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The 3 Key Steps To Understanding Your Profit

By July 31, 2018 No Comments

So you’ve got your top-level numbers sketched out.

You know roughly what profit you’re aiming for in 3 years time, 1 years time and the next 90 days.

Now it’s time to make sure these numbers make sense. And here’s how to do just that… 

 

#1 Understanding the historic performance

 

Always a good place to start. Review your last 2-3 years numbers in terms of both revenue as well as profits. Now review the last year and finally the last 90 days. How have the numbers and margins changed over time?

You also need to understand the make-up of where revenue and profit have been achieved. Is there a particular client masking the figures which would cause the numbers to drastically alter should you remove them? Are there particular departments or services that have either pushed the numbers up or dragged them down?

 

#2 Comparing the past to the future

 

Now that you’ve got your historical performance laid out the next step is to compare this to your forecast. Do the forecasted margins make sense against what you’ve done previously? More often than not your forecasted margins will be much higher than what you’ve ever achieved before. Do you need to ask yourself if there’s a clear justification to support this? Are the forecasted margins realistic?

For example, if you’re planning on doubling revenue but only taking on a couple of new staff then is this really achievable? Are you operationally efficient enough to be able to drastically increase revenue without increasing headcount?

Now put your Profit Map against your Client & Service analysis and think about how both your client portfolio and service offering will change over the next few years to support the financial performance. Again is this realistic when comparing to past information?

 

#3 Detail, detail, detail

 

The 3rd step is to put some detail behind your top-level numbers. Most agency owners have an idea of what they want to achieve in high-level financial KPI’s but don’t have any indication as to whether this is truly realistic.

Start with the target revenue figure and sketch this out month on month (or quarter by quarter). Next, apply a target profit margin to this figure e.g. 20%. This will give you a running profit target. The final number to plug in between is your monthly allowance for costs (both fixed and variable).

Now analyse your costs in detail. An agency’s costs are probably the easiest to forecast as around 90% will always be fixed (such as staff salaries, office costs, professional fees etc) with the balance being on variable costs such as client ad-spend, freelancer costs and one-off project spend.

By analysing out your projected costs you’ll be able to compare this against the required costs needed to achieve your target revenue and profit.  You can then see whether this overall target is realistic or it whether it needs adjusting.

 

Do you want to take the first step to understand your numbers?

 

Give us a call on 0161 711 0810 or book a discovery call here to arrange a Mapping session with our team.

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