Agencies sell hours. So it makes sense that the income you can achieve directly correlates with the number of hours people work.
It would also then make sense that the number of hours available multiplied by the hourly rate would give you your weekly, monthly and annual target income per person. But it’s not quite as simple as that.
Forecasting like this would be unachievable – and you’ll be setting yourself up to fail because:
- People don’t spend 100% of their time on paid/client work
- Agencies don’t charge / recover 100% of their billable time
For example, if you have 10 people working 35 hours a week that’s 10 x 35hpw x £70ph = £24,500 per week. Fantastic! Under this equation you’d get a great gross profit.
But you have to be realistic. It’s highly unlikely that all 10 people spend all 35 hours on paid work. Think meetings, admin, new business, pitches, tea/bathroom breaks and so on.
Plus, it’s also very unlikely you actually charge 100% of their time onto the client.
Calculating achievable revenue
It’s extremely tempting for agencies to be over generous with their forecasting. It’s more exciting to think big. But as it becomes clear that these figures won’t be realised it can quickly lead to demoralised teams and out-of-whack budgets.
What you need to do is calculate your ‘achievable’ income or revenue. This means taking into account your utilisation and recovery over a given timeframe (weekly, monthly, yearly etc).
- Utilisation rate: the percentage amount of time someone spends on work the agency is paid for versus work it isn’t paid for. Their ‘billable hours’.
- Recovery rate: how much of this utilisation time you ultimately charge the client for
Total fee revenue achievable= Total number of hours x hourly rate x average utilisation rate
Realistic fee income/revenue target= Total achievable fee income x average recovery rate
Recovery rates vary from agency to agency, but they’re normally 90-95%. Looking back at your previous figures can help with your forecasting here.
If you’re looking to increase revenue and gross profit, you can push up your recovery rate by charging your clients for more of the hours you deliver. By this, I mean looking at what exactly you’re giving your client and what they’re paying you. Clients often have a habit of asking ‘could you just…’. And these could-you-justs all add up in terms of extra amends, moving away from the original brief, an added presentation and so on. Sometimes agencies just absorb these and take the commercial decision to take the hit in their recovery rate. But it’s certainly an area to have in mind. Essentially, if a client is asking for a service they place a value on, this should be reflected in your costs.
How to use your achievable income calculations
Let’s go back to where I started. Agencies sell hours. Your achievable income is potential, but can only become real when there is enough work for those hours and the right number of people to do this work. Compare your achievable income to your sales forecast. If there’s a disjoint then you either have too many people or not enough. What changes can you make?
From here, you can break down by department. How much revenue is forecast for brand, digital, PR etc vs achievable revenue target for brand, digital, PR? This tells you which services you need to sell more or less of — so you don’t have one team rushed off their feet while another has nothing to do. This can be tricky if one department or individual delivers multiple revenue streams, as it can be harder to tie down their specific time for each. But in general, it’s a good approach.
If you get to a point where you can’t sell any more of a service, then you need to look at your people mix in that department. Or if you need to sell more of a service, you may need to bring in freelancers, or recruit if this is a long-term trend.
There’s nothing wrong with pushing boundaries, with being ambitious, with wanting to achieve more. That’s what good agencies are all about. But you do have to look at what is realistic within the resource that you have. And if you want to go further, how do you resource this?