No matter what type of agency you are, profitability must be your utmost goal. Of course, you would want to deliver value to your clients but if you are struggling to hit your bottom line, you might have to shut the business.
Profitability is always calculated by looking at the facts and figures. To ensure your business is in great health, you must keep an eye on certain metrics also known as the KPIs (Key Performance Indicators). Knowing those will help you make better business decisions, and increase profitability. In case you aren’t sure what they are, help has arrived. Whether you are a staffing agency in Pittsburgh or a digital marketing agency, ideally, following are the KPIs that determine profitability:
1: Pre-Qualified Leads
Every business has its own system of bringing new leads and converting them into customers. The question is, how do you measure that? Let’s say you have got 10 new qualified leads. This number would give you a starting point for predicting the sales for the next quarter. The key is to focus on qualified leads only.
To increase the number of leads, identify where the best ones are coming from. Are they personal contacts, referrals, Google searches, or subscribers? Once you know that, double your effort on the strategy that’s working.
Keep on monitoring the number of new leads to predict your revenue. These numbers will also help you figure out if you need to expand your team.
2: Gross Margin
Gross margin lets you see your production profitability. It refers to calculating the profit margin on each client or project by subtracting time and material costs from the final price the client is paying.
Although this method is accurate, it’s time-consuming and expensive to calculate it. It also demands aggressive bookkeeping. Hence, this metric is recommended for mature agencies who have bookkeeping records on a weekly or biweekly basis. It’s ideal for agencies that work with lots of contractors.
A profitable gross margin is the one that aims for 50 to 70% per project or client. With this figure, you would be able to accommodate the slow business days without compromising on your net profitability.
3: Life Time Value
It refers to the total revenue received by averaging the sales of all clients as long as they remain your client. In other words, even if the initial value of a contract is $80k, you could be making 10 times over the lifetime of the client. That’s why lifetime value is a little tricky to calculate. You are going to need some historical data for calculating it accurately.
If you want to maximize your LTV, you must train your account managers in cross-selling and upselling to extract as much revenue from a client as possible. After all, everyone knows it’s easier to sell to an existing client than acquiring a new one.
Another way to increase the lifetime value of a client is to keep them happy. This way, your sales team won’t be always under the pressure to bring in new clients.
4: Billable Rate
Tracking the time of your employees is also another trick to improve the profitability of your agency. Each employee is an asset and the time they spend doing the work is your current. You are trading hours for money.
For calculating the billable rate, you must make your employees fill timesheets and track their hours. Each billable employee has a utilization rate. To calculate this rate, take their billable hours and divide them by 40 hours.
If your employees are working more than 40 hours per week without overages, this could give a 100% utilization rate. Those people deserve a treat. Be sure they are not burnt out. Achieving a 100% utilization rate is not always possible. When the rate is low, it’s a sign you need to push the low performers.
5: Overhead Spend
Overheats include those expenses that support your agency but they are not directly tied to a product or service. These expenses are mandatory for generating revenue. The main categories of overhead spending include admin, facilities, and marketing.
The rule of thumb says your total overhead spending must be between 20 to 30 percent of the adjusted gross income. It’s important to land in the acceptable ranges to maintain healthy profit margins. However, during the time of aggressive growth, you might have to spend outside your scale, which is normal as well as acceptable.
These numbers will leave a huge impact on your profitability regardless of the industry your business fall into. You may also calculate these KPIs if you are in the mortgage recruiters industry. They will give visibility into the progress you are making and the course of action for greater success in future.