Your agency’s profitability comes down to a simple equation. If the revenue you generated across the quarter or year was higher than the costs you incurred, then you’ve turned a profit. However, figuring out how to generate that profit, or how to increase it substantially, can be far trickier.
It may be a cliché but it’s true that you can’t change what you can’t measure. So, if you don’t have full visibility and clarity around your costs and your profit centres, then you will never be able to purposefully grow your agency.
Here are three of the key things you need to know so you can ensue your agency is profitable:
1. Cost of goods sold
As an agency, you sell services rather than goods but the principle remains the same. 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.
2. Revenue per project or employee
Tracking revenue per project or per employee gives you a far more detailed picture of your profit margin than simply tracking revenue overall. This is because your profit margin is revenue minus cost. But different projects will have different profit margins depending on how efficiently you can manage them and how accurately you can 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 start to see which projects are most profitable for your business and, of course, which staff members generate the most profit.
This understanding can lead you to make smarter management decisions. For example, you may decide to offer high performing staff members additional incentives to retain them in the business. You may also determine that they have specific skills that they can share to help others in the business improve their profitability. 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. 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. Then you can determine whether the budget is on track. In some projects, you might expect more than half the budget to be spent in the first month while, in others, such a high burn rate might signal an issue.
It’s essential to keep an eye on the budget burn rate because this can provide an early signal of whether a project is likely to be profitable or not.
Turning information into profitability
With these three pieces of information, you can determine how profitable your business is and, more importantly, where those profits are coming from. Now, 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 provides the answer. Function Point’s 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.
And, by using Function Point, you can start to realize significant efficiencies in the way you approach and manage projects. By accurately tracking timesheets, costs, and more, Function Point gives you the information you need to improve profitability.
Learn more about improving profitability in your agency by booking a free demo with Function Point.