Managing an Agency: the KPIs...Tip: If you bill your customers on completion of work, you can also...

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Managing an Agency: the KPIs Best key performance indexes to look at for a smooth running of your agency

© Yuliya Vorontsova Port Marine Accountancy Ltd

1st Edition


Who is this guide for

You’ve got a big task to drive your agency forward. You could be a founder, an owner, who built your business from scratch (well done

by the way!) or a Managing Director, who is accountable to those who invested in the company. No matter who you are, you feel responsible for your business and all these people who rely on you, their employer.

The problem is, the specialists and pioneers in certain industries are not necessary specialists in finance and companies’ management. It takes years of studying for accounting professionals to finally get their qualifications. This guide will try to help you to navigate through your agency’s figures and identify any hidden problems.

What is an agency

We call “An agency” any type of business, which does project type of work and has relevant structure. These businesses sell skills of their employed or outsourced staff. Project managers capture direct costs and allocate resources to a particular project. Your overheads, such as rent, account managers’ salaries, website costs, advertising and business development, go on top and leave your business with the bottom line – profit, from which you pay Corporation tax and dividends.

Any skilled professional business can have an agency structure: advertising agency, creative agency, recruiters, firm of IT specialists and even solicitors and accountancy firms.

As a result, their staff costs are quite high and this is where most of the problems lie.


Who we are

Port Marine Accountancy is a professional business services company specialising in accountancy, business analysis, internal audit and

change management. On average, we have more than 15 years of experience in Accountancy and Business.

We embrace new technology, such as Cloud and Blockchain, and are constantly improving our knowledge not only in accountancy and taxation but in companies' management and productivity via use of new modern applications and technologies.

Over time we have discovered that improvement of existing business processes of our clients is the most enjoyable and rewarding type of work, which gives us a sense of achievement. We've learned about change management through experience and we can positively say that we like to work with modern, open-minded, constantly evolving businesses.

We monitor our own success using our industry's KPI's and this is something we advise any business manager to do. Our tools and management accounting knowledge allow us give business insights to our clients via easily digestible reports and dashboards. Forecasting and Planning tools help to support any business decision our clients make relieving uncertainty and doubt and reducing risks.

Please visit our website to find out more www.portmarineaccountancy.com


Profitability

Understanding whether your particular business period was profitable

or not is a good start. But seeing a positive number on your Profit and Loss account just

isn’t enough. You also need to understand how profitable your business is or

is it profitable enough for the industry you are in?

Calculating Profit Margins will answer these questions

Gross profit

Gross profit margin = x 100

Revenue

Operating profit Operating profit margin = x 100

Revenue Tips:

• Make sure you understand the difference between Gross and Operating Profit. Gross profit is profit after deducting all your project related costs • Beware that sometimes profit can be manipulated by using different accounting techniques, for example different calculations of depreciation • Remember that your figures are only as good and reliable as you records are


Liquidity

These ratios are a guide to the risk of cash flow problems and insolvency. If a company suddenly finds that it is unable to meet it’s short-term liabilities, there will be a danger of insolvency unless the

company is able to turn enough current assets, like customers debts, into cash quickly.

Current assets Current ratio = Current liabilities

Tip: Watch out for overtrading. It is when your revenue grows too quickly and your customer debts are too high, so you don’t have enough cash to settle your liabilities in time. Sudden drop in Current ratio will indicate it. Cash operating cycle = Receivables’ collection period – payables’ payment period Tip: If you bill your customers on completion of work, you can also add your Work In Progress holding period. This indicator will show if you pay your suppliers before money from customers hit your bank. It is very useful indicator for those, who outsource lots of their work to freelancers and other agencies.


Working capital management

What is better to have: profit or cash? It is important to have balance between profitability and liquidity. Unprofitable companies can survive if they have enough cash.

Profitable companies can fail if they can’t pay for their liabilities, such as wages, rent, etc. That’s why it is important to measure the

following two ratios

Customers debts Trade receivables days = x 365 Credit Sales Debts to suppliers Trade payables days = x 365 Credit purchases Tip: If your customers don’t pay you in advance or immediately when they receive your invoice, it’s a credit sale. And the other way around, if you take your time to settle suppliers’ invoices it is a purchase made on credit


Debt and gearing

These ratios are crucial for assessing the risk profile of the business and used extensively by potential investors and finance providers.

If your business doesn’t have any loans, you can skip this page

Operating profits before debt interest and tax Interest cover = Debt Interest Debt Gearing = x 100% Equity Tip: In long term, debt is usually cheaper source of finance than equity, but more risky, obviously


Cost control

Percentage of certain costs in revenue is a good indicator of “Where

your money goes”. It is good to do this exercise with different groups of costs, wages

particularly, as it’s one of the largest types of agency’s costs.

It is important to look at Billable Hours and Unbillable Time while analysing your Staff Costs.

Maximising Billable Hours is essential for optimising Income. By

measuring Billable Hours by Staff Member you can use it as a Performance metric in order to evaluate each individual’s revenue

contributions.

Unbillable Time is the number of hours which were worked on a project, which were not billed for to the client. As staff will typically be paid regardless, Unbillable Time eats into profits and thus should be

reduced as much as possible.

Tip: make an analysis of Billable Hours and Unbillable Time part of your weekly routine staff meeting


Customer Relationship

You should start with measuring Customer Acquisition Cost.

By measuring how much is it costing to you, on average, to get a new client, you can see the overall efficiency of your Sales and Marketing processes. Using Customer Acquisition Cost you can quickly identify

if there is a shortfall in one or more of these steps in your process, and then do the necessary investigations to expose and resolve the

causes.

Average Customer Satisfaction by type of service Customer Satisfaction is a measurement of how likely out of 10 of the

Client or Customer would recommend your services. By surveying only a small number of customers, you can follow up and dig deeper into their responses and to see how the individual responders change

their view overtime as a result of the steps you’ve taken.

Tip: There are number of other more specific financial and non-financial KPIs applicable to particular types of agencies. Please contact us if you need help in developing specific ones for you.

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