Fast-growth agencies continuously come up against common challenges, and often make similar mistakes along the way. In this series, we'll share actionable advice from our partners Wow Company on improving profitability with planning, pricing and more.
This week, members of our Network and beyond were invited to join us in the first of our ‘agency profit series.’ These workshops have been designed for agency owners looking to scale their profitability in 2022. Rory Spence of expert accountancy firm The Wow Company, talked through the first stage of profit building - planning for it. Following the workshop, we’ve put together some key takeaways to share with our network.
Planning for Profit: Getting Started
In a business, productivity, time-mapping and financial planning can easily fall by the wayside when it comes to calculating profit. Still, early results from this year’s BenchPress survey - the largest of its kind for agency owners - shows that 75% of participants would like more time to spend on ‘planning.’ These key areas that, when addressed, can have a massive impact on the bottom line. Here's how to get started on planning for profitability as an agency.
Participate: BenchPress Survey 2022
1: Goal Setting and Benchmarking Current Profit Margins
In order to properly plan for profit, first you need to work out your gross profit and gross profit margin. You can easily use this to see how you’re performing against other agencies of a similar size. But it must be done in a meaningful way. Below is a graphic to explain how to calculate your net profit.
Don’t be too worried if this is your first time calculating these numbers and you expected a higher outcome. The minimum a business should be aiming for is 40% when it comes to gross profit margins. 50% is a good place to be and would put you in the top 30% of agencies.
Top agencies will be up around the 60% mark. These tend to be specialists in their field, whose offerings are more niche and so can charge a premium for their services.
2: A ‘Bottom Up’ Approach
Now that you have your gross profit margin, you can begin to calculate some meaningful sales targets. Begin with your ‘net, net profit.’ This is the amount left after you’ve paid all costs, including corporation tax + directors dividends. Directors often forget to include their own 'average' industry earnings when working out profit in the business, but in this case it's crucial not to miss it! If you need to, google the average salary for your role within another agency and apply that as a benchmark.
After adding back your overheads, this will give you your gross profit target.
3: Map your Profit & Billings
The more granular you can go in terms of assessing data will help you build out some realistic business targets.
For example, how much is each department contributing to the business? What income streams do you have? Does project size affect your profit margins?
A key piece here is to calculate your billing capacity. This is the total amount you could bill if all your resource was fully utilised. To do this, take each person’s day rate and times it by 21 working days in the month. If some team members only do chargeable work for a percentage of the time, factor that in. Don’t forget to include regular freelancers in this equation too. Now, once you’ve calculated this figure, take a look at your revenue for the past six months and see how far short you were.
As well as the traditional measures (billing, gross profit, net profit), incorporate the below into your monthly profit dashboards:
- Leading indicators: These give you an indication of the profit you’re likely to make in the future, rather than the profit you’ve made previously. Examples of leading indicators could be how many pitches you're running this month, or the value of your sales pipeline.
- Billing per head: In Wow’s recent benchmark report on the creative sector, top performing agencies had revenue per head of £100k, with the average being £63k. Do you know your average revenue per head? What do you need to do to increase this?
4: Understand Where the Profit Is Going
The biggest value to your agency is the teams that run the projects. As such, it’s important to work out the value of your team’s time. That way, you can work out how much money might be lost on giving away ‘free-time’ when a project is over-delivered. Tracking your billing by team, or service area, will allow you to identify where there might be inefficiencies.
Another tactic at this point is to bring in other members of the team to help assess - although every agency leader likes to think they know everything about their business, it's more than likely that the team will be able to flag areas to shore up profit for the future. Keep communication open, and encourage a wider culture of profitability as you grow.
Of course, when it comes to increasing profit margins, it’s a team game and everyone is involved to help better the numbers. Here are some simple things you can do to keep your team involved and focussed on the process.
- Be open and talk about profit in your business.
- Asses what you analyse every day/week/month.
- Regularly review progress.
- Assess billing capacity.
In our next session, we’ll be looking at more data from the BenchPress survey to help guide your agency on the right pricing structures to increase your profits, including analysing rates and insights from the top 10% of agencies.