No matter an agency’s size or area of expertise, there needs to be a focus on maintaining a certain level of profitability in order to truly succeed as a business. At first, you can reasonably expect your agency’s profitability to be as little as 20% – and that’s OK. It’s completely on par for the early days.
But when it comes to scaling up your business, it becomes all too easy to allow those margins to slip over time. The result is your agency being held back by an ever-shrinking amount of money that could be used on reinvestment, R&D or hiring new staff. Not to worry though, because we’ve got some advice on tackling this particular challenge head on!
Identifying the Challenge
What some agencies don’t fully understand is that real, sustainable growth comes from underpinning your finances with well-maintained profit margins. As we mentioned above, these margins are the key to growing your business through reinvestment, as well as ensuring a payment buffer for months where money is slow to come in.
The result of fast scaling without tight control over your profit margins is simple: your capabilities shrink, growth stalls, and you end up making losses instead.
All of this comes about when agencies fail to address whether or not the projects they’re focusing on are profitable enough to grow with. If they aren’t, then eventually the reward becomes much, much smaller than all the risk and work that went into fulfilling a project.
In our experience, an all too common mistake made by agencies who witness rapid growth in this way, is to throw more and more money away in order to keep afloat. The reality of this situation is that the agency tends to lose out in the long term by forcibly shrinking their own margins. In actual fact, underpinning growth with a tight grasp on your numbers through the likes of your monthly management accounts can prevent this from happening.
What’s the Solution?
Fundamentally, the only way to maintain a healthy margin as your agency grows – even if it stays at 20% forever – is to put in place a system of stringent financial controls. Financial controls are exactly what they sound like: processes which help you to keep a handle on your business’ finances. They can range from making sure you get paid on time to better managing expenditures – and we’ll pick up on the essential controls you need to implement first in a future blog. For the sake of this article, however, there are two to consider right away.
- Every Minute Counts
In an agency environment, it’s commonplace to see that 50% of a project’s revenue goes towards salaries. As such, your team’s time is perhaps the most important cost a project can have – time is literally money to you.
Controlling this cost means regularly assessing how your team are using their time and helping them to address any challenges which are slowing them down. Reducing time related costs primes you for growth, and frees up hours which can be invested in new service offerings and projects – as well as negating the need to hire when overcapacity.
- Name Your Price
It’s also important to have control over how much you’re charging for the work you’re doing. Whereas efficiency can be evaluated and improved upon both with new and current projects, increasing fees is a measure most often reserved for new clients.
Before quoting a new client for a project, take into account what you’ve learned about your team’s time, as well as their successes and how much value you can give to the client. From there, you’ll be better positioned to confidently review your pricing structure and quote for the amount that works for all parties. If you make sure to review pricing regularly, then you’ll be ensuring great margin maintenance as your agency grows in size.
“But What if I Already Do That?”
As noted above, time and price are just two financial controls to keep in mind: you need to take into account far more to stay fully in control of your bottom line. For example, it’s also important to keep a keen eye on costs outside of salaries (which, as a rule of thumb, should never be more than 25% of your revenue). Regularly questioning whether or not you’re getting value for money from your suppliers can help to keep expenditure at a competitive level that works for you.
Finally, work on securing recurring projects from clients and upselling them on new services in order to create additional revenue streams. If you know your team can take on the extra work, then you’ll be able to reap the benefits of a deepening relationship with a client, as well as healthier margins on projects you know will deliver.
The End Result
As with all things in life, the first step is probably the hardest when it comes to maintaining profit margins. That being said, you can make the most of the advice and experience included in this article to kick-start your margin-maintaining initiative by yourself. Just be sure to tackle this hurdle before attempting to grow, or you’ll quickly find that the problem grows with you. Best of luck!
Helping digital/creative agencies to grow successfully is our speciality. Get in touch and let’s discuss how My Accountancy Place can facilitate your agency’s growth too!