Having sufficient data and the right information available at all times is a key differentiator between agencies that fail and those which succeed. Discover the crucial reports that could push your agency on top.
Imagine the following situation.
Your creative agency has signed a contract worth $1 million with a major company, with the payment expected in the following 6 months. The job sounds amazing at first.
But half a year into the contract, you find out that you've depleted your funds. Even if fulfilling the contract is possible, the issue is that your agency is still three months away from receiving payment.
When agencies get into this kind of predicament, they can easily end up failing. They find themselves unable to cover ongoing expenses like rent, payroll, and service costs. Finally, such agencies can lose large clients despite landing extremely valuable contracts.
The reason behind all of those problems is poor cash flow management. And it’s something your agency should avoid at any cost.
The best way to ensure control over your cash flow is by implementing a range of reports. Proper reporting allows you to know all relevant data at any point and get a good sense of what's going on in your agency.
In this article, we'll explain which reports your business needs the most to stay successful.
The Four Reports Your Agency Needs to Ensure Success
Report #1. Your DCoDB Report
DCoDB is an acronym for "daily cost of doing business." This report can be critical in daily management and when it comes to invoicing.
You can calculate your DCoDB by taking your total regular expenses on the annual level and dividing that by the number of your agency's workdays over the year.
The reason why the DCoDB is important is that your agency regularly spends time on nonbillable tasks. This is the work that you can't avoid, yet it doesn't reflect on your revenue directly. Such tasks include marketing your agency, managing prospects and leads, and having meetings to flesh out your strategy.
Since you can't go around this kind of work, your agency will have a somewhat limited time for work you can actually bill. The DCoDB report will inform you of the minimum hours you'll need to put in daily to maintain your agency's profitability.
Report #2. Your Blended Rate
Many agencies create their blended rate without considering all of the costs involved. In fact, when an agency gives us their blended rate, it never contains everything that's written off or written up.
The main issue here is with the billable hour blended rate itself. If you want to set up your agency for success, you'll need to account for various factors that play a role in this metric.
To use an example, one client we worked with had set their goal to between 15 and 20% increase on their net profit over two years. The goal was reasonable. But when we calculated the rate required, it turned out to be over $400 an hour.
The client was shocked because they didn't consider all of the general and administrative expenses. In this agency's case, they were writing off every one in two hours - an almost 50% write-off, which made their expected blended rate incredibly high.
If you consider these factors when calculating your blended rate, you won't encounter such unpleasant surprises.
Your blended rate will also be a good starting point for other metrics.
Report #3. Your Agency Fee Divided by All Hours of the Business
When you divide your agency fee by the complete number of work hours in your agency, you get the average hourly earnings.
But for this calculation, it's crucial to take the actual agency fee, not the entire revenue.
That means you'll need to take the revenue and subtract any costs that go into producing that revenue. And these may include different outside expenses, such as freelancers and media. The result will be your agency fee. Then, you should divide that number by the hours spent on producing that work.
Your average hourly earnings should be somewhere between $70 and $75 an hour, which is the industry standard.
This metric is vital because it shows you how much your agency is really earning. While some agency owners believe that their blended rate represents their earnings, this isn't true. The most reliable way to get that information is to calculate your average hourly earnings.
Report #4. Utilization Rate
One of the best opportunities for boosting your agency's revenue lies in maximizing the profitability of your team. Calculating the utilization rate will provide you with the tool that allows you to do just that.
You can determine your utilization rate if you divide the number of hours spent on billable work by the total work hours charged.
Measuring the time spent on different business aspects will provide you with useful information that could lead to significant changes in your agency.
For example, the data might reveal if certain team members aren't as efficient as others. While the effects of this inefficiency might not be apparent immediately, they could cost your agency potential new clients in the long run.
Once you measure your utilization rate, it can become necessary to make crucial decisions involving everything from better matching responsibilities with your employee's skillset to replacing team members.
Get On the Right Track With Essential Reporting
Detailed reporting is a useful tool that can inform agencies about the effectiveness of their process, the general direction they've taken, and how profitable they are. And you can ensure your agency's success by tracking and reporting on the key metrics.
More importantly, being aware of these reports and the data within them will allow you to stay clear of the common pitfalls that can sometimes lead to the failure of an agency.
If you can’t do it alone, or if you need more guidance, let us know. Contact us to book your profitability accelerator call and see how we can work together to optimize your business.