For years, businesses have relied on historical data to determine their future plans and business strategies. This method isn't always dependable — leaving agencies to risk the health of their business and long-term success. Leaders can't plan ahead when they can only see what's behind them. Nowadays, it's even more crucial for agency leaders to look forward.
According to McKinsey & Co., standard processes and strategies no longer work. Going into 2021 and beyond, companies need to focus on real-time responses and reinvestment according to business needs. They need to link performance metrics with strategic plans and pivot as soon as the need arises.
For digital agencies, that means preparing for the future by mastering cash flow and expense management — the foundation of profitability. To do this successfully, you’ll need to:
The first step will be to focus on expense management and cash flow, beginning with the control of an agency’s number one cost — labor.
If the answer to this question is “no,” you’re not alone. As creatives, agency owners tend to focus more on project design and meeting clients’ expectations than on mundane things like how to manage expenses. When they do look at what they’re spending and where, the results can be startling.
For example, did you know that labor can total as much as 70% of your total business costs? It’s nothing to sneeze at, but most HR professionals spend no more than 15% of their time managing labor costs. That’s a lot of cash flow potential that goes unexamined and a lot of potentially wasted employee time.
Expense management means not just understanding how much you’re paying people, but what they’re doing with the time they spend at work. Most companies, when they add up labor costs, only look at the dollar value spent. That doesn’t account for vacations, personal time, or non-billable hours, all of which can reduce the value of your labor spend.
To truly understand that spending, you need to track employee time. This can be uncomfortable for some leaders, but it’s the only reliable way to get the data you need to make decisions about staffing, billing rates, pay grades, and more. If you don’t know how people are spending their paid time, you can’t make an educated call about who should be working on what.
If you already have a timesheet system in place, you need to ask yourself how reliable that information really is. A survey of US employers revealed that 80% of timesheets have to be manually corrected, mostly because team members forget to clock in or out and can’t remember their hours.
Invest in an automated time tracking software, which gives you a more accurate and detailed measurement of how people spend their time. Time tracking lets you see not only who’s at work when, but also what projects they’re working on, when they’re not on billable tasks, and how much you’re spending on non-productive time.
With this information, you can make more informed decisions about where people’s time should go.
Managing labor expenses isn’t just about maximizing utilization on billable projects. It’s also about creating new opportunities for billable work, potentially outside of your traditional scope of services.
According to recent research from Wix, the role of the digital agency is shifting rapidly. Competitiveness used to mean following industry trends and hopefully outperforming the competition. Now, it means knowing what you’re uniquely positioned to offer and communicating that value proposition to clients.
This trend has been developing for a while. In 2018, a Wix survey revealed that one of the best ways for agencies to drive profits was to offer additional services. Since then, the COVID-19 crisis has prompted companies to cut back on expenses and take on more in-house tasks, spending only on what will provide significant value.
To truly stand out, agencies need to create a unique brand identity and set of services. The best way to do this efficiently is to look at the skill sets of your staff. Who has the talent and time to provide a service you may not have offered before? When you capitalize on those capabilities, you create new sources of revenue and improve staff utilization.
The only way to take control of your labor costs is to understand them. With Accelo, you can track employee time automatically and get detailed utilization reports, all in real-time.
Accelo users see an average billable time increase of 41% and an average annual revenue increase of 46%. Start today with a free trial and download our ebook, Profitability Lessons for the Agency Owner: Book Two, to learn how you can take back control of your spending.