The key financial ratios for creative businesses, what they mean, and what good and bad look like.
Formula: (Revenue minus Cost of Goods Sold) divided by Revenue, times 100
For service businesses: 50% to 70%. This means for every dollar earned, you keep 50 to 70 cents after paying for the direct cost of delivering the work.
Below 40%. You are spending too much on delivery. Either your pricing is too low or your costs (contractors, tools) are too high for the rates you charge.
Formula: (Net Profit divided by Revenue) times 100
For agencies and studios: 15% to 25%. After all expenses, salaries, rent, and overhead, you keep 15 to 25 cents of every dollar.
Below 10%. Your overhead is eating your profit. Look at operating expenses and headcount relative to revenue.
Formula: Current Assets divided by Current Liabilities
Above 1.5. This means you have $1.50 in short-term assets for every $1 you owe in the near term. You can cover your bills comfortably.
Below 1.0. You owe more than you have available. This is a cash crisis. You may not be able to cover payroll or vendor payments next month.
Formula: Total Annual Revenue divided by Number of Full-Time Employees (or FTE equivalent)
For creative agencies: $150,000 to $250,000 per person per year. This means each team member generates enough revenue to cover their cost and contribute to profit.
Below $100,000. You are either overstaffed, undercharging, or both. Each person is not generating enough revenue to justify their cost.
Formula: Total Sales and Marketing Spend divided by Number of New Clients Acquired
Depends on your average project value, but a general rule: CAC should be less than 20% of your average first project value. If a typical first project is $10,000, your CAC should be under $2,000.
CAC higher than 30% of first project value. You are spending too much to win each client. Review your sales process and marketing spend.
Formula: Average Revenue Per Client Per Year, times Average Client Relationship Length in Years
LTV should be at least 3 times your CAC. If it costs you $2,000 to win a client, that client should bring in at least $6,000 over the full relationship.
LTV to CAC ratio below 2:1. You are either spending too much on acquisition or not retaining clients long enough. Focus on retention and upselling.
Formula: Cash in Bank divided by Monthly Burn Rate (total monthly expenses)
6 months or more. This gives you enough buffer to handle a slow quarter, a lost client, or an unexpected expense without panic.
Below 3 months. You are one bad month away from trouble. Cut non-essential spending, accelerate collections, and focus on closing new revenue.