When it comes to keeping PR firms financially healthy through effective and efficient management, there’s a lot to be desired. It’s understandable. PR principles generally are right-brain folks and hail from a creative (or literary) background rather than a financial one. PR principals can grow their business and attract new clients but not learn how to prepare a detailed annual operating budget and understand financial reports, and that’s a problem.
Creative, award-winning PR campaigns are all well and good (and help prospective clients keep score when considering hiring a PR firm). But the lack of know-how among many PR principals for grasping and controlling the financials of their firms causes many firms to fail. At best, the firm may roll right along, but show little to no profit despite healthy revenues and a strong client roster.
Simply generating revenue with little to no earnings—or “net revenue” growth—may not be sustainable for PR firms. Competition from other creative services agencies (and other marketing agencies such as advertising and digital shops) grows by the day. So, too, does the demand from clients for solid returns for their PR investments.
With that in mind, here are a few tips for sound business management for PR agency owners and C-level executives:
> The virtue of budgeting. The single most important item for running a sound financial house is budgeting. Without a budget you’re just playing a guessing game as to the health of your financials. With a hat tip to Don Tipple, CFO of Taylor, there are two essential budget items: labor and rent. Labor should be 50 percent-55 percent of net revenue while rent should net 6 percent to 8 percent. “If your objective is at least 20 percent profitability, pin down your labor and rent costs and allocate the balance to your other operating costs,” according to Tipple. Let’s do some math: Using Tipple’s example, if total labor costs are 55 percent and rent is 8 percent that totals 63 percent. If the profitability goal is 20 percent that will leave 17 percent for other operating costs (55 percent + 8 percent = 63 percent + 20 percent profitability = 83 percent, 100 percent – 83 percent = 17 percent). How does this stack up with your calculations? If you can reduce labor to 54 percent and rent to 6 percent there is your 20 percent profit.
> Your numbers will set you free. It will certainly help your PR firm in the long run—and reduce business headaches—if you put together a monthly package that includes P&Ls, Balance Sheet, Statement of Cash Flow, time utilization reports and group P+Ls. It works for David Anderson, co-founder, president-CEO of Off Madison Ave Inc. He also gets a running biweekly billing projects for the next three months and a weekly custom cash-flow report, he tells us Gould+Partners.
> Create your agency’s financial dashboard. PR firms increasingly create on behalf of their clients dashboards for messaging strategy, measurement and other marketing disciplines. So doesn’t it make perfect sense for PR firms to establish their own financial dashboards? No doubt it should be de rigueur among PR agency owners. With automated accounting systems, such as QuickBooks or Timeslips, it’s possible to record/aggregate all the relevant numbers that you need to track. Having such systems in place enables PR owners to get a grip on myriad financials, such as monthly P&L statements, balance sheets, monthly and annual budgets, along with key financial ratios. Depending on the employee structure of your firm, you might consider hiring someone (or a small team) to track the financials/documents. Outside of hiring a part-time CFO, it’s one of the best investment you can make toward putting your firm on solid financial ground and giving it more predictability amidst a volatile and unpredictable marketplace.
This article is an excerpt from the new (and 4th) edition of “The Ultimate PR Agency Financial Management Handbook,” by Rick Gould, CPA, J.D., managing partner of Gould+Partners. For more information, please click here.
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