The more projects your agency works on, the more important it becomes to understand which projects are the most (and least!) profitable. As projects pile up, the gap between your most profitable and least profitable projects grows too. Left unchecked, your unprofitable projects will erode your agency's margins, and limit growth.
Today I’m looking at how to calculate the profitability of your projects, and how your agency can use this information to grow sustainably.
How to Work Out the Profitability of Your Projects
For most agencies, the revenue generated by a project is linked to the amount of time spent on that project. If you are using a billable hour pricing model, revenue and time are directly linked, but even if you aren’t, your employees’ time still has a monetary value (calculated as a fraction of their annual cost to you).
To work out the profitability of a project, you need to look at the fees you charged in comparison with the resource costs you incurred. This includes staff time (as a monetary value), but also hardware, media (such as imagery or video), benefits, training, travel and other expenses that go overlooked. These costs are all directly associated with your project, and shouldn’t be forgotten.
You can use this simple formula to work out an individual project's profitability:
- Fee = the total amount charged to your customer for the project
- Hours Spent = the total number of hours your team has spent working on the project
- Hourly Cost = the average cost of each staff hour spent on the project
- Fixed Costs = any fixed costs incurred as a result of the project, which aren't linked to hours worked. Examples include stock photography, travel, freelancers (that bill you per project), entertainment, or software
- Profit = your overall profit made on this particular project
Remember that your hourly costs need to include all employee related expenses, not just their salary. There's a free, comprehensive guide to calculating your employees' real hourly cost here.
To correctly calculate the costs of working on a project, it's essential that your employees track their time accurately.
Many agencies initially use a spreadsheet to create timesheets, but a resource management tool will provide a more practical alternative as you grow.
Accurate timesheets enable you to see how much time each of your employees spent working on a project, and provide you with the insight needed to evaluate whether the people working on each task or project were appropriate.
I’ve Calculated the Profitability of My Agency’s Projects – Now What?
Once you’ve worked out how profitable each project is, it's essential to use the information to generate actionable insights that will improve the profitability of your agency as a whole.
Accurate time and profitability data will provide you with:
- Insight into which team members should be working on future tasks and projects. Different employees excel in different areas, and tracking both employee time and project profitability will enable you to pinpoint the tasks and projects your team should be assigned to in the future.
- Knowledge of your agency’s most and least profitable customers. This won’t always be the customer who spends the most money with you each month!
You may find that your biggest client monopolises your team’s time and effort, whilst your smaller clients bring in more revenue with less cost. Knowing this will help you to proactively fix unprofitable relationships, and let go of chronically unprofitable business.
- An understanding which helps you make better strategic decisions, and cultivate profitable growth. By identifying the customers and projects that are most profitable for your agency, you can better target your sales, marketing and account management efforts, growing your most profitable accounts and attracting similar work as you head into the future.