It’s a worthwhile question to get answered. So here’s four metrics every agency should be tracking to ensure they remain profitable, high performing organizations.
We work with 60+ digital agencies and even ones over the 1-2M/year mark aren’t tracking what we’re about to share with you (consider yourself ahead of the curve if you read on).
Here's 4 less commonly talked about metrics you should be tracking:
1. Revenue Per Employee
Annual Revenue / # of Employees
Annual revenue per employee is a great guidepost for organizational efficiency. As your revenue grows, your headcount will too, but if their time is more efficiently spent/more billable, this number will steadily rise.
This measures how well we utilize time. The agency business is structured around time arbitrage essentially - we bill out skilled labor at an amount that’s more than it costs us. Ideally significantly more.
2. Utilization Rate
Total Billable Hours/Total Available Hours * 100
This is a key factor in tracking how well your organization is utilizing your staff (and billing hours). Typically, you want employees 75-85% utilized based on 2080 total "available" working hours per year.
The other 15-25% should be used for internal meetings, training, etc. If severely underutilized, it's likely you're overstaffed or using freelance talent in excess. If you're over 85%, employees may feel burnt out or you might not be focusing enough internally.
3. Gross Profit Margin
Revenue - Cost Of Sales / Revenue * 100
Gross profit margin is a great indicator of how efficiently you're able to fulfill projects. The main cost variable with agencies is the time required to complete projects.
You should measure gross margin at the project level and the organization as a whole. This requires you knowing exactly how many hours are going into projects - meaning time tracking is a necessity for this along with metric #2 above.
4. EBITDA Margin
EBITDA / Revenue
This is a key profitability metric that looks at revenues and deducting operating expenses, such as cost of sales, general & administrative expenses (SG&A), but excluding interest, taxes, depreciation and amortization.
If you ever want to sell, this one matters as it focuses on operating performance vs. other, less controllable factors like interest, taxes, depreciation & amortization. Using this metric is a better comparison tool with a similar business vs. net profit for these reasons.
None of these are the end all be all metric, but they're super helpful to ensure you're on track to growing your agency's value and progressing in the right areas.