Creative Work Job Costing Starts with your Net Effective Multiplier
Read time: 3 minutes
In many creative agencies, costing a job is left to be done after a disaster has been cleaned up, if at all. Jobs get rushed into the studio and sent for client approval only to have multiple revisions requested, and finally…sent off for final production.
The invoice is sent out, but how profitable was the work? How much should the invoice really have been? Unless you’re actively engaged in setting up checks and balances on what your entire team costs the agency for every hour you pay them versus what you’re effectively charging out for that time, you are cutting yourself (being the profitability of the agency) short.
The Net Effective Multiplier (NEM)
This is effectively the number of times you multiply your direct labour to achieve your sell price.
The formula is (Gross Margin + Direct Labor) / Direct Labor. In a simplified approach, if your staff person is costing you $35.00 per hour and you’re selling this time at $100.00 per hour, the Net Effective Multiplier is (65+35) / 35 = 2.85.
Phil Edwards of the Edwards Management Group, a leading financial consultant to creative agencies, would consider this low. In a recent Financial Performance Survey of communications and industrial design firms, Phil suggested NEM rates from 2.8 to 5.5. Hence the example above is a little low and some changes should be made.
What to Do to Improve Your Situation:
As you’re not likely to cut your staff person’s wage, you’ll want to look at raising the bill-out rate. To achieve a a modest 3.5 NEM, you would play with the formula above to establish a new higher gross margin and charge out rate.
Here is the formula: (Direct Labour x Desired NEM) – Direct Labour = Gross Margin.
In the example (35 x 3.5) – 35 = 87. You would take the $87 and add it to the direct labour cost of $35 for a new bill out rate of $122 per hour.
For an Net Effective Multiplier of 4, the charge out rate should be $140.00 per hour.
This discussion raises the point that if you’re not selling your time with a reasonable NEM, your creative agency is never going to make money, even if clients are happy paying the invoices.
Keep an eye on your costs, make sure you get approvals from your clients and sell your time at a rate that will allow you to make a profit on all your work. The Net Effective Multiplier is a simple way to standardize the assessment of your profit potential.
Another great way of improving productivity and profitability at your creative agency is through a project management system like Function Point. fp. offers seemless integration with your existing accounting software, real-time financial reports, and easy invoice and expense reports. To learn more, check out our free eBook on using project management software.