As a marketing agency owner, you’re familiar with metrics like CTR and CPC. But what about the financial side of things?
When it comes to your agency’s financial health, there are lots of marketing agency KPIs you could track. But we’ve asked ourselves: Which ones do we focus on first for our clients?
Today, we’re highlighting the top 5 marketing agency KPIs that we think are most important for your agency’s success.
Here’s a look at our favorites, in no particular order:
- Monthly Recurring Revenue
- Accounts Receivable Turnover
- Days Sales Outstanding
- Client Acquisition Cost
- EBITDA
#1 Marketing Agency KPI: Monthly Recurring Revenue
Let’s start with the first key marketing agency KPI: Monthly Recurring Revenue (MRR).
Instead of just looking at all the sales you make, MRR focuses on the money you can count on receiving every month. This steady income is what keeps your agency going, even when new business might slow down.
Why is this so important? According to Hubspot, 57% of marketing agencies have less than three months of cash in the bank. That’s not much of a safety net. If business slows down, some agencies might struggle to pay their employees or cover other costs.
The solution? Focus on building recurring revenue.
For your agency, this means having clients who pay you regularly every month, so you know exactly how much money is coming in.
Here’s a quick and easy formula to figure out your MRR:
MRR = Number of active contracts x Average revenue per contract
So, if you have 20 clients paying an average of $5,000 each month, your MRR would be $100,000.
But don’t stop there—make sure your MRR is enough to cover your expenses. If it’s not, you might need to look at your pricing or find more clients to make sure your business doesn’t run into any immediate financial trouble.
#2 Marketing Agency KPI: Accounts Receivable Turnover
The next key metric we love for marketing agencies is the Accounts Receivable Turnover Ratio (ARTO). Like our first KPI, this one also ties directly into your cash flow—are you seeing a theme here?
So, what does ARTO tell you? Simply put, it measures how efficiently your agency collects payments from clients.
The higher the ratio, the better you’re doing at getting paid on time.
For example, if your agency billed $500,000 last year and your average accounts receivable (the money clients owe you) was $50,000, your turnover ratio would be 10.
That means you collected your average receivables 10 times throughout the year.
Why does this matter? Well, slow-paying clients can really choke your cash flow, making it tough to grow your business. That’s why it’s important to keep an eye on this ratio.
Here’s how you calculate it:
ARTO = Service Revenue ÷ Average Accounts Receivable
For reference, a good ARTO is around 7.8, meaning you’re collecting almost 8 times a year.
If your ARTO is lower than before, it’s a sign that collections are slowing down. In that case, it’s time to remind your clients to pay up on time!
#3 Marketing Agency KPI: Days Sales Outstanding
Next up on our list is a marketing agency KPI that works well alongside the Accounts Receivable Turnover Ratio: Days Sales Outstanding (DSO).
While ARTO tells you how often you collect from clients, DSO tells you how many days, on average, it takes for your clients to actually pay you after a sale.
You can calculate DSO like this:
DSO = (Average Accounts Receivable ÷ Service Revenues) x 365
Or you can use your ARTO to find it:
DSO = 365 ÷ ARTO
Let’s look at an example:
If your service revenue is $200,000 and your average accounts receivable is $80,000, your DSO would be 146 days.
This means it takes almost five months to collect payments from your clients—longer than you’d want.
If your DSO is this high, it’s a sign that you might need to speed up how quickly you get paid by tightening your collection processes.
Why is DSO important? You guessed it—cash flow! The faster you get paid, the better your cash flow will be, helping you cover expenses and keep your agency running smoothly.
For reference, a DSO under 45 days is generally a good sign that you’re getting paid promptly.
If your DSO is higher than 45 days, it might be time to set up automated invoice reminders and establish clear payment deadlines with your clients. If these steps don’t improve the situation, you may need to consider whether it’s worth continuing to work with clients who consistently pay late.
#4 Marketing Agency KPI: Client Acquisition Cost (CAC)
The next marketing agency KPI on our list focuses on how much it costs to bring new clients into your agency.
If your agency is looking to grow, it’s essential to know how much money it takes to attract each new client. That’s where Client Acquisition Cost (CAC) comes in—it measures the total amount your agency spends on marketing to secure a new client over a certain period.
Here’s how you calculate CAC:
CAC = Total marketing costs ÷ Number of new clients
For example, if you spent $15,000 on newsletter ads and sponsorships, and that effort brought in 80 new clients, your CAC would be $187.50. This means it cost you $187.50 to acquire each new client. Naturally, you want this number to be as low as possible to maximize your earnings.
Now, let’s say your goal for the quarter was a CAC of $160. If your actual CAC is $187.50, you’re spending $27.50 more per client than planned. This could indicate that your marketing strategy needs some tweaking, or perhaps your original goal was a bit too ambitious.
Knowing your CAC helps you determine if your marketing efforts are cost-effective. If it’s costing too much to acquire new clients, it can eat into your profits, making it harder for your agency to grow.
#5 Marketing Agency KPI: EBITDA
Last but not least, let’s talk about EBITDA—one of those fancy financial terms that might sound complicated but is actually pretty helpful when you break it down.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a metric that gives you a clearer picture of how well your agency is doing, without getting bogged down by things that don’t directly affect your day-to-day operations.
Why is EBITDA important? Think of it as a way to strip away the “noise” from your financials.
Interest, taxes, depreciation, and amortization are all expenses that can cloud your view of how your agency is really performing. By removing these from the equation, EBITDA lets you focus on your core operations—how well you’re actually running your business.
Here’s how you calculate it:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Now for an example:
Let’s say your company had a net loss of $15,000, but you also had $5,000 in interest expenses, $15,000 in depreciation, and $5,000 in amortization. When you add those back in, your EBITDA comes out to $10,000.
So, even though your bottom line showed a loss, EBITDA shows that your core business activities are actually making money (if only slightly).
In short, EBITDA gives you a better sense of your agency’s operational health. If your EBITDA is positive, it means your agency is covering its operating costs and then some. But if it’s low or negative, it’s a signal that you need to take a closer look at your costs and figure out what’s eating into your profits.
Need Someone to Give Advice Re: Your Marketing Agency KPIs?
We hope you’ve found this quick list helpful!
While we’ve briefly covered our top 5 financial KPIs to track for marketing agencies, we’ve only scratched the surface of what you should be looking at when it comes to your financials.
Which is where our team comes in!
At Agency CPAs, we work closely with agency owners like you every day, digging deep into financials to spot opportunities for improvement and potential red flags.
If you’re wondering whether your agency could be holding on to more of its monthly profits, Get in Touch with Us to see how we can help.
You can book a quick introductory call by using the calendar below.
And if you’re interested, check out our recent blog post on profit margins—we think you’ll find it useful!
Until next time.
