Understand the Ebb and Flow of Finances in a Communications Firm

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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.

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