Robert is the Founder of Patin & Associates and the Author of the international best-selling book The Agency Blueprint.
2021 is finally coming to a close, and for those of us who were able to outlast all the craziness of this year with a thriving business, that is truly something to celebrate. Now that the end of the year is here, it’s time for reflection — analyzing what went right, what we could do better, and where we want to be this time next year. For your business, that means a year-end audit.
A year-end audit gives you a true picture of how your business performed that’s based on numbers, not emotion. When I help my clients with their year-end audits, it’s always interesting to see how many of them are shocked by the results — some in a good way, some not.
In your year-end review, make sure you calculate these four key performance indicators that will uncover how your business really performed in 2021. These numbers will give you a solid foundation on which to build your 2022 plans.
When it comes to growth, many people think they need to make a massive shift to see improvement. But it’s really about small changes and incremental growth. A superstar isn’t 100 times better than everyone else; they’re 2 or 3 percent better than everyone else. That’s all you have to shoot for, too – 2 or 3 percent better than you are right now.
Wherever you are right now, chances are, you’re almost where you’d like to be. All you have to do is keep tinkering and refining what’s not working. A couple percentage points of improvement in the areas below can massively improve your business.
1. Effective Billing Rate
Your effective billing rate is the actual amount of money your agency earns per hour. It will reveal if you’re pricing correctly, which is key to long-term success in your business.
To find your effective billing rate, take the total revenue of your business, deduct expenses, and then divide the answer by the number of hours worked.
Revenue – Expenses / Total Hours Worked = Effective Billing Rate
The average effective billing rate for an advertising or marketing agency is about $72 per hour. However, agencies that are doing their pricing correctly can see $250-$500 per hour rate. Do the math. A lot of agency owners think they’re making a lot more money than they actually are.
2. Average Client Value
The mistake many agency owners make is thinking that the way to increase profitability is by getting more clients. What they fail to realize is that more clients require more people and more hours of work, and those things cost money. More clients does not necessarily equate to greater profitability.
Average client value tells you how much revenue you make from each client, on average. This number will help you understand what you need to do to grow and scale in 2022.
To find your average client value, take your total revenue for the year, deduct project expenses, and then divide the answer by the number of clients your agency actively worked with this year.
Revenue – Project Expenses / Number of Clients = Average Client Value
Instead of racking up acquisition costs getting more clients, focus your efforts on making the clients you have more valuable, which increases revenue without increasing operating costs, and raises your overall profitability.
3. Owner Hours
You probably didn’t go into business for yourself because you were daydreaming about working 70-hour weeks. And yet, it’s rampant in our industry for agency owners to pull near-three-digit weeks trying to handle everything from sales to project management to creative and more.
If you’re working too many hours in your business because you’re unable to afford help, raise your prices. Your goal should be to remove yourself from the business other than when you’re critically needed.
4. Net Profitability
Net profitability tells you how much of each dollar in revenue you get to keep as profit. It is one of the most important indicators of your business’ financial health.
To calculate your net profitability, take your total revenue, deduct expenses, and then divide the answer by total revenue.
Revenue – All Expenses = Profit
Profit / Revenue = Net Profit Margin
In the advertising and marketing industry, 8-12% is the average. If you’re above that, congratulations. If you’re below that, it’s time to start looking for ways to increase profitability.
What Will You Focus On?
A year-end audit can be thrilling, disappointing or both. Whatever numbers you come up with, remember, these are not an indictment. Your numbers will act as a foundation to plan a productive and profitable 2022.
Take this year’s numbers and use them to make changes for the coming year. Create long-term, mid-term, and short-term goals for 2022 based on what your year-end audit numbers have shown you. Short-term goals will help you develop the momentum you need to keep going over the long haul.
As a business owner, the point of having a business is to create the life you want. Take a look at your personal life. Is it what you pictured when you started out? Do you live where you want, have enough time with your kids, take lots of vacations, and have plenty of money to enjoy your life? If not, the time to do something about that is now.
If you’re not sure exactly what to do to make 2022 your best year yet, hire an expert who can help. Investing in someone to help you hit your goals faster can be more profitable than taking years to figure it out on your own. They say it takes 10,000 hours to become a master at anything. Talk to an expert, and you can absorb 10,000 hours of experience in a fraction of the time.
Next year’s audit can be a celebration of all you’ve done right when you set your business up for success today.