An agency can be very profitable. However, if you’re often reworking and having extra meetings, you will also see your delivery costs rise. If you aren’t tracking what time is being spent on your projects, it’s hard to know what projects are actually profitable and what are using up a lot of resources. Knowing how profitable your agency is per project and client allows you to understand your delivery costs, identify areas you’re losing money, and improve your decisions on pricing, workload, and future projects.
Understanding Project and Client Profitability
Project profitability shows how profitable you are from one specific project, taking away direct delivery costs. Whereas client profitability gives you the bigger picture, including all projects, support, revisions, and extra requests. You may find that one of your clients has many profitable projects but one that isn’t as profitable due to it taking up more time/resources than expected.
Five Practical Steps to Measure Agency Profitability
- Identify Project Revenue and Costs
Start by working out your revenue and costs for each project. This will include any fixed fee, retainer, staff hours, freelancer/paid contractor hours, plus project-specific costs. Ensure that all projects are calculated in the same way. If there are any general overheads, ensure that they aren’t included unless you can clearly show how they are allocated. - Track Actual Working Hours
Calculate the amount of hours actually spent on the project. You might have estimated that a project would take 40 hours, but actually it has taken 65 hours due to revisions. Split your hours into how many hours were originally planned, extra requested, and revisions. This will help you see where you have overspent and help you improve your estimates in future projects. - Compare Agreed Scope with Completed Work
All projects should have a clear scope of deliverables, timescales, and revisions. When comparing the original agreement with the delivered project, consider:
- Extra rounds of revisions
- Changing requirements
- Delays in client sign-off
- Unplanned meetings and support
These can add to the cost of delivering the project but may not result in any additional revenue. Having clear agreements and a change management process will help to avoid this.
- Calculate Project Contribution Margin
Project Contribution = Revenue – Direct Delivery Costs
Contribution Margin (%) = (Project Contribution / Revenue) x 100
For example if a project has direct costs of $12,000 with $6,500 the contribution will be $5,500. This would give a contribution margin of around 45.8%.
Note: This doesn’t take general overhead into account and is not the same as net profit.
- Review Profitability Across Clients and Projects
Look at the big picture and understand how much you’re actually spending on maintaining client relationships. Too many meetings, extra support, unpaid hours, and multiple iterations will hit the bottom line. This provides useful insights so you can see where you could improve your pricing, planning, and resourcing. It can also help agencies understand which client relationships are really valuable to them.
Common Mistakes That Affect Agency Profitability
Even if you are providing regular financial reports, there may be hidden expenses that are impacting your margins.
- Just Focusing on Revenue: Even though a project may be bringing in high revenue, there may be costs involved in delivering the project.
- Not Factoring in Uncharged Time: The extra time spent revising, meeting, and doing things for the client will take away from valuable time.
- Different Cost Methods: If you have different rates per hour or different expense types, then comparing projects can be difficult.
- Late Project Reviews: By leaving it until after delivery, it can be harder to fix issues around cost and resources
How AbelEdge Helps Agencies Understand Profitability
Financials will only give you part of the story. You’ll want to see what’s going on with your projects, clients, resources, and expenses. AbelEdge is a Business Growth Intelligence Platform that brings all of your business data together. This allows you to look at related information, spot any problems with resources or delivery, and make smart decisions around costs and workload. Keeping everything consistent and having the correct modules set up will give you insight into how your business is performing and where you may need to pay more attention.
Frequently Asked Questions
- Should we monitor profitability by client or project?
You should monitor profitability by project to see how people are doing on individual projects, and also by client to know whether you are making a profit on your relationship.
- How often should we monitor profitability?
Monitor your ongoing projects regularly and your general profitability each month.
- What costs should be included?
Labour, contractors, freelancers, and project-specific costs.
- Why would I want to track actual hours?
To see if tasks are being underestimated, if there are too many revisions, and if there are change requests.
- Can the software monitor profitability?
Yes. Business management software helps you tie your project costs, finances, and resource usage to help give clearer reports.
Making Better Decisions with Clearer Profitability Insights
Profitability within an agency can depend on many factors. By measuring the exact amount of hours worked, direct costs, project margins and performance at a client level, you can see where your agency is making money and where you are losing out. Having consistent reporting will enable managers to set better prices, manage their workload and be more confident when making decisions for future projects.