Managing Your Benchmarks

The key to managing your PR agency to earn a 20% or higher operating profit is to set the correct benchmarks for your key cost and expense categories.

To begin, let’s look at some of the basic ratios you’ll want to understand and monitor.

benchmarking graphHow to target your revenue/cost benchmarks:

Net Revenue: 100% (Not “Gross” Revenues)
Direct Labor: 55% or less of net revenue
Gross Profit: 45% or more of net revenue
Operating Expenses: 25% or less of net revenue
Operating Profit: 20% or more of net revenue

While these benchmarks may not exactly describe your agency at present, and there may be structural reasons why you can never get your agency to operate at precisely these ratios in the future, you’ll nevertheless find it helpful to set and work toward a “target” net profit benchmark for your company. It’s also valuable to realize that if you reduce your firm’s labor or operating expenses, you will automatically—dollar for dollar—increase its operating profit.

Setting a target benchmark is useful because it makes thinking about other financial metrics easier. For example, if you set a target operating profit benchmark of 20% for your PR agency, it’s easy to remember that your costs—no matter what—should never exceed 80%. The minute you let them climb higher than that, you’ve given up on your goal of netting out 20% of net revenues.

Always remember that a critical factor in managing and increasing your PR agency’s profitability is how successfully you can control costs. You can’t do this at all unless you have a strong grasp of the essential performance numbers your agency is making, and you can’t establish and maintain that grasp unless you obtain reports on and then review your agency’s financials each month, or more often.

The content of this blog was extracted from the recently published “The Ultimate PR Agency Financial Management Handbook