How to calculate ‘true’ agency profitability: Part 2: How Profitable are your Clients?

In part 1 we talked through calculating the cost per hour of each of your delivery team. This gives you a base cost to work from. Hopefully, you are using some form of system to allow your team to log their time against projects (clients and internal). Systems such as Harvest work great for this. Providing the logging of time is being managed correctly, we can now start to pull out some meaningful data.

We’d recommend that you run this report quarterly rather than monthly as you’ll be able to see more trends over a quarter and also compare to prior quarters as you go along. 

Calculating Client Profitability

First and foremost you’ll want to look at the clients you’ve worked with over the last quarter. You need the following information:

• Total Revenue – actual revenue ‘earned’ for the quarter. Exclude any pass-through i.e. any 3rd party costs recharged directly to the client
• Direct Spend – a breakdown of any costs incurred that weren’t charged back onto the client, and the cost of all freelancers who worked on the client during the quarter
• Hours Breakdown – a summary of the total hours worked on the client over the quarter AND by who

Once you have this information you can then work out the internal ‘cost’ of servicing the client by multiplying the hours worked by each employee on the client by their representative cost per hour. This will give you the internal cost of servicing the client, and from this, you should be able to build the following table for each client:

Now you’ve got the breakdown you need to agree what you’re aiming for in terms of profitability. Remember that these calculations don’t include the cost of internal time, therefore setting the target to match your overall profit target (such as 20%) will be too low.

Let’s say we’re aiming for 60% target margin on all clients. You now need to set parameters of what’s acceptable, so it could be:

• Below 50% = unacceptable – we need to review these clients and analyse the issues involved
• 50% – 70% = perfect – we need to review these clients and take learnings for what’s working well
• Above 70% = warning signs – although these clients are very profitable for us, does this suggest we’re not spending enough time on the accounts to deliver the value required?

Once you’ve graded your clients you should now have a full list showing how each is performing. Armed with this analysis, you can now sit down with your team, review the findings and most importantly discuss what you’re going to do about it?

Completing the same analysis every quarter allows you to then track progress and hopefully see improvements across each client.