There's a myth in digital agencies that any work is good work at the start — even work that isn't really priced to turn a profit. While there may be some truth to this early on, it’s important to shift your focus to profitability for the long term.
The Bureau of Labor Statistics reports that at least 20% of businesses fail in their first year, and that number is far higher when you drill down into many specific industries.
These early failures are often directly related to doing unprofitable work. The work you do hour over hour must bring in actual revenue, or you’ll eventually run out of steam and be forced to close. A good place to start getting a handle on profitability is with the profitability trinity (or triangle).
The three elements that must be optimized to make a digital agency profitable are:
Watch our agency profitability webinar to learn more about these three critical elements and how your agency can start making real progress in each area to drive profitability. Register now!
The basic principles of employee utilization seem obvious. For example, you'd never pay your employee $50 per hour and then bill at the same rate. You provide everything from benefits to office space to vacation time, so your billed rate will inevitably be higher than your rate of employee compensation. However, it can be more complicated to understand how damaging a low utilization rate is for your bottom line. Even one full-time employee who only bills a few hours a week becomes quite expensive.
Often, low utilization happens when the Tetris blocks of different projects don't line up: You have a graphic designer on staff but have a month where you only need five hours of graphic design. Keep in mind that it's not just about their work efficiency, but rather about the variety and timeline of the projects you have available to complete.
High utilization results from having a team of efficient individuals aligned with the right kinds of work on timelines that allow for each employee to have a full day every day. Attaining utilization numbers isn't a one-time thing, either. It's easy to let these numbers slide if they aren't monitored, but every meeting and every task has a cost. When you achieve high utilization and keep your billable hourly rate at a sustainable level, profits — and a profitable mentality — are possible.
Budgeting isn't just about figures — it's about anticipating costs and forecasting revenue so you can create an accurate roadmap for future projects.
A failure to set boundaries around budget can lead to dangerous habits of overspending. If you're consistently over budget, you might have overly ambitious projects or hidden bottlenecks to address.
Still, there will inevitably be times when budgets must be revised due to unforeseen project expansion. As timelines are refined and new elements or obstacles are discovered over the course of the project, it’s critical that you keep your client informed. Clear information visibility for your client keeps the relationship solid without forcing you to eat expensive overage costs.
Lastly, don't let awkwardness prevent clear communication about payment terms. If necessary, get paid up front, or get a significant deposit to ensure that the intention and ability to pay is there. Agencies that don't require any kind of upfront payment can be burned easily by people looking to get something for nothing.
Timelines are profit boosters because they not only represent your ability to deliver client work on time but they help you establish trust with your clients. Sticking to what you've promised in terms of deadlines demonstrates your commitment and professionalism as a company.
On the other hand, delays can strain your resources and lead to even more magnified costs because of the hit to your reputation.
It's essential to know exactly why your time estimates might be inaccurate in order to align with the other two sides of the profitability triangle. If you don't understand the story of time your team spend on each piece of client work and where you might be off in calculating timelines, you won't be able to pinpoint opportunities to correct and increase profitability as a result. Tracking time is one of the most valuable ways to gather data about your team's usage and utilization.
➡️ Read more about the three moving parts of the profitability triangle in our free agency profitability guide.
Profitability can feel like a puzzle in the dynamic landscape of agency work. It's possible to complete this puzzle if you can find and properly place the three key pieces of utilization, budgets and timelines. The financial health of your agency depends on your willingness to look carefully at these realities. Accelo is here to support you in this somewhat uncomfortable exploration.
We're diving even deeper into the agency profitability conversation. Watch our on-demand agency webinar to learn how much cash flow the average agency has, tactics for increasing billable time and more. Register now!