The Top 3 Financial Metrics That Should Matter to Agencies (& How to Track Them)
By Eric Choma
The framework for financial analysis has evolved substantially since the arrival of easy-to-use big data tools.
As a result, there is a lot of differing advice on how to identify “important” financial metrics within your business.
This can make the topic seem intimidating, especially for marketers, but it doesn’t have to be.
If you read my last article, you know I come from a financial discipline as opposed to that of a seasoned digital marketer. This means I am very data-oriented and precise when it comes to making decisions. This is a bit at odds with most marketing reporting.
Most of the key performance indicators (KPIs) marketers focus on evaluate brand awareness, driving leads, and engagement rather than overall business health and growth like most financial metrics.
While those KPIs are extremely important, they tend to only measure progress towards a specific, defined goal within your marketing channels. They’re only a piece of the puzzle.
My goal is to help you improve the financial literacy of your organization as a whole.
The goal of this article is to help you, as a marketer, identify and analyze financial metrics to improve individual project profitability, client satisfaction, and overall company health.
There’s quite a few, but in this article, I will highlight the top three that I believe marketing agencies, specifically, should start tracking today.
This metric shouldn’t be much of a surprise. As every business owner knows (and most of their team members should know), in order to keep the lights on, your company needs to make money.
From a marketing agency perspective, there are several different profitability metrics that I recommend you start tracking immediately (if you aren’t already).
First, is gross profit, which your agency is already tracking this gross profit on a consistent basis.
Analyzing this metric helps you understand how much your company is truly making from every dollar of revenue and further identify areas where you can be more efficient. For example, if you can cut an unnecessary tool or find a more affordable one.
It can be calculated by subtracting your costs of goods sold (customer success salaries, agency tools & tech, client travel, etc.) from your total revenue.
Second, you want to also be able to track profitability on a client and project level.
This will help to identify the type of projects that make the most money for your company, highlight your most valuable products or services, and help to deliver better value to your clients.
Lastly, for service agencies, the hardest part about calculating project profitability is figuring out how to track client deliverables from a cost perspective, in other words, how much time and resources go into fulfillment.
At IMPACT, we track the value we deliver to our clients using a point system, as opposed to the traditional time-tracking methodology, however, both methods have the same goal.
Ultimately, your company needs to be able to track and allocate the time your employees spend on every client deliverable. This information will allow you to calculate profitability at the project and client level.
2. Accounts Receivable Aging
Profitability is very important, but before you can begin to focus on profits, you need to attract new business, sell your services, invoice them, and THEN...dun dun dun... collect payment.
Collections is what we call, in finance and accounting, accounts receivable.
Simply put, the accounts receivable aging report will show you a detail of all unpaid invoices, the related client, and how old the receivables are.
It’s a tricky task for a client service agency to handle collections in-house. As Controller here at IMPACT, it’s part of my job to make sure we as well as our vendors get paid on time.
However, I was hired as employee #60 and the first in our financial department. Most small companies do not have the luxury of having someone like me in-house to make sure everything is getting paid on time.
As a result, you typically will see more client success team members bearing the responsibility of selling AND collecting.
As most of you probably can understand, this can potentially put your team and client in an awkward position and worst case scenario, harm your long-term relationship.
My recommendation would be to use a tool like QuickBooks or Bill.com to automate and streamline your invoicing process.
Not only will these tools automatically sync into your accounting systems for easier bookkeeping, they will allow you to easily send payment reminders via email, track your invoices on an individual level, and track the aging of your receivables (overdue, unpaid invoices) in real-time.
Accounts receivable management is a very important area of focus for any agency. If you are able to understand how long it takes your clients to pay on average (DSO, discussed below), you can better manage your company’s cash flow.
3. DSO (Days Sales Outstanding)
As your company starts to grow, you will also notice your accounts receivable account growing as well.
While you may be tempted to jump to conclusions about your collections process, it’s important to take a step back and analyze further.
Normally calculated monthly or quarterly, Days Sales Outstanding, or DSO. It tells you how many days, on average, it takes to receive payment from the invoice date. So, for example, if your average payment terms are Net 15, a DSO of 15.0 days would indicate a healthy, efficient collections process.
It’s important to understand your collections process and how long an average customer takes to pay in order to avoid any unexpected cash flow issues. For example, you want to collect payment for work completed as soon as possible so that you can use the cash to grow your business.
DSO is calculated by taking the ending Accounts Receivable for the period divided by the total Agency Sales Revenue for the period, multiplied by the number of days.
I am constantly thinking of new ways to improve our business processes here at IMPACT. One initiative is to sign as many new and existing clients up for ACH (aka Automated Clearing House, these payments are usually instant ).
Not only does this ensure timely payment, but it also can also potentially save you and your client some money on credit card processing fees/interest. A “win-win” as they would say.
Becoming a Numbers Nerd
In the interest of improving our overall financial literacy, let’s take a moment to digest all of that.
This is by no means an all-encompassing secret guide about three magical financial metrics that will make your marketing agency more profitable overnight. That doesn’t exist. Every single business is different.
However, we fortunately have an amazing community of entrepreneurs, marketers, and agencies here at IMPACT, all learning and iterating as we go.
As for you, I’m happy to help you figure out the right financial metrics that do work for you and your organization, how to track them, and how to improve.
What financial metrics are you tracking and how is it working for you? If you ever want to talk numbers, feel free to email me at firstname.lastname@example.org because I am an actual nerd!
Wondering where to begin?