What is the Job of Financials and Metrics for Creative Agencies?

By Jason M Blumer – CPA, CEO of Blumer & Associates, CPAs

The world of finance seems to be elusive for many digital, marketing and creative agencies. This post will highlight some practical ways to understand financials and what the financials are meant to provide a creative agency owner.

Understanding Benchmarks & Metrics: The North Star of Financial Performance

Benchmarks serve as aspirational targets rather than mere reflections of your current reality. Some of our agency clients stress out when they don’t match the proprietary benchmarks we provide in our financial advisory reporting for them. But financial benchmarks are simply standards against which you measure your agency’s performance and set goals for improvement. Instead of simply tracking where you are, benchmarks show you where you should or could be heading. The benchmarks I’ll share in this series of articles are neither right nor wrong, but rather a tool to elicit conversation about the performance and results of the agency; and ultimately to reveal insights that can change the behavior of the Founder/Owner.

For example, many service organizations aim for their team costs to represent approximately 50% of total revenue. This isn’t an arbitrary figure but a good industry standard that helps maintain profitability while delivering high service. It’s a standard you can apply your own spending against to see if you are higher or lower than the benchmark. The power of benchmarks lies in their ability to contextualize your performance. Without them, you might celebrate a 10% profit margin without realizing that top-performing agencies in your niche consistently achieve 18-20%. Or maybe you’ve made a decision to invest in your current team even when revenue is down – the result of this will be a lower profit percentage. In fact, investing in your current team may be the right choice for you – but at least the comparative benchmark hopefully led to a discussion as to why you were above or below the target benchmark. Benchmarks provide the necessary perspective to evaluate success and identify areas for improvement.

Metrics: Transforming Data into Decision-Making Tools

While detailed financial data provides the foundation for understanding where you are at a point in time, metrics offer concise summaries that make this information digestible and actionable. As your agency grows and operations become more complex, the ability to distill financial information into key metrics becomes increasingly necessary. Why? As service organizations grow over time, they become more complex due to larger teams, more complex scope (or unknown scope), challenging pricing in down turn markets, and struggles to pull clients through their deliverable milestones. As this happens, agency leaders must stop operating from their gut (which they may have done previously) and begin operating off of summarized data. That is where metrics, benchmarking, budgeting and the like come into play. These are just financial tools meant to give you more information so you don’t have to fully rely on your instincts and intuition as a tool to make complex decisions.

Consider two fundamental metrics that every creative agency can track:

Monthly Recurring Revenue (MRR): This metric summarizes your predictable, ongoing revenue streams, providing insight into your agency’s financial stability and capacity for long-term planning. You can compare your MRR to your average monthly operating expenses and see if your MRR is covering your expenses. Doing this instead of sifting through a large detailed Profit & Loss statement provides much more opportunity to see insights in the numbers and make decisions on those numbers.

Since you should have a cash reserve to cover 2 to 4 months of your average operating expenditures, then you can see if your cash balance is where it needs to be and if your MRR is helping to sustain that cash balance over time.

Call out: you may have just noticed above that I provided another benchmark metric for you: we suggest agencies should keep a cash reserve of 2 to 4 months of your average operating expenditures. You may compare this to your actual situation and see that you have more cash than that, or that you have less cash than that. The metric I provided is just the tool, while the analysis or comparison of my metric to your actual reality is what leads you to the decisions to either:

• Go ahead and take a risk and hire some new team that you need so that you can grow if you have more cash in the bank than our stated metric, or
• Slow down some of your innovation and growth so that you can allow your cash savings to catch up to a place where you are more stable and the risk in potentially lost or attritioned revenue won’t be so high.

Average Revenue Per Client (ARPC): As another example of an agency you can divide your MRR by your total number of clients to arrive at your Average Revenue Per Client (ARPC). This helps you understand how much revenue your average client generates so that you can make informed decisions about client acquisition costs, increasing prices, capacity allocation, or if your ARPC is too high, possibly pointing to the fact that you have too much risk embedded in too few clients (we don’t want to see more than 20% of an agency’s annual revenue embedded in one client).

From Information Overload to Actionable Insights

These types of metrics tell a story that raw financial data alone cannot. A declining ARPC might signal that you’re underpricing your services or attracting clients with smaller budgets. Conversely, a steadily increasing MRR could indicate a growing financial stability for your agency and potential for expansion. The point is that the primary function of financial metrics is to cut through the noise of detailed data and facilitate quick identification of insights. As mentioned earlier, the definition of an insight is a particular and bespoke understanding of complex information derived from summarized data analysis that brings clarity so an owner can act on it – an “aha moment” that can guide strategic decision-making.

The Aspirational Power of Metrics

Effective metrics do more than measure current performance – they inspire growth and improvement too. This aspirational aspect of metrics fosters mental growth among agency owners and leadership teams. A benchmark that your agency is currently trailing behind or under gives you something to strive for, and can make you ask “why am I behind?” It shifts your focus from day-to-day operations to strategic thinking and long-term planning. Instead of short-term efforts like “cutting out all premium coffee in the office” you can instead begin moving away from an unprofitable client focus and to a more profitable focus over the next year. Summarized data in the form of metrics can tell you this. To fully understand metrics and to produce insights, leverage a partnership between agency leadership and financial advisors. Even after reading this article, you may not know exactly where to begin to create, maintain, and analyze your own metrics. So firms like ours teaches you how by setting it up for you, showing you how to read the data monthly, and then helping ask the hard questions: “why do you continue to maintain this team size when your team metrics over the past 6 months have clearly shown you need to lower headcount to start saving more cash?”

The most successful creative agencies recognize that financials and metrics aren’t merely a business necessity—they’re powerful instruments for achieving creative excellence and business sustainability. Regularly reviewing some type of financial metric, led by an agency financial expert, can keep you from taking the wrong risk, and can also help you make the right investment that can actually move you forward. Need help? Reach out to our firm at blumercpas.com, or download our pricing book online here.

About Author

Jason Blumer 4As Expert Network – Agency Financials and Metrics

Blumer CPAs serves as an advisory firm for the design, marketing, and creative agency services niches, as well as high end nonprofit organizations. Jason Blumer and his partner, Julie Shipp, focus on business consulting and coaching with the owners and partners of firms, agencies, and nonprofits while their team meets the technical and financial needs of the client.