As agency-builders it can be easy to think that the best (or only) way to grow our business is to get more clients, do more work, bill more hours, and ultimately send bigger invoices.
In fact, adding more work to your plate (or your team’s plate) is not necessarily the answer to more net revenue for your business.
Sure, if you want to grow the top-line numbers, you’ll probably need to charge more, find new clients, or work more hours.
But if you and your team just want to take home more profit at the end of the day, some simple adjustments in how you approach profit margin may just do the trick.
A quick boiler plate on profit margins
If you’re going to improve your agency’s profit margins, first it’s key to understand just what a profit margin is.
Technically, profit margin is “the amount by which revenue from sales exceeds costs in a business.”
More casually, it’s the money you have left over after you’ve collected all payments and paid all expenses.
Profit margin is expressed as a percentage. So if you make $100 and you spend $50, you have a 50% profit margin.
Pretty simple.
Yet, one major reason many companies go out of business is their inability to understand the power of profit margin.
Many companies that make multiple millions of dollars in revenue every year spend far too much of that (sometimes all or more) to run the business—leaving them with a massive top-line (revenue before expenses) and a struggling or dying business.
Don’t let that be you.
If you’re eager to boost your agency’s profit margin this year, here are the most effective strategies I’ve seen:
1. Understand your current profit margins
Before you can do just about anything to improve your agency’s profit margins, you have to understand what your margins look like in the first place.
Depending on how well you’ve done at tracking your revenue and expenses in the past, this will be extremely quick and painless or could take a lot of extra effort.
Hopefully, you’ve been diligent in tracking your expenses and projects up to this point. That will help you gather the data you need quickly and efficiently.
If you haven’t been using a helpful tool to track expenses, you have just two options:
Go back and try to estimate previous earnings and expenses
While this is definitely an option (and may be your only option at the moment), you may find yourself missing important details which will impact your decisions and goals moving forward.
Start tracking and measuring accurately starting now
For a more accurate picture, you can also begin tracking your expenses and revenue more closely beginning right now. While this process may take longer before you can review the data and make effective plans, at least you’ll know the information is reliable.
Regardless of how you get the data, you’ll want to review the inner workings of your profit margin in order to have a complete picture of where your business is at.
Some helpful questions might include:
- Do certain kinds of projects yield higher profit margins? If so, which are they?
- Do certain team groups or employees seem to improve profit margins? If so, which ones?
- What commonalities can I find between high-margin projects? Between all low-margin projects?
2. Set a reachable margin goal with tactics to achieve it
Once you have a clear picture of what your current profit margin looks like, you may want to consider setting appropriate goals for where you’d like your profit margin to be.
Keep in mind when setting profit margin goals, they should be realistic and achievable. If you’re currently spending 75% of your revenue to run your business (leaving you with 25% profit margins), drastically increasing margins to 60% in the near future may be a practically impossible depending on the scale at which your business operates.
Instead take small steps, setting goals to improve profit margin by 5%, 10% or 15%. Once you reach those goals, you can re-evaluate and set new goals to continue to improve.
You may also want to consider doing this particular task at the end of the other activities outlined in this article—making goals based on ideas you get by reading the suggestions below.
3. Boost efficiency in everyday tasks
One of the most common culprits of low profit margins are inefficiencies in your company.
It could be your employees (or you) spend too much time searching sites for new jobs.
Perhaps you spend too much time negotiating with clients that you know in your gut are ultimately going to turn down your proposal.
Maybe you or your team are not up-to-date on the latest software or strategies for accomplishing your tasks quickly and efficiently.
All of these things can be solved.
Take an efficiency audit
In order to know where inefficiencies lie in your agency, you have to be familiar with all the work that’s happening in your company.
This doesn’t mean you need to micromanage your employees but it does mean you need to be keenly aware of the many processes that make up the work your employees do on a daily basis.
Inefficiencies can’t be improved from a back-corner office somewhere. If you want to make quick progress, spend as much time with your employees as possible (maybe even moving your desk to join them if applicable), coaching them on better and faster ways to do things.
Many employees welcome the added guidance and enjoy feeling more productive throughout the day. It’s a major win for both you and your team.
4. Let technology help with inefficiencies
There are many tasks that, no matter how good you or your team get at them as a human they still just take more time than it might take for technology to handle.
For example, you might use FunctionFox to set up templates for projects that you repeat often—saving you the extra time and effort of tracking down previous documents.
You could use software to better track your time. When I worked at my first agency, we literally kept track of time on a sheet of paper that we turned in to our boss at the end of the week.
In hindsight: that was a massive inefficiency: we first wrote it down, then handed it in, then he input it into the computer, and then used excel sheets to figure out which client owed what amount.
We should have used technology.
With new apps being built literally every day, chances are there is some sort of technology being developed to solve almost any inefficiency your agency is facing.