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| Kelsey Campbell & Dominic Rovano co-authored this article. |
Cracking O’Dwyer’s list of top PR firms takes more than just creative brilliance. Financial acumen also plays a critical role.
The O’Dwyer’s rankings is full of accomplished PR firms that have prioritized being strategic partners to their clients, excelling in finding, creating and distributing newsworthy content and building strong relationships. All are foundational elements of great firms.
The one key element that keeps a PR firm at the top of the list year after year is FP&A (financial planning and analysis).
Our goal is to let everyone in on some of these tips and tricks to keep your firm at the top of the rankings.
Key financial metrics for PR firms
The key to having a growing business is to understand your financials and to use that information to make smart decisions and plan for the future. Here are a few key metrics to focus on while reviewing your financial statements:
Client profitability. Are the clients you serve profitable for your company? Sometimes smaller clients can require more time and more labor therefore making them less profitable. A focus on increasing the size of your average client may help to increase profitability.
Project profitability. Tracking project profitability alongside client profitability is important to identify any mishaps when scoping or pricing individual projects.
Profit margin. Does your business have a healthy profit margin? What is a healthy profit margin for your business?
Operating expenses as a percentage of gross profit. Are you maintaining a healthy margin when comparing your operating expenses against gross profit? The Agency Management Institute recommends a 55–25–20 rule: 55 percent of your gross profit should be spent on payroll and related costs, 25 percent of your gross profit should be spent on overhead expenses and the remaining 20 percent is left for profits. This is a good metric to report against and see how you measure up.
Accounts receivable (“A/R”). At least every month—we recommend weekly—business owners and account executives should be reviewing their clients’ accounts receivable with your accounting and finance team. Are clients being slow payers? Are you waiting on a big payment from a client to help cash flow next month? Business owners and team members being aware of A/R balances helps for better accountability on their client portfolios and better cash flow for businesses, it’s a win-win!
Accounts payable (“A/P”). Review your accounts payable as often as you review your accounts receivable report. Are you able to pay for all of your outstanding bills? Are you being strategic when it comes to terms with vendors?
FTE. Being a top agency isn't all about the number of employees. A good number of the top 30 firms listed in O’Dwyer’s have fewer than 400 employees and still make more than $26 million a year. It’s not always about the size of your employee pool, but the quality of the team members that you do have. An effective way to quantify the appropriate number of FTEs is by calculating the amount of gross profit by the number of FTEs and comparing that to the total cost of payroll and related costs by the number of FTEs.
The importance of cash flow management
One of the most effective exercises we perform for our clients is a simple net working capital calculation. We look at our current cash balance and any upcoming A/P, and upcoming A/R. Then we take that total and divide it by our average operating expenses—this gives us a quick and effective way to look at client’s run rates for cash planning. When explaining to clients, we let them know that if their business were to close today, here is the position they would be in after collecting all remaining A/R and paying off all related A/P.
Cash flow management is key to running any business so looking at it on a weekly basis is pertinent for remaining at the top.
Diversification of clients and services
Another key component for staying at the top is having a diverse pool of clients and a diverse pool of offerings. Bloomberg mentioned that diversification of offerings “keeps marketing agencies at the top of their client’s minds by closing the loop and becoming a comprehensive solution to their client’s needs.”
This is an important consideration for agencies and PR firms—more offerings allow for clients to think of you when anything PR, marketing or advertising-related comes up.
Additionally, more service offerings allow for more clients and recognition in the industry.
In addition to service diversification, another key metric is client diversification. One of the biggest risks for professional service firms is too much concentration on one client or project. This means that if a client were to get new leadership, or if a client were to close their doors, it would drastically impact your business. If one client makes up 40 percent of your client revenue and that client ends up parting ways with you, it’s a huge loss, but if it only makes up 5–10 percent of your client revenue, that makes it much easier to replace.
Forecast the future
Finally, having a good forecast and plan for your business is key to maintaining a top firm. This allows you to make key strategic decisions for your business like investing in technology, new people, or business development. It also allows you to really analyze what expenses are necessary for your business to move forward. It considers all of the KPIs already discussed as well as client diversification. One of the best benefits of a good financial forecast is it lets you test scenarios and adjust throughout the year based upon your firm’s events—the gain or loss of a client or key employee.
A public relations firm gets recognized for helping its clients navigate their communications. Understanding your business and finances is key to staying at the top.
Congratulations to all of the firms that made O’Dwyer’s list this year; it’s incredibly well-deserved!
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Dominic Rovano and Kelsey Campbell provide tax, accounting, and consulting services to Professional Service Organizations at Armanino LLP.
Stagwell registered an eight percent rise in Q1 revenues to $670M and a $1.3M net loss compared to a $1.4M profit last year.
WPP reported a 5.5 percent decline in Q1 PR revenues to $292M as its BCW and Hill & Knowlton units suffered the loss of Pfizer assignments, and cutbacks in client spending due to the economic uncertainty.
Interpublic CEO Philippe Krakowsky said the firm is off to a “solid start to the year” as its flat $2.2B net revenues are in line with 2024 financial targets.
Omnicom CEO John Wren reports Q1 revenues jumped 5.4 percent to $3.6M, powered by a solid 7.0 percent rise in its advertising & media segment.
Public Policy Holding Company registered 24.1 percent growth to a record $135M during the past year, which included the results of the March 1 acquisition of Multistate Assocs.
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