Stop thinking about invoices. For the first time in forever, this year’s goal has to be different.
What’s the point in having 100 clients and billing $1 million, if you don’t know how much money the agency would make after delivering these projects?
It’s time for you to know exactly how profitable the agency’s accounts are.
I hope that, after reading this blog, you will rethink many fundamental aspects of your agency’s management. I am not trying to give you a definitive solution, I simply want to help you recognize what is going wrong in your business, and thus begin the process of improvement.
How to improve your profitability
As part of the Marketing team of a SaaS that caters to creative agencies, studios and professional services companies, I have had the opportunity to investigate the difficulties that a team goes through on a daily basis, and the flaws that may exist in a group, which prevent the fulfillment of deadlines.
From directives to freelancers, everybody has specific varying problems; but the most striking thing is not only that these problems are common in most service companies, but that the people who suffer these difficulties are totally unaware of what they are. You probably think that it does not happen to you, that you know the problems of your agency and “you cannot solve them” or you do not consider them relevant enough to invest time in them. As I mentioned at the beginning of this article, I promise that when you finish reading it, you will rethink the management and organization within your company, let’s see why.
I found it simpler to organize this article in questions, giving you the opportunity to answer them as you read, identifying the issues that affect your organization and what improvements you can make to increase your profits.
Calculate your profitability for each client
It seems like a simple question to answer, but the reality is that most people don’t know. I’m not talking about monthly or yearly profitability; I’m talking about how much money does the agency make on each job it delivers to each of its clients.
Let’s double the bet, do you know what kind of projects make them the most revenue? Are you sure that the higher paid projects are the ones that make the most income?
Let’s use a simple example:
The agency gets a big client; the project they develop for this client counts with a big budget and they expect to make a lot of money from it. A large part of their team is dedicated to developing it, and this client consumes a high percentage of the organization’s labor power. Meanwhile, the remaining members of the team are dedicated to other types of projects that end up being solved quickly.
The large client has particular demands, rejects proposals, makes revisions, asks for changes; since they are investing a large amount of money, they expect personalized and efficient service, at any time. It is likely that the client is in communication with his account manager, so C-levels are not aware the dynamics this project entrails.
At the end of the project, the team had to call in additional resources to reinforce the work, worked overtime, and probably extended the estimated delivery date. This project, which had a large budget, actually meant a very low (if not loss-making) profit margin for the agency. Calculating profit simply as total revenue minus expenses does not distinguish the actual number earned, leading one to believe that in order to earn more, one must get more clients and expand the team.
Perhaps, the organization should not focus on invoices or getting more clients, but on specializing, measuring its costs in real time, estimating times and selling projects at a price that will allow the company to sustain the expected profitability margin.
It would be amazing to be able to identify which clients actually make money and how much, wouldn’t it?
So, I ask again, do you know how much money the agency made on the last project it undertook?
Do you know what your agency’s productive capacity is?
When you offer a service, what’s actually for sale are working hours. You can easily know the productive capacity of your team by multiplying the working hours of each member. But let’s face it, that number is an ideal that is never met, either because not all of those hours are productive, or because tasks are referred to freelancers or suppliers, etc.
Considering this, do you really know what the agency’s productive capacity is?
Not knowing the available hours for sell can lead to miscalculations in a budget, overlapping of deadlines, a collapsing team work, and the need to resort to emergency solutions.
Having a clear understanding of the agency’s production capacity is the basis for understanding how much you can bill and what strategies should be taken to expand your business.
Do you calculate your profitability based on concrete data?
After analyzing the above questions, it’s time to get to one of the most important points for revenue growth – are your budgets being calculated accurately?
As we have seen, several factors can affect the performance of a project. Some can be pressure points and others are repeated constantly. How do you analyze this data to draw conclusions and correct your estimates? Do you?
Service companies tend to have fixed budgets for certain projects, without considering that they may be relying on an inaccurate estimation of their time or on outdated factors, such as the team working on the project.
Communication with and within the team, the correct knowledge of how long it really takes to develop a task, performance evaluations of different people on the same task, all of these are valuable data when organizing a budget.
It is usual that this information is known by the project leader, as well as being the person responsible for the knowledge and evaluation of these data. However, when this person performs other roles within the company, it can be complicated to obtain the necessary information for the preparation of an accurate budget to gain best profitability. Therefore, not only does the information need to be available, but it also needs to be available to the person in charge of sending proposals to clients.
