Improving Your Creative Firm’s Performance Through Benchmarking
Article

Improving Your Creative Firm’s Performance Through Benchmarking

by Jenn McCabe
November 04, 2021

When you have a foggy view of your firm’s financial performance and overall organizational efficiencies, it’s almost impossible to plan strategically. By monitoring key performance indicators (KPIs) and comparing your performance with industry benchmarks, you can gain important insights that enable faster, more effective business decisions.

For creative businesses (such as advertising firms, PR and social media agencies, media buying and placement firms, event and experiential producers and content production companies), tracking common KPIs helps ensure that your staffing and investment levels are aligned with your financial goals and growth plans, and that you can maintain a strong financial position to enable day-to-day operations, obtain financing or pursue a strategic transaction.

Understanding Current Performance and Future Trends

KPIs help stakeholders and managers understand your company’s current performance as well as the implications of adjusting expenses, increasing investment or other actions. They can also provide an early warning sign of negative trends, which gives you time to prepare a response based on data instead of gut instinct.

Understanding the metrics underlying your overall financial performance helps your company improve its forecasting capabilities. By going beyond basic measurements such as revenue or gross profit, KPIs allow you to perform what-if scenarios and evaluate the likely implications of organizational decisions.

This understanding can be invaluable in the event of a sudden shift in market conditions. In the early stages of the COVID-19 pandemic, for instance, firms with a good grasp of the factors underlying their performance were better able to adjust staffing and other costs. Having ready access to KPIs helped them make effective cost-reduction decisions more quickly and scale back up as market conditions improved.

Key Metrics to Track

Net margin

As a bottom-line measure, a creative company’s net margin, as a percentage of adjusted gross income (AGI), should be above 10%. Over time, this percentage should improve (or at least remain within a consistent range). This indicates the firm’s financial and operational performance is consistent (or experiencing sustainable growth).

A firm that maintains or increases its net margin consistently is healthy and positioning itself well for ongoing operations or, potentially, a sale if the shareholders are interested.

In contrast, if your company’s net margin changes dramatically, it’s important to understand why. For example, your margin can be affected negatively if you are making significant investments in growth that you expect will lead to future improvements in the firm’s performance.

In this situation, you’re making a deliberate tradeoff of lower profitability in the short term in exchange for medium- and long-term growth, and that investment will be reflected in your net margin. Less favorably, a sudden decrease in revenue (such as losing a major account) can also affect your net margin and impede budgeted hiring plans or other growth initiatives.

People and performance metrics

Because talent-related costs make up the majority of expenses for creative firms, some of the most common (and valuable) KPIs are related to the organization’s staffing levels.

For instance, a variety of per-head metrics such as income per head, cost per head and rent per head are important for quick benchmarking purposes. They offer a meaningful analytical tool that measures how efficiently a firm utilizes its employees in relation to income and expenses. KPIs outside a desirable range can provide valuable insights into your firm’s performance and spending levels.

Similarly, measuring staff salaries as a percentage of the firm’s AGI is a key metric that allows you to understand how effective your firm is in converting people-related expenses into gross income. The lower the percentage, the more effective (and profitable) a firm is. For most firms, a good benchmark is maintaining staff salaries within 55% to 65% of AGI.

That said, it’s important to understand why a staff salary ratio is lower than this desirable range. For instance, a seemingly favorable ratio below 55% could indicate that there is too much work for the existing staff.

This, in turn, can be an early indication of potential staff burnout that can increase the risk of talent leaving the firm — creating additional recruitment or retention costs in the near future.

Likewise, if your firm’s people cost as a percentage of gross income is decreasing, you may need to expand your team with full-time talent or contractors to distribute the workload more effectively.

Overhead costs

As a general benchmark, overhead expenses, as a percentage of the firm’s AGI, should remain below 20%. Within that category, rent and facilities (as an AGI percentage) should be less than 10%.

In most instances, creative firms will have less flexibility to reduce overhead costs since expenses such as leases and rents will be covered by ongoing contracts. But because overhead costs represent a lower percentage of a creative company’s expenses than its talent, the lower flexibility usually doesn’t represent a significant management challenge.

Regardless of the category, however, paying attention to your firm’s overall financial performance by monitoring KPIs helps you optimize staffing levels, expenses and investments for growth.

Contact our experts to learn more about how using KPIs can improve your creative company’s financial performance.

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Authors
Jenn McCabe - Partner, Outsource HR - El Segundo CA | Armanino
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