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?
Margin is generally calculated as follows: your company’s profit (customer revenues minus all your operating costs) divided by revenues (commissions, fees, bonuses and other remuneration).
How can you easily calculate your company's margin?
As a business owner, you’re constantly faced with unforeseen costs and changing budgets, so calculating your margins can be extremely difficult.
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 first need to 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, average gross margins were 44%, while agencies should be aiming 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 into Furious is one of the first and most important steps in getting a clear picture of your profitability. By adding their number of hours worked per week and their monthly salary, you’ll get an estimate of their hourly cost. and ultimately their YMPE.
2. Freelancers
When your agency lands a new contract and you don’t have enough in-house resources to cover the load, you call on your freelancers. Furious keeps track of all your project-related purchases.
3. Overheads
Overheads 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 expenses
4. Any additional expenses
Your stay in Cannes or your participation in a trade show, as expenses linked to your company’s communication, are added to the 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 analyze your costs in detail?
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 view of your business: By breaking down each cost, you can identify exactly where your money is going, and which items weigh most heavily on your finances. This transparency helps you better understand your budget priorities and adjust your strategic choices.
-
Resource optimization: By identifying excessive or superfluous expenditure, you can allocate your resources more efficiently. 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 enables you to establish a consistent and profitable pricing structure. By aligning your prices with your actual costs, you can guarantee that your expenses are covered, while optimizing your margins.
-
Loss prevention: Rigorous monitoring of your costs helps you to detect financial inefficiencies early and take the necessary action before they affect your profitability.
-
Informed strategic decisions: With a clear 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.
"Using a very user-friendly and effective interface and UX, Furious is proving to be a fearsomely powerful, creative and innovative tool. After just a month and a half, we finally have a clear and pleasant view of all aspects of my company's business.
Piloting really becomes a pleasure, whatever the position, and the whole team has taken to the application quickly and enthusiastically."
How can you maximize billable time to boost your margins?
When it comes to setting profitable rates, the key question is: what is your company’s actual occupancy rate?
You may already be using tools to cross-reference data, or you may be totally lacking in visibility. There’s no single method for measuring this rate, but one key point remains: accurately track your employees’ working time, whether billable or not. Good tracking enables you to optimize your workload and better anticipate your resources.
On average, an employee in a service company works around 120 hours a month, or 1,440 hours a year (including vacations and absences). An annual occupancy rate of 75% is generally considered a good balance.
Here are our top tips for effective time tracking
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 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 hours actually worked over the year(approximately 1,440 hours on a 40h/week basis).
This calculation gives you the minimum hourly rate you need to charge to guarantee your agency’s profitability.
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 your company’s profit margins by reducing the amount of time that is usually wasted:
- 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 a growing number of consulting firms, without a unique value proposition, you risk drowning in the mass.
- Customer expectations: Customers are looking for solutions tailored to their specific needs, not generic ones. Differentiation enables you to offer this personalization.
- Adding value to your expertise: specializing in a field or adopting a unique approach enhances your expertise and attracts customers looking specifically for 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?
Consulting pricing is not an exact science, but the result of 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.
- Operating 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 your competitors’ prices enables you to adopt 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 he or she 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 margin rate gives an idea of the gross margin generated by a firm in relation to its total revenues. The higher the rate, the higher the margin. It’s an indicator of the firm’s ability to manage costs effectively. So, how does this relate to profits?
- Operational efficiency: A high gross rate means that the firm retains a higher proportion of its revenues after covering its direct costs. This can translate into higher profits if fixed costs are well managed.
- Financial flexibility: A high gross interest rate provides a certain amount of leeway to cover other expenses, invest in development or manage difficult times.
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 operating performance.
- Financial health: A positive EBITDA indicates that the firm is operationally profitable, irrespective of 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 customers: This enables companies to access consulting services on demand, without making long-term commitments.
- Recurring revenues for firms: This offers firms a stable source of income and a long-term relationship with customers.
Consultant price list: why is it crucial to have one?
- Transparency: This gives customers 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.
