As you spend time reviewing your financial statements for the year, note these important numbers, ratios, and percentages we have compiled at Second Wind during our conversations with our more than 700 member agencies, and our findings from consulting assignments. Use these “quick numbers” to take your agency’s pulse. If they are not in line, you may need help.
Key Income Statement Indicators
- Adjusted Gross Income (AGI) should be at least in the 40 to 45 percent range as it relates to billings. For more service-based businesses, AGI should be in the 60 to 65 percent range.
- All payroll, including benefits, should be no more than 50 to 55 percent of AGI.
- Almost as important is the ratio of gross income to direct labor. This should be no more than 3-to-1. For example, if you have an account that generates an AGI of $100,000, the direct labor (creative and account management) should cost you no more than $33,000 in payroll.
- Another measure of payroll effectiveness is AGI generated per person. The average agency employs approximately one person per every $140,000-$170,000 of AGI.
- Each employee who bills full-time (art directors, copywriters, public relations directors, etc.) should bill at least 1,600 hours in a year. Account executives, production managers, media directors and other personnel who do not usually bill full-time should bill at least 800 hours a year. All other agency personnel (receptionist, clerks, etc.) should be able to bill at least 400 hours a year. In the case of totally fee-based agencies, everyone in the agency should bill 1,600 hours yearly.
- Margins on services bought on the outside such as printing, photography, illustration, etc., should be in the 25-30 percent range.
Key Balance Sheet Indicators
- Average collection time for invoices should be 30 to 45 days.
- Fifteen percent of assets should be in cash or equivalents.
- Accounts Receivable should exceed 50 percent of assets.
- Fixed assets (furniture, cars, computers, etc.) should be around 25 percent of assets.
- Net worth should be approximately 30 percent of total assets, but may vary in an “S” corporation.
- Long- and short-term debt should be no more than 15 percent of liabilities. Any long-term debt should exist to finance capital purchases.
- Accounts Payable should be no more than 35 percent of liabilities.
- Net profit before taxes and bonuses should be 7 percent of billings and 25 percent of AGI.
- Liquidity in your agency should be about two to one (a cash surplus of roughly twice what you need to cover current debt, payroll and general overhead).
Distribution of Agency Income Per Client
- You should have no one client comprising more than 25 percent of your AGI.
- You should have no more than two clients totalling 12.5 percent of your AGI.
- You should have no more than four clients totalling 6.25 percent of your AGI.
- And, you should have no more than eight clients totalling 3.125 percent of your AGI.
If your client mix is not similar to this, you have too many clients in one or more of these categories. Think about resigning some of them, or adjusting your commitments to them.