The marketing sector helps every business promote their products and services to the target audience and attract them to purchase. Thus, it forms an integral part of the economy. However, even the marketing industry depends on accounting and bookkeeping services to plan and strategize. Businesses need to understand their financial performance and position to optimize their functioning. Accounting allows maintaining up-to-date financial records and analyzing the prepared statements to explore financial options and forecasts. The outsourcing accounting services enable companies to focus well on their core competencies while the outsourcing firms handle the particular department.
Marketing businesses need to measure their financial metrics to indicate success. Financial ratio analysis allows detailed interpretation and assessment of particular aspects. These metrics, also known as Key Performance Indicators, help track the critical areas for growth and improvement. Under ratio analysis, businesses can calculate ratios and compare them with industry benchmarks to analyze the competitive stance. Also, they can evaluate firms' previous year's performance with current and examine trends. It facilitates forecasts and identifies threats and opportunities early. Firms can face significant better, and more manageable challenges with financial ratio calculation and analysis.
The critical financial ratios a marketing business must analyze regularly are as follows:
Gross margin-
(Net sales - Cost of goods sold) / Net sales = Gross margin
The gross margin indicator lets businesses know their efficiency in turning revenue into profit. Comparing it with industry benchmarks allows firms to understand where they stand and how efficiently they manage the production staff, including developers, managers, etc. The resultant percent from the formula shows the profit left after removing production costs from sales.
Utilization rate-
Although it is more of an operational metric than a financial ratio, outsourcing accounting services use it to track time. Time tracking for different activities enables the calculation of the utilization rate. This ratio analyzes how much time the staff spends on billable vs. non-billable work. Knowing the total hours worked and its different categories help estimate the impact on gross margin.
Effective hourly rate-
Another crucial metric that determines business' adequate earnings is hourly rate measurement. Its formula is as follows:
Effective hourly rate= Adjusted gross income/ Number of hours worked
Monitoring this metric regularly and comparing it with the advertised rate provides information about the earnings per hour worked. When companies do not handle this metric, they may risk lowering the profit margins.
Free cash flow-
Cash flow is a highly essential metric to measure and track regularly. It allows businesses to know when inflows occur and plan the outflows accordingly. The cash flow forecasting model helps discover discrepancies and correct them effectively. It helps maintain the operating cycle and keeps it running smoothly. Firms will know how much they must keep and distribute in different activities to prevent shortfalls. Its formula calculated by outsourcing accounting companies is as follows:
Free cash flow= Net Income + Non cash expenses (depreciation/ amortization)- Increases in working capital- Capital expenses
Firms have clear visibility for a defined period based on the average sales and engagement length.
Overheads:
Marketing agencies and businesses must track the overhead costs incurred in a period to ensure it stays within limits. It includes rent, utilities, insurance, technology, software subscriptions, office expenses, etc. Due to different reasons, it is easier for these agencies to go overboard with such costs. Thus, firms must calculate and track this metric periodically and take appropriate actions if it increases or decreases significantly.
Overheads percentage= Monthly fixed costs / Adjusted gross income