06 Dec How to calculate true profitability of your agency
Often Agency owners and Senior Management teams have a feel for how their business is doing overall. But with so many pushes and pulls associated with running a business, it can be increasingly difficult to know if you’re on the right track and if the decisions you’re making day to day are leading you towards the growth you so desire.
For Finance Directors like me, real growth comes from growing the performance of your business and there is no truer reflection of performance than profitability.
So where do we find this sacred profitability data?
In this blog we are going to look at building your own tool kit to calculate true profitability of your agency and use it to improve performance.
We need to know:
- The full cost of each employee delivering client work
- The profitability of each client
- Whether the team is spending the right time in the right areas
- What to do with lessons learned
1. What is the full cost of each employee delivering client work?
To determine the base cost for each employee delivering client work, we need to calculate their cost per hour to the agency, which gives us a figure to use for all profitability calculations going forward.
Firstly, we take their annual salary + their share of the full cost of the overheads (total overheads cost divided by the number of staff delivering client work)
Then divide this by the person’s total client facing hours.
*(Salary + share of overheads) / total client facing hours = employee cost/hour*
In order to keep this calculation correct, it is best to review it at least quarterly. So that changes within the agency such as new employees, leavers, salary adjustments and changes in overheads are taken in to account.
2. How profitable are your clients?
Equipped with your figure for cost per hour for each of your delivery team, you’re now ready to analyse this alongside your timesheet data to understand client profitability.
This calculation needs data from clients you’ve worked with in the past quarter for up to date accuracy, just as we discussed in the employee cost per hour figure.
Take the total revenue earned from the client (excluding chargeable expenses) and subtract the total cost.
Total cost is direct spend (such as expenses not chargeable to client) + internal cost (total hours worked on the client x employee’s cost per hour)
*Total revenue – Total cost (direct spend + internal cost) = client profit*
3. Is your team spending the right time in the right areas?
Using our newly calculated in-depth data, we now want to look at how your employees are being utilised, i.e. what amount of time are they spending on client work.
A couple of stipulations before we proceed:
- Even an employee who is solely responsible for delivering client work can’t be expected to be 100% billable, all the time.
- Although it may sound a no brainer, the agency needs to make sure there is a continuous supply of projects for the delivery team to be able to work on.
Right, let’s talk targets.
Using timesheet data, we need to determine realistic targets for each delivery team member i.e. what % of time should each employee delivering client work spend on billable client work?
Naturally these targets will vary with each role within the agency. But providing both stipulations above are met, then these targets will give you tangible data that allows you to communicate with your team about current performance.
4. Your Lessons Learned
Lastly, we’re going to look at completed projects. The dreaded lessons learned file, dutifully created and rarely seen again.
We know how vital it is to continually analyse current projects, to ensure workflow and resources can be managed for the project to stay within budget and delivered on time. But how much focus is there on the project once it is completed?
Henry Ford famously once said that “Failure is simply the opportunity to begin again, this time more intelligently.”
It would be all too easy to move on to the next project without a backward glance, especially if your team has time targets to meet. But by taking the time to analyse a project once it is completed you will gain a true insight into how profitable the project was and how the project performed against the estimates you made at the beginning of the project.
Your timesheet data will help with this suggested list of estimates vs actuals:
- Total hours recorded by:
- project stage
- Total cost
- Total profit/margin
(As you can see, timesheet data is a vital part of the profitability equation. So if you need a smarter way to manage your timesheets, many of the accounting software products that Link Accounting uses and recommends have modules and integrated apps that will help you keep an accurate track of you and your team’s time and expenses. Simply get in touch to discuss the best option for you).
You now have clarity of your clients, people and projects within your agency. But don’t go putting your toolkit anywhere you can’t find it later. You’ll need to do your calculations every quarter to ensure your figures are accurate, so that you are clear on where you are making and possibly leaking profit.
Want to know how we can help you achieve more profitability? As your trusted accounting partner, you will benefit from our tried and tested growth strategies so you can focus on attracting the projects, people and profit you’ll need to succeed. Just book a free 30 minute consultation to discuss how we could work best together.