The 9 Metrics Your Agency Should Be Tracking
Author’s Note: This blog post was originally published in August 2020 and was updated on June 2024 for accuracy.
I love metrics because they are cut and dry. No beating around the bush, no dawdling around what might be the best option. It’s like ordering pizza for dinner in my household… there is never anything to debate. 😋
A metric is telling you one of two things: where you’ve been and where you might be headed.
A real life example of a metric that you have likely encountered is going to the doctor and having your blood pressure taken. You may know that anything from 90/60 to 120/80 is a normal range. Imagine your doctor takes off the blood pressure cuff, gives you a concerned look, and tells you your blood pressure is 140/90. 😩
You may not know exactly what to do next, but I bet your doctor has a target they’d like to see that number drop down to. The great part about having a goal is you can work with the smart people around you to identify the best path toward that goal.
That’s exactly how you can think of metrics in your agency. They are numbers that tell you the health of your agency. If you review a metric and you realize you’re going off course, you can make adjustments to your business to get you back on track.
But First, A Little More About Metrics
It's not uncommon for those who don't already eat and breath metrics to at first find them a bit confusing. And with hundreds of different performance metrics out there—from average churn rate and customer lifetime value to the 9 this article will touch on—how can anyone know what's what without extensive Googling.
Fortunately, you don't need to Google anything to figure out which metrics your agency should be watching most. As an agency operations consultant, I've seen first-hand where most agencies shine, and where many miss the metric-mark, so to speak.
So, to optimize your agency here are the 9 agency metrics I like to see when I’m working with clients.
Metric #1: Revenue Capacity
Revenue capacity tells you how much revenue you can generate with the current team you have. It’s an important baseline number to track because it allows you to understand how much revenue you’re capable of generating as well as give you the ability to create your sales goals for each quarter. The great news is you only need to crunch this number when you’re thinking of changing your team size or rates.
To crunch this number, you’ll look at the people on your team and calculate how many of their hours can be spent on billable work. Then, multiply the total hours available in that given time frame by your agency’s blended billable rate (the hourly rate equivalent you charge work out at).
Revenue Capacity Formula:
A team’s total billable hours in a year x blended bill rate = Revenue Capacity
Example: On average, a team of 20 people are spending 65% of their total available time toward revenue generating work. You’d take 20 (people) x 2080 (hours in a year) x 65% = 270,040 billable hours available. Multiply this by your firm’s blended rate of $250/hour and you’ve got a revenue capacity of $6.76M.
The Ideal Range: There’s no set range for this and is entirely dependent on your agency’s goals and needs. Obviously, the more revenue you can generate per team member while still maintaining boundaries for other important people and business-focused initiatives, the better.
Metric #2: Project Gross Profit Margins
A project’s gross profit margins refers to how profitable a project is, as a percentage, after subtracting out the costs associated with the project. This is the amount of profit made for every dollar earned, on a particular project. This is a foundational item to get right in order to set yourself up for profitability.
Let’s start with the formula so you have a grasp of how this is calculated.
Project Gross Margin Formula (2 steps):
Step 1: Project Revenue - Project Costs = Gross Profit
Step 2: Gross Profit / Project Revenue x 100
Calculating Project Revenue:
This is the amount you’re charging your client minus any passthrough expenses that you’re going to be billing directly to the client. Examples of passthrough expenses are things like print/ad spend, imagery purchases, travel expenses related to the project, etc. Because you’re charging them directly to your client, you don’t want to include these in your revenue.
Calculating Project Costs:
The most time-consuming task of capturing this metric will be totaling up the project’s costs.
The project’s costs are going to consist of the cost of everyone’s time who worked on the project, contractor costs (which you charge your firm’s rate for), and any agency markups you normally include in your estimates.
Employee Cost Rate Formula:
To calculate the cost of everyone’s time on a project, you’ll take each person’s salary + benefits + overhead costs / their workable hours in a year (normally 2080 if they’re working an average 40 hour week). This leaves you with each team member’s hourly cost rate which you’ll multiply by the number of hours they spend on the project.
Example: Sarah’s cost rate is $45/hour x 10 hours on the project = $450 cost toward the project
Example: You’ve billed a client $95k for the project and subtract out $5k in passthrough expenses leaving you with $90k of project revenue. You calculate that the cost of the project totals $40k. $90k Project Revenue - $40k Project Costs = $50k in Gross Profit. $50k Gross Profit / $90k Project Revenue x 100 = 55% Project Gross Margins.
The Ideal Range: Normally this will range anywhere from 50-70%, however I aim for agencies to hit at least 65%+ on each project. With a 65% goal, you’ll find it gives you some buffer for some variance and will in most cases still leave you profitable after taking into account all other company operating expenses.
Metric #3: Agency Gross Profit Margins
Similar to Project Gross Margins, Agency Gross Profit Margins tell you how much profit you’re making on every dollar of revenue you bring in after taking into account all operating expenses. The difference here is you’re now looking at profit margins across the entire agency’s revenue instead of looking at each individual project.
Profit Margin Formula:
Gross Profit / Revenue x 100
The Ideal Range: The healthy average range for gross profit margins is somewhere between 20-35% and fluctuates based on what you’re currently doing in your business. If you’re investing in scaling and doing things like hiring key employees, investing in business development, etc., you can expect this will likely be toward the lower range or even dip below the 20% temporarily.
Metric #4: Cash on Hand
This is the amount of cash you have in your bank account that’s in your operating account as well as business savings. It’s crucial to build up a healthy reserve for the times your agency inevitably hits a rough patch, or times you want to invest in growth.
Ultimately, having cash on hand gives you the freedom and flexibility you’ll need to navigate whatever comes your way.
The Ideal Range: Depending on your company’s goals, it’s recommended that you keep 10-30% of revenue as cash on hand. If you know there will be upcoming investments into the business, you’ll want to be on the higher end of the range knowing you’ll be dipping into your cash reserves.
Metric #5: Average Bill Rate
If you’re in the agency world, you know that just because you bill for a certain number of expected hours, it doesn’t mean that a project always ends up taking that many hours to finish. Average bill rate refers to the amount you’re earning for every hour of work you output.
Unless you’re billing T&M (time and materials), this will fluctuate depending on how well the project is scoped, and how well your team can finish within the estimated projections.
Average Bill Rate Formula:
Amount you’ve billed a project or retainer / the number of hours it takes to complete the work for that project or retainer’s time period
Example: When you pitch a $100k project that you estimate will take 500 hours (so $100,000 / 500 = an average bill rate of $200/hour), but it takes you 800 hours to finish. As you can see, you’ve now ended the project with an average bill rate of $125/hour ($100k/800 hours).
The Ideal Range: This metric is largely dependent on your standard bill rate (the rate you charge up front for the work). You want to try to get as close to your standard bill rate as possible but know that small variances are okay. Ideally, you don’t want to dip past 10-15% of your standard bill rate. If you find yourself regularly missing this target, you should look at your scoping/estimation process as well as for workflow issues on project delivery.
Metric #6: Utilization Rates
Utilization rates refer to the amount of time each team member is being utilized on billable work out of their total time available. Ideally, agencies are tracking on a weekly, monthly, and annual basis. I know tracking at a weekly level seems cumbersome but doing so will ensure the data going in is as accurate as possible AND that you’re catching any issues early.
Utilization Formula:
An employee’s amount of time spent on billable work / their total amount of time available
Example: If a full time employee is working 40 hours/week and is expected to bill 32 hours out of their 40 hour week, their weekly utilization rate is 80% (32 / 40). You can then calculate and measure the monthly or yearly average by also factoring time off for holiday and vacations/sick time etc.
The Ideal Range: Weekly utilization rates will vary greatly for billable team members. Some individual contributor roles will be utilized as much as 85%, while others, such as a Design Manager, will be lower to account for time spent on non-billable work. Overall, monthly utilization rates for an agency fall between 60-70% however your goals can depend on your rates. If you’re charging higher rates, you may be able to accommodate lower utilization rates.
Metric #7: Revenue Per FTE
This is the amount of revenue you’re generating per full time equivalent (FTE) team member. It’s calculated by taking the agency’s annual gross profit (revenue minus any pass through expenses), and dividing it by the number of FTE’s in that same time period.
This number alone won’t tell you everything, but it can be the first step in telling you how productive your agency is. It can also be a great indicator for you to dig deeper if the team feels stretched thin, but they’re at a low revenue per FTE.
Revenue Per FTE Formula:
Revenue (Gross Profit) / Average FTE’s in the same time period
Note that when you’re looking at this on a monthly basis, you’ll need to multiply by 12 to annualize the metric
Example: Say you’ve earned $5M of gross profit for the year. You calculate that you had an average of 20 employees during that time period. You’d take $5M / 20 FTE’s = $250k/FTE
The Ideal Range: Aim for a minimum of $200k / FTE. Aiming for more is great, but when your numbers start dipping below $200k / FTE, that's an indicator that you may have some areas of the business that need tweaking.
Metric #8: Salaries to Revenue
Salaries to revenue refers to the amount you’re paying in salaries compared to revenue. Since salaries are the largest expense for any agency, I like to capture this metric to ensure you’re setting yourself up for success to be profitable.
Salaries to Revenue Formula:
Amount in salaries / revenue (Gross Profit) for the same period of time.
Example: If you pay your team $550k in salaries per year, and your annual revenue is $1M, it would be $550k / $1M x 100 = 55% in salaries
The Ideal Range: Healthy targets are going to be in the 45-60% range depending on your other business overhead expenses. Obviously, the higher your percentage, the more that eats into your overall profits.
Metric #8: Financial Feedback Loop
Admittedly, this one isn’t actually a metric but it is THE critical piece in ensuring all those metrics you’ve worked so hard to capture are going to good use. The financial feedback loop refers to the workflows and organizational communication in place that ensures the critical financial information is being communicated to the right people at the right time. Key team members then hold the responsibility for making course corrections as needed.
The Ideal Structure: This is going to vary greatly depending on your agency and how it’s structured. My recommendation is that the metric information be captured in a central location, such as a dashboard or spreadsheet.
An operations manager (or equivalent) would then highlight any variances in the metrics on the spreadsheet or dashboard and communicate those variances on a monthly basis to the leadership team. The leadership team is then responsible for addressing and correcting any “unhealthy” numbers.
Read here for tips on how to create a financial story for your team.
Metrics Are Your Map
Whether your agency uses these 9 metrics or different ones, the idea is to keep a regular pulse on your business. If you’re wondering how to drive financial impact in your agency, having these 9 metrics can be incredibly helpful for mapping your team's progress and determining where to pivot and improve. Ultimately, metrics are your map for success because you cannot improve what you don’t measure.
However, using metrics is just one aspect of cultivating a prosperous business. To succeed, an agency must also have solid workflows, operational best-practices, and excellent people management.
This is where I can help. If you suspect your agency might need a tune-up, contact me today. With the right systems in place, I'll help your team increase profits, attract top talent, and keep daily operations running smoothly and effectively.
