervals you will be paid on account, so that you have to pay as little as possible in advance) and not just on the future cash flow!
In Switzerland, 30-day payment terms are standard, but they are not always adhered to. A good resource for the latest figures by country is Intrum’s European Payments Report.