By Pamela Phillips
It goes without saying (but I'll say it anyway) that a basic principle of doing good business is being profitable. At a very simplistic level for an agency this comes down to ensuring that projects are priced in a way that delivers an appropriate profit margin and then delivers on budget.
Even if a project is creatively brilliant and delivered on time, if it goes over budget it can have a devastating effect on your agency.
Here we give you 5 reasons why it is essential to track the profitability of your projects if you want a thriving agency.
#1 Keep projects on budget
Close monitoring and management of project costs whilst a project is live will mean that potential overspends can be identified early on and appropriate action taken quickly.
Staff costs are one of the biggest project costs of an agency which means tracking hours spent on each project becomes increasingly important as the number of projects you are running and the number of staff you have grows. This is simple enough to do so long as you have the right systems and processes in place.
#2 Manage scope creep
Scope creep is the uncontrolled change or growth in the scope of a project. It is one of the leading causes of project overruns and occurs when the scope of a project is not accurately defined, documented or monitored.
Careful tracking and monitoring of costs, including staff time, can highlight where scope creep is happening and can be a useful prompt for a conversation with your client around revisiting the project scope and potentially adjusting your fee.
#3 Make better decisions
Understanding which projects and clients are more profitable than others will help you make better decisions. When you know which of your projects are the most profitable you can actively seek out more of them. If you are running other projects that are less profitable (or worse, they are loss-making), you can make the choice to turn down that type of work in future or to increase your fees for doing it.
#4 More accurate budgeting for future projects
Pricing for future projects will be more accurate as you benefit from the lessons learned in past projects. For example, if projects typically end up with a lower gross profit margin than expected then your pricing tool can be adjusted to include a buffer to factor this in.
When you know what actual hours are spent by your team to deliver a project this can make you better placed to plan resources for the future as well.
#5 More efficient team
By understanding what your team are doing, including how much is billable versus non-billable, you can better manage the efficiency of your agency. If one team has a higher utilisation rate than another, understanding why this is may help you improve the efficiency in the other team.
Take a look at Harvest, the tool we recommend to clients for tracking project costs.
Get in touch if you would like to talk to us about setting up project costing in your agency.