These are 4 “CFO performance metrics” that every marketing agency, PR agency, communications agency, or professional services firm should be paying attention to.
Most agency owners don’t go into business to be experts in managing their finances and administrative needs. Chances are, you’re probably a really skilled practitioner who built your business over time through a lot of hard work and maybe a little sprinkling of luck by being in the right place at the right time. But the business of the business?
That’s another thing entirely.
At a basic level, if sales are good and there is sufficient cash to pay suppliers and employees, that must mean that things are going pretty well, right? Well, kind of. In reality, there’s a whole lot more to running a successful business than just cash flow.
While there are definitely many important metrics to pay attention to, there are a few that will have the biggest impact on improving your profitability. If you’re operating with a bookkeeping solution or with a less experienced accountant, these metrics might not be on their radar.
This is where consistently evaluating what we call “CFO Performance Metrics” is important — and can make hiring a part-time CFO helpful if you don’t already have an experienced person in that seat.
You see, CFO Performance Metrics are more than just data; they tell a story. And the right CFO is like an expert storyteller. They can take your financial information and provide a fulsome picture of the past, present, and future of your business. The right CFO can also translate that story in a way that makes the most sense to the leadership team so your business dreams can become less of a fairy tale and more of a non-fiction bestseller.
4 CFO Performance Metrics Every Business Should Monitor
CFO Performance Metrics: #1 – Capacity
Your capacity is simply the number of hours in a year that have the potential to be billable multiplied by your hourly rate. And understanding your available capacity is the first step to knowing how much revenue you could be making.
Let’s break it down.
There are 52 weeks in a year. If you remove three weeks for vacation and two weeks for statutory holidays and office closures, that leaves you with 47 available weeks in a year. If a normal working day is 7.5 hours and your average blended rate is $150/hour, that works out to $264,375 in available capacity each year. If you were able to realize 100% of your potential, that would be the revenue your firm should be doing per person, per year.
In reality, realizing 60% capacity is considered to be very good, while most firms sit at between 40-60% of their potential capacity. To be clear, no firm kicks off revenue at 100% potential, but the best-performing agencies know what their potential is and then track their performance vs. their potential.
Give it a try using the actual billable rate of each employee to see where your firm stands. Or better yet, have your CFO provide regular updates on capacity as a critical metric for your success.
CFO Performance Metrics: #2 – Realization Gap
Another key metric for your CFO to monitor is the realization gap. This is the difference between your revenue potential vs. what you’re actually realizing in revenue.
In the example above, one employee has the potential to realize $264,375 in revenue if fully utilized. If you have 10 employees, your potential goes up to $2,643,750. If your firm is doing $1,321,875 in revenue (or 50% of the potential revenue), your realization gap is 50%.
In general, the more your firm can do to realize and minimize that gap, the more profitable your agency will be. This, of course, assumes you manage your overhead costs within reasonable norms and a whole lot of other assumptions that your CFO could also help to shed some light on.
CFO Performance Metrics: #3 – Staff Cost Ratio
As a rule, in professional service firms, the total for all staff costs should not exceed more than 60% of the fees earned. Note the reference is to fees earned, not to the total billing. For firms with substantial third-party costs that are billed back to clients, the fees earned could be substantially less than the total billing, so it’s an important distinction.
Note that for the purposes of this calculation, staff costs should include all salaries, benefits, and payroll taxes plus subcontractor costs if they have not been netted against revenue already.
In general, a ‘good’ staff cost ratio is 55% or less—assuming the owner(s) is taking a market value salary.
Your CFO should be able to easily calculate this metric and help you understand what it means for your business, and provide ways to help you lower that number if it starts to creep up.
CFO Performance Metrics: #4 – Overhead Cost Ratio
It’s easy to over-invest in nice things like fancy offices, bespoke training, and premium beer for Friday drinks, but overhead costs need to be managed responsibly. Overhead costs include items that are generally more fixed in nature, like rent, insurance, leases, licensing costs, etc., and can also include things that are variable (and a little more fun), like client entertainment, award entries, training, office snacks, and staff parties.
The best-performing firms tend to spend less than 18% of their fees earned on overhead costs.
In general, as long as your staff costs are managed below 60% and overhead costs below 20% of fee revenue, you can still expect a decent profit. However, as your firm grows, you should be targeting the 15-18% range for this ratio.
If you are a small business with limited infrastructure, less is more. And while it can be fun to pick out a hip downtown office space filled with bespoke furniture and a great selection for beer o’clock, your CFO can help keep things in check to let you know what may or may not be possible. Yet.
Other CFO Performance Metrics to Monitor
This list is by no means exhaustive, and there are many other metrics that a CFO could be monitoring against your financial performance. Things like revenue per employee, recovery rates of time spent on clients, and economic dependence are other common professional service financial metrics that your CFO should be monitoring and reporting on.
While even that is not an exhaustive list, the most important thing is that your CFO is monitoring the metrics that will have the most impact on your profitability, especially if you are a small firm with limited resources. What exactly that looks like is going to vary based on your business needs, but one thing is universally true.
Without a CFO—even a part-time one—to keep an eye on these numbers, they probably won’t be seen.
There’s an old saying that what gets measured gets done. So the better you get at staying on top of your key metrics, the better your business will perform and the quicker you can realize your financial goals.
WANT TO LEARN MORE ABOUT CFO PERFORMANCE METRICS AND HIRING A PART-TIME CFO?
We provide part-time CFO and advisory services to marketers, designers, PR firms, architects, and more. If you think we’d make a good partner, contact us.