Growing an agency with profitable clients, staff & services.

The journey to success often begins with a simple plan: acquire 5 clients per month, each paying £1,000, and you’ll be onto a winner. However, as your agency grows and you delegate more tasks, the profitability economics start to shift and continue evolving along the way.

Running a successful agency requires more than just attracting clients and offering services. It involves strategic planning, effective management, and a focus on profitability.

Based on our experience working with numerous agencies, we’ve developed the following toolkit to help agency owners effectively manage their profitability at every stage of their journey.

1. Lay the foundation for success.

Financial reporting is essential for getting a handle on your agency’s profitability, helping you assess financial performance, identify areas for improvement and make confident decisions about the future of your business. However, there are some core systems you will need to lay the foundations for this level of reporting.

A great place to start is a financial reporting wish list and work back from there. From a profitability perspective, it’s essential that you’re able to report on the gross profitability of each project, client, chargeable team member and service area.

In order to do this, you will need:

• Reliable project management software that works – this will enable you to track revenue and staff time for every project. It could be as simple as Excel, as long as it allows for proper accounting. Ideally, it should integrate seamlessly with your accounting software.

• Accounting software that’s set up properly – this includes a customised Chart of Accounts and tracking categories that are tailored to the metrics you want to report on. It’s much easier to start off on the right foot rather than reformatting historic data at a later point.

2. Report on the value of work delivered.

The default position of any accounting software is to report revenue as the value of work invoiced in the period, regardless of whether or not it has been delivered. This hampers reporting as there may be no connection between the delivery performance in a month and the value of revenue on the P&L for that month. This can mask underlying profitability issues and slow down corrective action.

When reporting on the value of work delivered, it is a good idea to break this down into service areas using both Profit & Loss codes and tracking categories. This will provide you with great flexibility on how to slice and dice your profitability reports at a later point.

The most successful agencies we’ve seen take this approach, enabling them to focus on performance and drastically increase the value of their reporting.

3. Breakdown of staff costs.

For every agency we work with, their biggest cost is human resource. Whether this relates to employees on payroll or sub-contractors, the profitability challenge remains the same.

Looking at the monthly staff cost figure as a whole doesn’t give much insight into profitability, so it’s essential that you’re able to accurately break these costs down in a number of different ways:

1. Direct Cost vs Overhead – Splitting your team costs into client-facing and non-client-facing allows us to differentiate between a direct cost, such as staff delivering a client project, and an overhead cost, such as marketing or advertising staff. This is key in all profitability reporting and will inform your understanding of the financial model as the business scales.

2. Project A vs Project B – Direct staff costs can then be broken down by projects worked on by the delivery team, enabling you to calculate the time and cost of each project. You could also break down direct costs by service to allow you to gauge the profitability of each service line.

For the breakdown of staff costs, a good project management system is key– this will enable you to do this kind of reporting with accuracy.

Once you have all of this mapped out, one of the vital figures you’ll now be able to calculate is the breakeven charge-out rate for each team member – This sets a floor on pricing to avoid loss-making projects, clients & staff.

4. A custom reporting structure.

If you have all the above, then you will be able to generate gross profit reports for each project and in turn each client, team member and service line. We recommend running this monthly alongside a meeting with your accountant to discuss the results and required actions. This can then be cascaded through the team where appropriate.

A strong agency reporting pack also needs to include some key non-financial metrics, most importantly, the utilisation percentage for each team member and the team as a whole. Other KPIs such as average day rate can also be included in this performance report.

This level of financial reporting is key for monitoring profitability, providing valuable insights into the financial performance of different aspects of your agency's operations. With these insights, you’re armed to make informed decisions that maximise overall profitability.

“What gets measured gets managed.”

Good reporting is an essential first step for gaining clarity on how your agency runs and makes a profit, underpinned by a bespoke accounting setup and reliable project management software. As the saying goes, “what gets measured gets controlled”. These tools are both vital for monitoring profitability, laying the foundations for the type of reporting you can utilise to bolster sustainable growth.

This approach doesn’t solve all issues (we can talk about cash flow another day), but it’s a useful baseline for agency owners with growth ambitions, helping you scale with confidence and clarity.

The profitability toolkit.

This is simply the first step: gaining visibility over your financial performance to fuel control, decision making and confidence as you scale. We will delve deeper into this topic, launching an in-depth profitability toolkit for agencies in 2024.

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