Getting the Numbers Right

Agency Check-up
provided by Second Wind

How are you doing? Below are some basic figures that will help you determine if your agency is "in the pink" or "feeling poorly".

• On average, agency gross income (billings minus direct costs) should be around 30% of total non-capitalized billings.
• Your payroll, including the owner's salary, should be no more than 50% of agency gross income.
• Another way to look at the same figure is to compare the number of employees per 100,000 of agency gross income. The ideal is about 2 per $100,000.
• The average agency's net profit before tax is 5%.

Bill with Markup

• The average agency markup for a $1000 outside buy is $223.
• The average agency earnings for a $1,000 outside buy, if the agency charges for hours spent in supervision instead of taking markup, is $122!
• Keep trying to take markups rather than billing for time spent whenever you can. It's more profitable.

Results-Based Compensation

Get paid for results. Clients respect agencies who are willing to put their money where their mouth is. Being paid on results is an idea whose time has come.

Here is a step-by-step example of a results-based agency compensation program.

1. Calculate the agency blended rate.
2. Offer the client 25% discount on blended rate.
3. Determine measurement criteria for success.
4. Negotiate rate increases based on agency performance. (Up to 25% above blended rate)
5. Set all media commissions and outside services as net.

Blended Rates

The secret to making money on blended rates is to get the client to agree to a satisfactory blended rate. This is in most cases, lower than the rate normally billed by top management, but higher than the rate normally billed by other staff members. After the client is on board, the agency pushes as much of the daily service responsibility down to mid and lower level employees as much as possible.

Progress Bill

Progress billing means you bill the client for work completed on a monthly basis whether the project is completed or not. This technique of speeding cash flow, if it is sold and administered correctly, can be acceptable to the client.

When an agency progress bills, invoices should look something like this.

Half-Year Check-Up

I have always recommended you conduct a half-year agency financial review. By this I don't mean a cursory look at financials, but a complete study along with appropriate adjustments. The best way to do this is to gather your partners, key employees, etc. and move off-campus for a half-day uninterrupted meeting. At this meeting you should study the financials, examine current new business opportunities, and review the agency's vision and mission statements. This gets the agency back on track, if necessary, and focuses your efforts for the next six months. Following are some markers you can use for guideposts.

First and foremost, look at the billings. Have you met projections? How do you compare with last year at the same time? Remember to look at your work in progress. Your real billings for the period must include charges you've incurred but haven't billed to the client. Sometimes there are significant hours and outside charges logged but not yet billed to the client.

Also check the following additional markers:

1. Agency Gross Income (AGI) should be about 35% billings
2. Payroll should be no more than 50% of AGI
3. Net profit before tax and bonuses should be 7% of billings and 20% of AGI.
4. Each employee should bill three times their salary
5. There should be no more than 1.5 people per $100,000 of AGI
6. Average collection time for invoices should be 34 days
7. 15% of assets should be in cash or equivalents
8. Accounts Receivable should be about 50% of assets
9. Fixed assets (furniture, cars, computers etc.) should be 25% of assets
10. Long and short term debt should be no more than 15%of liabilities
11. Accounts Payable should be around 35% of liabilities
12. Net worth should be about 30% of total assets

If you're off on a number of these markers, please call. We should talk.

This article has been provided by Second Wind. For more information, please visit their web site at www.secondwindonline.com