FunctionFox Blog

As agency-builders it can be easy to think that the best (or only) way to grow our business is to get more clients, do more work, bill more hours, and ultimately send bigger invoices.

In fact, adding more work to your plate (or your team’s plate) is not necessarily the answer to more net revenue for your business.

Sure, if you want to grow the top-line numbers, you’ll probably need to charge more, find new clients, or work more hours.

But if you and your team just want to take home more profit at the end of the day, some simple adjustments in how you approach profit margin may just do the trick.

A quick boiler plate on profit margins

If you’re going to improve your agency’s profit margins, first it’s key to understand just what a profit margin is.

Technically, profit margin is "the amount by which revenue from sales exceeds costs in a business."

More casually, it’s the money you have left over after you’ve collected all payments and paid all expenses.

Profit margin is expressed as a percentage. So if you make $100 and you spend $50, you have a 50% profit margin.

Pretty simple.

Yet, one major reason many companies go out of business is their inability to understand the power of profit margin.

Many companies that make multiple millions of dollars in revenue every year spend far too much of that (sometimes all or more) to run the business—leaving them with a massive top-line (revenue before expenses) and a struggling or dying business.

Don’t let that be you.

If you’re eager to boost your agency’s profit margin this year, here are the most effective strategies I’ve seen:

1. Understand your current profit margins

Before you can do just about anything to improve your agency’s profit margins, you have to understand what your margins look like in the first place.

Depending on how well you’ve done at tracking your revenue and expenses in the past, this will be extremely quick and painless or could take a lot of extra effort.

Hopefully, you’ve been diligent in tracking your expenses and projects up to this point. That will help you gather the data you need quickly and efficiently.

If you haven’t been using a helpful tool to track expenses, you have just two options:

Go back and try to estimate previous earnings and expenses

While this is definitely an option (and may be your only option at the moment), you may find yourself missing important details which will impact your decisions and goals moving forward.

Start tracking and measuring accurately starting now

For a more accurate picture, you can also begin tracking your expenses and revenue more closely beginning right now. While this process may take longer before you can review the data and make effective plans, at least you’ll know the information is reliable.

Regardless of how you get the data, you’ll want to review the inner workings of your profit margin in order to have a complete picture of where your business is at.

Some helpful questions might include:

• Do certain kinds of projects yield higher profit margins? If so, which are they?
• Do certain team groups or employees seem to improve profit margins? If so, which ones?
• What commonalities can I find between high-margin projects? Between all low-margin projects?

2. Set a reachable margin goal with tactics to achieve it

Once you have a clear picture of what your current profit margin looks like, you may want to consider setting appropriate goals for where you’d like your profit margin to be.

Keep in mind when setting profit margin goals, they should be realistic and achievable. If you’re currently spending 75% of your revenue to run your business (leaving you with 25% profit margins), drastically increasing margins to 60% in the near future may be a practically impossible depending on the scale at which your business operates.

Instead take small steps, setting goals to improve profit margin by 5%, 10% or 15%. Once you reach those goals, you can re-evaluate and set new goals to continue to improve.

You may also want to consider doing this particular task at the end of the other activities outlined in this article—making goals based on ideas you get by reading the suggestions below.

3. Boost efficiency in everyday tasks

One of the most common culprits of low profit margins are inefficiencies in your company.

It could be your employees (or you) spend too much time searching sites for new jobs.

Perhaps you spend too much time negotiating with clients that you know in your gut are ultimately going to turn down your proposal.

Maybe you or your team are not up-to-date on the latest software or strategies for accomplishing your tasks quickly and efficiently.

All of these things can be solved.

Take an efficiency audit

In order to know where inefficiencies lie in your agency, you have to be familiar with all the work that’s happening in your company.

This doesn’t mean you need to micromanage your employees but it does mean you need to be keenly aware of the many processes that make up the work your employees do on a daily basis.

Inefficiencies can’t be improved from a back-corner office somewhere. If you want to make quick progress, spend as much time with your employees as possible (maybe even moving your desk to join them if applicable), coaching them on better and faster ways to do things.

Many employees welcome the added guidance and enjoy feeling more productive throughout the day. It’s a major win for both you and your team.

4. Let technology help with inefficiencies

There are many tasks that, no matter how good you or your team get at them as a human they still just take more time than it might take for technology to handle.

For example, you might use FunctionFox to set up templates for projects that you repeat often—saving you the extra time and effort of tracking down previous documents.

You could use software to better track your time. When I worked at my first agency, we literally kept track of time on a sheet of paper that we turned in to our boss at the end of the week.

In hindsight: that was a massive inefficiency: we first wrote it down, then handed it in, then he input it into the computer, and then used excel sheets to figure out which client owed what amount.

We should have used technology.

With new apps being built literally every day, chances are there is some sort of technology being developed to solve almost any inefficiency your agency is facing.

5. Understand how much your team’s time is worth

When it comes to your team’s creativity and drive, there’s no real worth you can assign to their time.

In a previous article on our blog, we explain:

"The real reason [to track time closely] is to inform decisions and streamline processes and workflow. When time is tracked, it can help guide how to think about monetary value. And more importantly, perhaps, it can help deepen understanding. With greater knowledge, better choices can be made."

There are a few simple things you can do immediately to understand where, how, and why your teammates are spending their time.

Ask each team member to do a fast time estimation

For starters, you can ask each team member to help you identify where they are spending their time.

It’s important not to make them feel like they are being micromanaged here—a concern which can be overcome by you doing your own time estimation first.

Make quick estimates on where you spend most of your time. Yours might look something like this:

• Email & correspondence:
  15% of my time (or 1.2 hours per day)
• Assisting employees:
  25% of my time (or about 2 hours per day)
• Working on client projects
  38% of my time (or about 3 hours per day)
• Managing client projects
  17% of my day (or about 1.5 hours per day)
• Other (socializing, facebook breaks, unaccounted for, etc.):
  5% of my time (or about 25 minutes/day)

The purpose of the time audit is not to make employees feel like they will be punished for how they spend their time. You may even choose to have them submit their estimations anonymously so you can view the agency as a whole, instead of as individual team members.

Encouraging the entire company to do a time estimation audit will force everyone to take a good look at where they spend their time. This naturally results in team members taking their own initiative to spend more time where it matters most.

It also allows you to identify places you need to focus on as the team leader.

For example, if your entire team is spending 20% of their time communicating with the client, you may choose to assign a project manager—a single communication point—for each client or project.

6. Track your time (and your team’s time) like your life depends on it

In addition to doing a general time audit and estimation, you need to start tracking your time or your team’s time like your life depends on it.

Track time extremely closely and assign it accordingly to each project.

Again, the point of tracking time is not to try and assign an actual dollar amount to any given hour. Instead, the point is to identify inefficiencies in the system.

For example, if your employees are spending way more time on the brainstorming process than you believe they should be, it may be that the clients’ problems are not well-defined enough to begin with.

That’s the kind of problem you can solve together with the client to save time on the back-end of the project.

Alternately, maybe you find your sales team is demanding too much spec work from your creative team in order to close deals with your clients. That’s a problem that can be remedied quickly with spec work limitations.

Pair that kind of learning with the strategy of billing your client by the project (instead of by the hour) and you’ve got yourself some automatically boosted profit margin.

7. Avoid scope creep like the plague

As I’ve worked with freelancers and agencies for over a decade now, one thing is painfully clear: scope creep is the #1 killer of profit margin for creatives.

It makes sense: you’re told to price client work based on the project or the value you bring to the table.

Great advice.

But then the client adds a few things here or there to the brief, wants you to change or add this or that and before you know it: the project has doubled in size.

However, your budget hasn’t.

All of a sudden your profit margin is headed out the window—slipping through your fingers, never to return.

So how can you stop scope creep? Here are a few suggestions:

Outline a project scope document

Before you begin any client project, you should outline the scope of the entire project in a simple project scope document.

While this added document may seem like a lot of extra work, the hours you’ll invest into this document will save you loads of headache and hours of extra work during the course of the project itself.

Which increases your profit margin.

Have your client review the document and sign it. You may need it later.

Have a professional response ready when you see scope creep coming

In addition to using a project scope document, you should also be prepared to handle scope creep when you see it coming.

That means you (or your team project manager) have to:

1. Be intimately familiar with the details of the project scope document.
2. Be unafraid to address early signs of scope creep with your client.

If (probably when) you receive a scope creep email from your client, you’ll want to:

1. Acknowledge you heard them clearly.
2. Remind them of the scope creep document.
3. Offer additional alternatives.

It’s important to remember that most clients don’t intentionally try to scam out into more work or more hours. Many clients have something come up they genuinely didn’t see coming and decide to add it in during the project.

Therefore, avoid getting defensive, rude or short with your clients just because they’re requesting extra work. Take it as an opportunity to increase your total revenue and delight your client.

Here’s an example of what a professional response to a client who may be adding scope to your project might look like:

Remain calm and dignified, but stand your ground. Often times, clients just don’t realize what extra resources in time and money such changes will require.

Be patient

Lastly, improving your profit margins is a game of patience. It’s a bit like getting healthier or mastering a new skill: it takes time.

Lots of small efforts compounded over time will yield very satisfying results and soon you’ll find your agency is healthier financially than it ever has been.