Determining your agency’s profitability is a simple equation: If your revenue generated across the quarter or year was higher than the costs incurred, then you’ve turned a profit. However, figuring out how to generate that profit is far trickier.
You can’t change what you can’t measure. If you don’t have full visibility and clarity around your costs and your profit centres, you’ll struggle to grow your agency.
Here are three key questions you can ask yourself to ensure your agency is profitable:
1. What is your cost of goods sold?
Any business that sells goods and services needs to be aware of their cost of goods sold. It’s a key indicator of overall profitability and sustainability of your business.
Whether its fixed overheads like staff salaries and rent, or fluctuating costs like out-of-pocket expenses, it’s important to ensure every bit of outgoing cash is accounted for. You need to be able to associate those costs with a project so you can understand exactly how your profitability is being affected.
At an agency, typically your COGs are split into two categories: the money owed to vendors and the money spent operating your business, such as paying salaries, overhead costs, and pre-tax profit. The second category is your adjusted gross income (AGI) and is what you really need to pay attention to. In an ideal world, your AGI should breakdown as follows:
Once you’re able to workout your COGs and AGI of different types of projects, you’ll get a clearer picture of which types of projects are most profitable.
2. Is your revenue per project or employee?
Tracking revenue per project or per employee provides a more detailed picture of your profit margin than simply tracking overall revenue. Although your profit margin is revenue minus cost, different projects will have different profit margins depending on how efficiently you manage them and how accurately you estimate for them.
Understanding exactly where your revenue is coming from lets you determine which projects or staff members generate the most revenue. By calculating the profit margin on that revenue, you can see which projects are most profitable for your business and, of course, which staff members generate the most profit.
This understanding helps you make smarter management decisions—especially important during periods of uncertainty. For example, you may decide to offer high performing staff members additional incentives to retain them. These high performing staff members are valuable and should be rewarded and encouraged because they form the foundation on which your agency will grow.
3. What is your budget burn rate?
If you have provided your client with an estimate for a three-month project, it’s important to understand how that budget will be used across the three months. Later, you can check to see whether the budget is on track. In some projects, you might expect more than half the budget to be spent in the first month. In others, such a high burn rate may signal an issue.
It’s essential to keep an eye on the budget burn rate because it provides an early signal of whether a project is likely to be profitable or not.
Turning information into profitability with a centralized management software
Once these three questions are asked, you can determine how profitable your business is and where your profits are coming from. From there, you can decide where to focus your resources.
If some jobs are clearly more profitable than others, you can get your accounts team to sell more of those types of projects. If other projects are typically unprofitable, you can either decide to limit the number of those projects you do or, if those projects are valued by your customers, you can take a closer look. Perhaps you can charge more for those projects, or else find ways to reduce the costs so that your profit margin becomes healthier.
For many agencies, the key issue is that they can’t measure this information, so they can’t determine what they need to do to increase profitability.
Centralized agency management software offers a solution. Our centralized agency management software includes built-in business intelligence reporting to give you insights into all of this data and more.
You can use it to see exactly how much revenue your agency is generating day by day, and break that information down to see exactly where the revenue is coming from.
For example, Function Point has a built-in, automatically generated staff profitability report that uses a bar graph to illustrate staff profitability. It can illuminate areas that need attention, such as a staff member who may be underbilling regularly. By seeing that information, you can take a closer look at that staff member and determine whether they need more training and support, or if they’re burning out and need time off, or if they’re experiencing personal issues and need flexibility.
By using Function Point, you can find new ways to approach and manage projects more efficiently. By accurately tracking timesheets, costs, and more, our management software gives you the information you need to improve your profitability.
See if your business could benefit from a centralized management software by taking our test.