Annual Revenue Targets for Small-Agencies
Many small agencies will be planning for 2026 in the coming weeks. One of the big topics will be: next year’s revenue.
Starting with Costs
When I’m thinking about annual planning, I like to start with costs, rather than revenue. Why?:
Our costs are much more predictable than our revenue; we likely know what they’ll be based on our historical data and our unit economics.
We have more control over our costs than the sources of our revenue (i.e., lead volume and quality, new business win rates, accounts receivable). We can choose not to spend money on something more easily than we can control money coming into the agency.
If we start with an estimate of what our Cost of Services will be, we can determine what our target revenue might be based on the Gross Profit Margin we want to achieve:
If your agency is in the top right of the table, you don’t need to be reading this.
For the rest of us, here is how to parse the table: if billable salaries next year will be $2M, you can expect the fully-loaded costs for those team members to be ~$2.60M.
So to achieve a 10% Gross Profit Margin, the agency needs to generate $2.89M in revenue or billings.
To achieve a (more desirable) Gross Profit Margin of 40%, the agency needs to generate $4.33M in revenue or billings.
Starting with Revenue
If you prefer to start with a revenue target, the lookup table can help bring context to that as well.
Let’s say your agency will do $2.75M in revenue this year and you’d like it to achieve a 20% growth next year: $3.30M.
The lookup table has $3.25M, so based on your Gross Profit Margin target, you can estimate how much you can afford to pay in salaries:
At 10% Gross Profit Margin: ~$2.25M in salaries
At 20% Gross Profit Margin: ~$2M
At 30% Gross Profit Margin: ~$1.75M, etc.
Where do you go from here?
Once you have a target revenue and COS, you can use your agency’s unit economics (e.g., average revenue-per-billable-hour, cost-per-billable-hour, utilization rates, etc.) to calculate a target headcount.
If you have accurate data on business development performance, you can estimate how much revenue you need to bring in from new and existing clients. This will inform the number of proposals you need to send out and the number of leads you need to generate.
Keep in mind, you’ll want to decide if your revenue target is based on accrual or cash, which I go over in Metrics: Revenue. ❦
If you could use a hand with any of the above…
