If you’ve watched the news, read the papers, or listened to the experts, chances are you may be convinced we’re already in a recession.
My opinion, after a full year of taking the pulse of the industry, through the annual polls published by Gould + Partners, is that the public relations industry Not be facing a recession.
Here is my reasoning:
- The growth in 2021 and 2022 to date has been up to par for companies in each of our four main net revenue categories: for companies with net revenues of less than $ 3 million per year, companies with net revenues between $ 3 and $ 10 million, companies with revenues of between $ 10 – $ 25 million, and agencies that boast more than $ 25 million annually.
Growth has also increased in each of the ten North American regions we follow for our surveys.
- Billing rates and usage rates were also impressive and strong.
- Profitability rates averaged 19.7 percent, with the largest category (companies with annual net revenues above $ 25 million) standing at 21.3 percent and the next largest (companies with between $ 10 and $ 25 million) at 20.1 percent.
- Average monthly amounts have also increased.
So, in my opinion, 2021 was too strong for a 2022 national recession to sink the public relations industry in the United States.
For companies that may be affected because their business books are too focused on a few major customers and if those customers are in financial trouble, I offer the following information:
- Tackle the recession head-on with focus, discipline and leadership.
- Make sure you correctly define and understand net revenue, the number by which all costs and profitability are measured.
Net income is simply commissions + markups on refundable credits. To be clear, if your commission income is $ 5 million and your refundable credit markup is $ 100,000, your net income would be $ 5,100,000. And the markup is the difference between the refundable cost you pay and what you billed to your customer.
For example, if your event fee is $ 75,000 and it costs your team $ 10,000 for travel and hotel for the event and you have billed your client $ 12,000, the markup on that chargeable is $ 2,000. (20 percent) and add to the $ 75,000 event fees to determine the net revenue for that $ 77,000 ($ 75,000 + $ 2,000) event.
- Keep labor costs below 50 percent of net revenues. Be sure to include freelancers who are required to work on clients in the cost of labor.
- Maintain a laser focus on the “use” (productivity) of each staff member.
Usage is defined as the total customer hours divided by the total “available” customer hours. So, if a full-time employee has the potential to bill 1,700 hours per year (total hours minus all non-customer hours) and have billed 1,500 hours, the utilization rate is 88.2 percent (1,500 ÷ 1,700) . You should then compare this value to our billing / utilization rate ratio to compare your staff utilization rate to the industry standard.
- Keep operating expenses at no more than 25% of net revenue.
- Included in the total operating expenses is the rent, which should not exceed 6 percent. If some of your staff are remote now, your rent should be even lower.
- Minimize executive benefits. If you anticipate a loss in net income, start reducing the benefits that could be provided during times of prosperity right away.
- For customers with loyalty, compare them in our report with your average monthly loyalty. If you are below average, dig deeper. You could be overly excessive service for the catch you are receiving.
- Use our annual financial best practice benchmarking report as a tool. Review each of our twenty benchmarks and compare them to your size and region.
- Try to avoid full-time staff layoffs. First look at the cut in freelancers, T&E, avoidable office expenses, rent, and executive benefits.
- Freeze hiring unless the new hire’s salary is covered by new business.
- Deferred bonuses, to be recovered post-recovery.
- Strictly manage each cost and expense item.
To reiterate, I am totally optimistic about the growth and profitability of the PR industry in 2022 and 2023. The message, however, is to be ready if an unforeseen event makes your company the exception.
To your success!
Rick Gould is Managing Partner of Gould + Partners, a New York-based M&A consulting firm specializing in the PR industry. Can be reached at [email protected].