Becoming Profitable

How to calculate ‘true’ agency profitability – Part 1: Calculating Cost Per Hour

By December 13th, 2019 No Comments

So you’re building an agency. You’re dealing with the day-to-day grind of sales, clients, projects, people and finance. Maybe you’re making some money while you’re at it…which is great! But do you actually know where the profits are coming from?

Most agency owners and senior management teams have an ‘idea’ of which clients, projects and people are the most profitable within their business. But wouldn’t it be great to actually see this data and more importantly to take steps to improve the numbers?

First and foremost in order to get to true profitability, we need to calculate the cost per hour to the agency for each person delivering services to clients.

We get to this figure through the following calculation:

  • First we take their annual salary cost (including Employer National Insurance and Employer Pension contribution)
  • We then need to calculate current annual overheads of the business – this being the total costs to the business excluding the salary costs of the delivery team above
  • By dividing annual overheads by the number of staff delivering client work, we get each person’s ‘share’ of the overheads. Add this to the annual salary cost to get each person’s total cost.
  • Now we need to work out how much time each person has available in a year to complete client work in total. Take their total annual hours (usually around 2,000 hours for a full time employee) and deduct time off for holidays etc to get to available hours.
  • Now divide the total cost by available hours to get their cost per hour. This now forms the base cost for any profitability calculations
  • See below an example of a full time employee on a £40k salary in an agency with £250k annual overheads and 10 staff delivering client work:

(1) Salary

(2) NI

(3) Pension

(4) Annual Salary Cost

(1 + 2 + 3)

(5) Overhead Share

(6) Total Cost

(4 + 5)

(7) Total Hours

(8) Holidays/

Time Off

(9)Available Hours

(7 – 8)

(10) Cost Per Hour

(6 / 9)











Once you have the Cost Per Hour figure for each employee delivering client work, you’ve then got the ‘base’ cost that you can use for all profitability calculations.

It’s best practice to review calculation at least quarterly to account for changes within the agency such as new starters, leavers, salary adjustments and movements in overhead costs.

Armed with your cost per hour for each of your delivery team, you’re now ready to start analysing some timesheet data….