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Understand the Ebb and Flow of Finances in a Communications Firm

October 10th, 2016 · No Comments

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By Michael J. Clark, APR

Water and Revenue. I like the metaphor of water as it relates to revenue, it illustrates how money flows, clarifies the importance of creating reservoirs of cash, and demonstrates areas of absorption and how cash can evaporate from the business. Plus, it’s primarily a life source for business.

I recently learned from Ron Culp of Culp & Co. and professional director of the graduate PR and advertising program at DePaul University of a national research study he conducted with colleague Matt Ragas and Dr. Nur Uysal of Marquette University, which found that 84.5% of senior communication executives believe that it is extremely important for PR professionals to have a solid grounding in business essentials. After having the honor and privilege of employing more than 140 people and as a former COO and part owner of an award winning public relations firm, I couldn’t agree more with the study. So, I thought might shed a little light on the ebb and flow of finances within a communications firm.

So let’s go with the flow and talk about how we make money. Communication firms are primarily made up of business professionals with communications expertise. They offer consulting and supportive services in both strategic and tactical areas. They collectively inventory and invoice for their time, in exchange for income.

Communications professionals typically use their skills, knowledge and expertise to help clients work towards upholding their enterprise’s mission while implementing work aimed at their communications goals, objectives and best achievable outcomes, all in the name of profit. We hope, right?

There are three primary income streams which keep an agency afloat: retainer fees, hourly fees and project fees. While primary sources, they’re not exclusive. Agencies can earn from tributaries of income such as: books, web applications, trainings, research studies or other proprietary products or processes. Often times a firm can mark-up out-of-pocket expenses (OOP) which includes, but is not limited to: hiring key influencers, outsourcing talent, project related expense items and fees or percentages of office expenses or monthly services.

What many employees in the business have a difficulty understanding, is how an average blended rate of $183 per hour (p.8, PR Agency Industry 2014 Billing Rates & Utilization Report) translates to doing business. When an entry-level employee in the firm might say, “hey, I’m only making $16.82 per hour; that doesn’t seem fair, right?” I would like to address this question with the help from data in the Gould+Partners annual PR Agency Industry 2016 Best Practices Report.

Here’s a scenario using results from PR Agency Industry 2016 Best Practices Benchmarking Report from numbers generated in 2015:

Let’s say you own an average performing firm in the U.S. and you’re collecting $2,127,969 of retainer work, project fees and other OOP expenses for your revenue stream, and let’s say you have ten employees generating income on average $212,796. Top executives have a larger precipitation of earning and entry level members likely generate less; but collectively they add to the total pool of resources of roughly $2.13 million. If we add administrative support salaries to the mix, this will evaporate some revenue per employee to $185,624 since admin doesn’t typically generate income.

When looking for a key performance indicator (KPI) I like to use $200,000 per employee as a good company average with administration staff included. I believe it gives a good quick read on how a firm is performing. I refrain from using any collateralized numbers because I think it’s an “all hat and no cattle number,” and can give you a false positive.

Now, let’s say for the sake of discussion, you can invoice an average $177,330.75 per month. While it’s easy to take your revenue of $2.13 million and divide by 12 months for setting monthly goals, I think most firm leaders will contend that’s not real-world. Why? It’s because clients, projects, and income streams come in at various times and volumes. You would need at least five years’ worth of data and seasonal patterns to set your revenue goals by month. Even then, I’d advocate looking more at quartile data. Furthermore, if you plan to cover all of your expenses and payroll down the road by month; which most agencies do, then it’s imperative for an agency to build up a reservoir of cash for months when there may be a drought in revenue.

I believe most effective leaders in this industry will attempt to contain a cash reserve for the ebb and flow of expenses. For example, when accounts receivables are low and salaries and expenses continue on. These times can be pretty stressful for agency leaders and owners, so it’s critical to snap the operating line well below the income line to account for the inconsistencies of monthly income.

So, when the money comes in, then what? What happens to income, where does it all go? Let’s take a quick view of the numbers and see how $2,127,969 revenue absorbs into the business.

  • Average Total Account Executive (AE) labor costs – This generally is one of the biggest pipelines drawing from revenue as it includes account-related salaries, payroll taxes, bonuses, and freelance labor costs. In our scenario, total AE labor costs are at 58.5% or $1,244,862 which is considered high according to the study and up from (57.8 % in 2014), This is an indication that salaries, bonuses and freelance labor costs are not being managed tightly in PR Firms across the nation. The benchmark report notes that model firms attempt to keep it as low as 50%.
  • Total Operating Expense – This is where most of the absorption and evaporation occurs in business. It derives from rent, utilities, office supplies, new business marketing, professional fees, technology, new business referral commissions and other business related expenses. In our average PR Firm scenario, the Total Operating Expenses are positioned at 26.2%, or $557,528, which is also pretty high, where model firms shoot for around 25%.
  • Operating Profit – This is where revenue minus total AE labor and operating expenses leaves behind a reservoir of income; namely, operating profit at 15.3% or $325,579. Operating profits do not cover taxes paid, company assets sold or expenses not related to the company’s operating costs

Therefore, if somebody simply looks at a blended hourly fee of $183 per hour less $16.82 as your model for profit or fairness, I would respond it’s more essential to the business to see this as teaching moment and to share a view that’s more like this: Of your $183 per hour at least $107 is for all AE salaries $48 for expenses and administration and the $28 is operating profit. Then I would emphasize that operating profit is not your total net profit in which then, $28 will diminish or continue to evaporate through taxes and other costs, not to mention reinvesting or the need for cash reserves.

If there’s anything to take away from this blog post besides water as a metaphor for revenue, I’d say we need to continue to improve our business acumen as communications professionals. We need to understand and share what we know about the ebb and flow of finances. I’ve often heard during my 28 years in this profession, we want more executive level exposure and roles in the boardroom. If that’s so, then it’s our obligation and duty to learn everything we can about how a dollar is made in the enterprise and equally as important is how it’s spent.

If you haven’t read the post 5 Ways to Build Greater Business Acumen, I would encourage using these tips from www.Culpwrit.com as a good place to start.

What do you think about this topic or other topics for how to improve business essentials? What might you add?

michael-clark Michael J. Clark, APR, is a graduate student of Georgetown University’s Master’s in Global Strategic Communications, Editorial Board Member for the Center for Social Impact Communications – Georgetown University, Former COO, CCO at Mitchell Communications Group, and Trustee of Arkansas-The Nature Conservancy.

 

Tags: Advice from a Pro · Day in the Life · Guest Post

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