Running a business means juggling growth, recruitment and customer satisfaction. But without a clear vision of your profitability, it’s hard to optimize your margins.
In an ultra-competitive market, every margin point counts. So how can you avoid profit erosion and maximize profitability?
In this article, find out how to calculate your margins… and, above all, how to increase them.
What is a company's margin?
The margin is generally calculated as follows: your company’s profit (client revenue minus all your operating costs) divided by revenue (commissions, fees, bonuses and other compensation).
How can you easily calculate your company's margin?
As a business owner, you must constantly deal with unexpected costs and changing budgets, making calculating your margins extremely challenging.
Remember that client who brought your agency a profit of 15,000 euros with a margin of 25%? Add to that a few returns and campaign modifications from that same client and your profit drops to 7,000 euros.
To make informed strategic (and tactical) decisions, you must first know your company’s actual margins.
In a survey conducted by The Wow Company for BenchPress 2021, only 80% of agencies reported making a profit in 2020, while 14% recorded a loss and 6% broke even. According to The Wow Company’s survey, the average gross margins were 44%, whereas agencies should aim for a gross margin of 50% or more.
In the same survey, it is interesting to note that over 61% of agencies received funding in the same year. This raises the question of how to manage these additional revenues.
Profitability is the cornerstone of a sustainable agency. Whatever plans you have for your future, you won’t get very far if you don’t make money. To get an idea of what your margins should be, you need to enter all your expenses into your management tool: personnel costs, overheads and any additional expenses your business generates.
Let’s take a look at these expenses:
1. Personnel costs (salaries and other)
Entering your employees’ costs in Furious is one of the first and most important steps to get a clear picture of your profitability. By adding their weekly working hours and monthly salary, you’ll get an estimate of their hourly cost, and ultimately their ADR.
2. Freelancers
When your agency lands a new contract and you don’t have enough internal resources to cover the workload, you call on your freelancers. Furious accounts for all purchases related to your projects.
3. Overheads
Overhead costs are not limited to your company’s fixed and variable expenses. In the service sector, they also include all non-billable costs, such as:
- HR salaries
- Compensation for office managers (essential)
- Budgets dedicated to marketing, SEO or internal projects
- Accounting
- Pre-sales related expenses
4. Any additional expenses
Your stay in Cannes or your participation in a trade show, as expenses related to your company’s communication, are added to other costs.
Once all your costs have been integrated into your management tool or ERP, the challenge is to set rates that not only cover them, but also guarantee your profitability. To do this, it’s essential to understand and master the calculation of margin rates, a key indicator for assessing your company’s financial performance.
Why not use a spreadsheet?
You might think that a spreadsheet does the trick: you enter your budgets on one side, your costs on the other, apply a few formulas… and voila, a “theoretical” vision of your profitability.
But in reality, all it takes is a few unforeseen events to throw everything out of whack: a project that takes longer than expected, an unanticipated purchase, rising overheads (thanks to the leaky toilet), a pre-sale that was over-invested but lost… The result? You juggle extra expenses, forget some, underestimate others (not to mention the differences in CJM between your new account managers).
And all the while, your margin melts… without you realizing it in time.
Rather than suffer these discrepancies, why not adopt a tool that gives you a precise view of your profitability, customer by customer, project by project? A system that integrates all your expenses, overheads and additional costs, while generating real-time reports to help you make the right decisions.
More than just an accounting formality, this analysis is a real strategic lever for your profitability. Here’s why it’s essential:
- A clear vision of your activity: By breaking down each cost, you precisely identify where your money is going and which items weigh the most on your finances. This transparency helps you better understand your budgetary priorities and adjust your strategic choices.
- Resource optimization: By identifying excessive or unnecessary expenses, you can allocate your resources more effectively. The objective? Maximize your return on investment by focusing your efforts on what really brings value.
- A more relevant pricing strategy: Knowing your costs in detail allows you to establish a coherent and profitable pricing grid. By aligning your prices with your actual expenses, you ensure coverage of your costs while optimizing your margins.
- Loss prevention: Rigorous monitoring of your costs helps you quickly detect financial inefficiencies and take necessary measures before they affect your profitability.
- Informed strategic decisions: With a fine understanding of your finances, you can invest with confidence, whether in new technologies, recruitment, or business development.
In short, rigorous cost management means a company that performs better and is more resilient in the face of market challenges.
How can you maximize billable time to boost your margins?
To set profitable rates, an essential question arises: what is the actual occupancy rate of your company?
You may already be using tools to cross-reference data, or on the contrary, you may completely lack visibility. There is no single method to measure this rate, but one key point remains: accurately tracking your employees’ work time, whether billable or not. Good tracking allows you to optimize workload and better anticipate your resources.
On average, an employee in a service company works about 120 hours per month, or 1,440 hours per year (taking into account holidays and absences). An annual occupancy rate of 75% is generally considered a good balance.
Here are our best tips for effectively tracking work time
Once you have a clear picture of your occupancy rate and expenses, it’s time to apply a simple and effective formula to determine your rates:
Calculate the annual cost of an employee:
- Take his gross monthly salary.
- Multiply it by 12 months.
- Multiply this total by 3 to cover expenses and ensure a margin.
Determine the billable hourly rate:
- Divide this annual cost by the number of effective work hours in the year (about 1,440 hours for a 40-hour work week).
This calculation gives you the minimum hourly rate to charge to ensure the profitability of your agency.
Use a single tool to boost efficiency and margins
Having all your financial data, opportunities, budgets, and project communication in one place, in a reliable and secure space, helps you increase profit margins for the company by reducing the amount of time that is typically lost:
- Unconsolidated communication on projects and tasks across multiple tools.
- Resource planning data in 2 or 3 different systems
- Financial information in several places
- Administrative work related to invoicing and payroll on various platforms.
Profitability information in Furious includes your overheads, your employees’ ADCs (Average Daily Costs) and all additional expenses… all automatically and in real time, thanks to a business management solution that centralizes this data and enables you to optimize your strategic decisions!
Why is differentiation essential in the competitive consulting landscape?
In a world where information is at your fingertips and skills are multiplying, standing out from the crowd is becoming a necessity for any consulting firm. Here’s why differentiation is key:
- Market saturation: With an increasing number of consulting firms, without a unique value proposition, you risk getting lost in the crowd.
- Client expectations: Clients are looking for solutions tailored to their specific needs, not generic ones. Differentiation allows you to offer this personalization.
- Valuing expertise: Specializing in a field or adopting a unique approach highlights your expertise and attracts clients specifically seeking your know-how.
Current challenges facing the consulting sector
- Technological adaptation: In this digital age, consulting firms need to keep up with the latest technologies to remain competitive.
- Globalization: Serving a global customer base requires an understanding of local markets and cultural challenges.
- Changing expectations: As businesses and industries evolve, firms must constantly adjust their services to meet new needs.
How does our advice evolve with market needs?
We are constantly adapting to changes in the industry to ensure that our recommendations are always relevant. Thanks to active monitoring, we stay abreast of emerging trends to anticipate market developments. The ongoing training of our team ensures that our solutions remain at the cutting edge and meet today’s challenges. Finally, by working closely with our customers, we understand their specific challenges and tailor our advice to maximize its impact.
How do consulting firms set their rates?
Pricing in consulting is not an exact science, but results from a combination of factors:
How is a consultant's daily rate determined?
- Experience and expertise: The more experience a consultant has, the higher the rate.
- Market demand: In high-demand areas, rates can be higher.
- Operational costs: A firm’s cost structure also influences the rate.
The importance of analysis in pricing
- Evaluating costs: Understanding costs in detail enables us to set competitive rates while guaranteeing a profit margin.
- Competitive analysis: Knowing competitors’ rates allows for adopting an appropriate pricing strategy.
How does the pricing formula adapt to the level of expertise?
- Specialized services: Services requiring special expertise may justify higher rates.
- Added value: The more value a consultant brings to a project, the more he can charge.
- Return on investment: If a consultant can demonstrate that they will bring considerable benefits to a company, this can also influence pricing.
What is the correlation between the gross rate and a firm's profits?
The gross rate gives an idea of the gross margin generated by a firm relative to its total revenue. The higher this rate, the greater the margin. It’s an indicator of the firm’s ability to effectively manage its costs. So, how does this relate to profits?
- Operational efficiency: A high gross rate means the firm retains a larger proportion of its revenue after covering direct costs. This can translate into higher profits if fixed costs are well managed.
- Financial flexibility: A high gross rate offers some leeway to cover other expenses, invest in development, or manage difficult periods.
EBITDA analysis: how to interpret these figures for a consulting firm?
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is an indicator of a firm’s operational performance.
- Financial health: A positive EBITDA indicates that the firm is profitable at the operational level, without considering financial and accounting factors.
- Sector comparison: Comparing EBITDA with other firms can give an idea of the firm’s relative performance in the sector.
Staffing rates: how do they affect profitability?
The staffing rate refers to the proportion of consultants currently working on billable projects.
- Revenue maximization: The higher the rate, the higher the revenue generated.
- Cost management: A low rate may indicate a surplus of staff, resulting in additional costs for the firm.
How to stand out from the crowd?
Consulting compensation has evolved over the years, reflecting changes in the industry and increased competition.
Current trends in consultant compensation.
- Performance-based compensation: Many firms are adopting performance-based compensation models to attract and retain top talent.
- Non-financial benefits: Benefits such as flexibility, training and well-being are playing an increasing role in compensation packages.
Consulting as a Service (CAAS): the future of consulting?
CAAS is an approach where consulting services are offered on a subscription basis, similar to SaaS models.
- Flexibility for clients: This allows companies to access consulting services on demand, without long-term commitment.
- Recurring revenue for firms: This offers firms a stable source of income and a long-term relationship with clients.
Consultant price list: why is it crucial to have one?
- Transparency: This gives clients a clear idea of the costs associated with each level of expertise or service.
- Standardization: This facilitates pricing and ensures a consistent approach for all customers.
- Competitiveness: A well-established can help a firm position itself advantageously in the market.
Ready to boost your margins and secure your company's profitability?
If your profits aren’t up to scratch, here’s what you need to remember:
- Adopt value-based pricing, optimize your occupancy rates, and rethink your resource management.
- Use a proven method to determine the right price for your services.
- Consider your non-billable time as a key element of your overhead costs.
But above all, don’t let these complex calculations hold you back. Discover how a powerful tool can help you manage your profitability with ease.
Request your personalized demo now and take control of your margins!
