Managing a company is not easy. Whether it concerns software development, consulting or communication, the demand is constantly rising, as well as the competition.
Between meeting client expectations and balancing recruitment with sustainable growth, you can’t additionally be concerned about your profit eroding, or worse: not having a clear view of where your agency or practice stands in terms of profitability.
That’s why we answer some of your most important questions:
How to calculate your margins and, more importantly, how to increase them?
What is a business margin?
A margin is usually calculated as your company’s profit (revenue from customers subtracting all your operating costs) divided by revenue (commissions, fees, bonuses and other remuneration).
How to easily calculate your business margin?
As a business owner, you are constantly dealing with unexpected costs and changing budgets, so calculating your margins can be extremely difficult
Remember that client who brought your agency a profit of €15,000 with a 25% margin? Add to that a few returns and campaign changes from that same client and your profit drops to €7,000.
In order to take knowledgeable strategic (and tactical) decisions, you first need to determine the actual margins of your business.
In a survey conducted by The Wow Company for BenchPress 2021, only 80% of agencies reported making a profit in 2020, while 14% made a loss and 6% breached the break-even point. According to The Wow Company’s survey, average gross margins were 44%, while 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. The management of this additional income therefore raises questions.
Let’s have a look at these expenses:
1. Personnel costs (salaries and others)
Entering your employees’ costs into Furious is one of the first and most important steps in getting a clear overview of your profitability. By adding their working hours per week and their monthly salary, you will obtain an estimate of their hourly cost and ultimately their ADR.
When your agency is awarded a new contract and you don’t have enough in-house resources to cover the workload, you turn to your freelancers. Furious keeps an account of all your project-related purchases.
3. General expenses
General expenses are not only the fixed and variable expenditures of your business. For services enterprises, overhead expenses refer also to all non-billable costs. These can be:
- HR salaries
- salaries of office managers (and they are indispensable!)
- Marketing / SEO / internal budgets etc.
- pre-sales costs
4. Any supplementary expenditure
Your stay in Cannes or participation in a trade fair, being expenses related to your own corporate communication, can be considered as supplementary expenses.
Once you have integrated all your costs into your management tool/ERP, you need to think about how to offer rates that will cover your expenses but also allow you to be profitabl
Why not use Excel, you will answer?
Simply because Excel offers a “flat” view of your projects and costs: you enter the budgets of your projects on one side, and the costs on the other. A well-adjusted formula and you think you have a reliable view of your profitability.
All it takes is a few unforeseen expenses (more time spent than expected, an unanticipated external purchase, overheads that increase without having been foreseen (e.g. the toilet leak), an over-invested pre-sale that was nevertheless lost, etc.) and you juggle with the additional expenses… You forget some, you underestimate some (the ADR of these two new customer managers is not the same)
And your margin has shrunk without you even realising it, or realising it in time!
So instead of Excel, why not pick a tool that enables you to monitor your profitability by client and by project? In a system that will take into account all your expenses, all your overheads and all your additional costs… And that will generate real-time reports which will indicate what you should decide next.
How can you maximise chargeable time to increase your business margins?
To determine the amount you should charge, you need to answer the following question: what are the actual occupancy rates in your business?
Perhaps you already use some tools to combine data and determine your occupancy rates. Perhaps you have no data available at all.
There is no standard way to assess your occupancy rates, but one thing is certain: you need to have your employees track their working time, whether billable or not, in a tool that will then show you their level of availability and occupancy.
On average, employees in service companies work 120 hours per month, which amounts to about 1,440 hours per year (including holidays, sick leave, training, etc.). If your actual occupancy rate per employee is about 75% on an annual basis, that is a pretty good result.
Here are our top tips for tracking the time spent by your employees.
Once you have a clear idea of your occupancy rates and all your expenses, it is time to use a simple but proven formula to calculate how much you should charge for the services you offer.
Basically, you must first take an employee’s gross monthly salary, multiply it by 12 months, and then multiply that figure by three.
This gives you the gross annual salary of an employee multiplied by three.
Next, divide the gross annual salary of each employee by the number of actual working hours per year. Let’s say that the number of actual working hours is 1,440 on average for a 40-hour working week.
By dividing the gross annual salary by the hours worked, you will obtain the hourly rate you need to charge for your agency to make a profit.
Use a single tool to enhance efficiency and margin
Having all your financial data, opportunities, budgets and project communication in one place, in a reliable and secure space, helps to increase business profit margins by reducing the amount of time that is usually wasted:
- An unconsolidated communication about 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 different platforms.
The profitability information in Furious includes your overheads, the ADRs (Average Daily Rates) of your employees and any additional expenses… all automatically and in real time!
Do you want to increase your business profits?
Here is what you need to remember from this article:
- If your enterprise’s margins are too low, consider moving to value-based pricing, re-evaluate your occupancy rates per employee and review your current resource planning;
- Use a proven method to calculate how much you should charge for your services;
- Include your non-chargeable time as an overhead cost.
Without a single tool to manage your business, it will be difficult to plan your success.