I’m a strong believer that owners of public relations and all communications firms must have a plan to achieve agency profitability. As I tell my clients, agencies can have non-profit organizations as clients, but there are no non-profit agencies. They’re either out-of-business, or on their way to that unfortunate destination!

While I wouldn’t say attaining profitability is easy, it’s much easier with a road map.

In this and the next few posts I’ll ask a series of questions. Having the right answers will get your agency on the road to profitability.

1. Do you have a profit goal for the year? When you declare one in writing, it increases the chance you’ll make it. I think a good goal is approximately 20%, though I’d shoot for slightly higher. (Didn’t someone famous say an agency’s profit goal should exceed its grasp?) Of course to achieve this, you’d need to project, and track regularly, your Salary/Benefit nut (around 56% depending on your geographic area, practice type and size) and Expenses (around 26%, give or take).

2. Is your firm generating its full income potential, based on the  number of PR professionals? According to the most recent report from StevensGouldPincus, average income/professional for agencies is almost $210,000, and $238,000/per professional for agencies larger than $10MM in annual fee income. If your firm has ten PR pros, and you use their average figure, you’ll see that it should be generating $2.1MM in fee billings. If you use the very conservative figure of $184,000 per professional, your agency should be generating $1.84MM in fee billings. Are you?

3. Is the firm generating its full income potential based on the following equation? A more sophisticated, but still simple way of determining your agency’s income potential is to multiply each employee’s Total Billable Hours/Year x Billable Rate x Target Utilization Percentage. Now you have a potential income figure for each employee. I generally use 1,840 possible client billable hours per year. Target Utilization Percentage is something you can set for each title/level, based on how many non-client, agency assignments you tend to give your staffers, and most important, how much time you allocate for new business. Some agencies target 90% utilization for AEs, some lower, some higher. Obviously, as agency owner/leader, your target utilization will be considerably lower. Combine the potential income figures from each employee, and you have an understanding of the your agency’s income potential. When I apply this process for my agency clients, the amount of income that can be generated based on current staffing is always higher than the process used in #2. It most likely will be for your firm too.

4. Are you using appropriate billing rates/staffer? There’s a highly complex mathematical formula you can apply to determine if your billing rates are appropriate, which takes into account salaries, benefits, overhead, and the agency’s profitability target. The figures generated by this approach then need to be compared to average rates per level, based on your geographic market, agency size, and practice type. Some agencies just skip to this second step.You can start by seeing how your current rates stack up vs. what you see from StevensGouldPincus, or if you’re a member, the Council of PR Firms.Your goal? To charge the highest rates you can per title, taking into consideration what the market will bear (again, based on your firm’s size, geographic location and practice area). Basing your rates on “what we charged last year” has never benefited any agency. I understand that you may not want, or be able, to increase your rates in August. But you should use these higher rates for all new clients, and start planning now for what you need to communicate to your current clients so that you can charge the higher rates on January 2, 2013.

5. How do you determine budgets? Do you “guesstimate?” So do many firms that aren’t making their profitability goals. Or do you take the effort to project out how many hours each employee will likely need to spend on each initiative per month, times the appropriate billing rate? Do you take into account seasonal variables? For major projects, do you factor in how much time it takes to effectively plan and deliver a special event or major media interaction? Do you factor in ample time for reporting? For repeating clients, do you factor in additional hours needed for extra hand-holding for those who need it? Do you allocate extra time at the senior level for those who require your attention? For new clients, do you add comfortable buffers, since you really don’t know how difficult the client may be? Do you factor in extra time, just in case things don’t go as smoothly as you’d like?

6. To that end, do you track how much projects/initiatives actually took in time vs. what was originally budgeted? Do you keep this in a database, so that when you budget future similar projects, you know not only what the previous project’s planned budget was, but what it actually required in man hours, and at what level?

This is just a start. I’ll share more in Part Two.  In the meantime, please let me know if you’re taking all the steps above. I hope you’ll share this post if you know of an agency owner or leader who can benefit from it.  And please do contact me if you need assistance with helping your agency achieve target profitability.