The Profitability Mindset

The Profitability Mindset: Why Digital Agency Leaders Need to Shift Their Focus

21-Jan 2021

How well prepared is your agency for the unexpected? Can you see where you're going, or just where you've been?

For a digital agency, evaluating financial performance from historical data is a lot like walking backward. You can see all of the obstacles you’ve encountered in the past, but you don’t know what’s ahead. You also can’t see exactly how you got around those roadblocks.  

Basing your financial performance on historical information isn’t any better. First of all, you only know what happened — how much you earned and spent at a particular time, and how those numbers compare. You don’t know why it happened, so you can’t learn from it, and you don't know if it's at all comparable to what's happening now. Without that visibility, you don’t have the information you need to withstand a catastrophic event.

If the COVID-19 pandemic has taught us anything, it’s that adaptability and rapid response are essential to a successful recovery from disaster. For digital agencies, that means gaining a deeper understanding of profitability.

Profitability can be defined as a business’s ability to generate gains using existing resources. It's not about whether you made a profit last month, but whether you'll make one this month and in the months ahead.

The Importance of Profitability

As a creative, you know that every project uses a different set of resources. You can’t expect outdated tools that focus on historical data to give you a complete picture of what’s going on now. 

And yet, many businesses still use outdated tools like cash flow analyses to track financial performance. These tools draw from past data, which means that companies know nothing about their current profitability.

The result? Only 40% of small businesses are profitable, 30% break even, and 30% continuously lose money. They can’t look forward because they only see what’s happened in the past. They don’t know if they’re using their resources appropriately for their current projects. 

Consequences of “Walking Backward”

Approximately half of all small businesses fail by their fifth year, and those are pre-pandemic statistics. It’s even harder to stay afloat in the current economic crisis, especially when circumstances are changing so quickly.

Planning by looking backward has always been risky, but now it’s essentially a waste of time. One in every three small businesses worldwide have cut jobs during the coronavirus pandemic, so they’re working with different resource levels than they were before. 

Many of those job cuts have come from reductions in sales. With less money coming in and fewer staff members to work on available jobs, you can’t possibly make informed decisions using past data.

You have to be proactive and know exactly how you’re using your resources today. If not, you could easily find yourself in a situation where a bill comes due before you get the income from a project.

You have too many people counting on you — the clients you work so hard to serve, and the team members who deliver great work every day — for that to be an option. You need to treat profitability as the priority that it is, for the sake of your company’s survival.

What’s Next?

1. Check Your Data Confidence

Data is the key to profitability. How accurate is the information you get from your timesheets, invoices, quotes, and budgets? If you're at risk of manual entry errors or record-keeping mishaps, it's time to rethink your methods. Incorporating automation to help track the data you need to stay ahead. 

2. Make Financials Routine

As a creative, you’re probably used to having regular check-ins with the people working on your client projects. It’s time to apply that mentality to your financial planning.

Your finances are as dynamic as any creative element, and you need to be ready to respond just as quickly. Make sure everyone who works with your numbers knows what your key metrics are, what they need to be aware of, and what warning signs they should look out for.

Predictive analytics will be critical. Sit down with your financial teams and find out how you can get a heads-up when your income is at risk of exceeding your expenses. The sooner, the better.

3. Raise Your Expectations

To improve profitability, you have to dispense with excuses. If you don’t have access to the kind of data that will let you make real-time decisions, it’s time to figure out how to get that data. Agency leaders don't have the luxury of waiting. Real-time insights are accessible, and agency leaders need to invest in obtaining them for the long-term success of their business. 

Accelo can tell you what’s going on with your current projects, including who’s working on what and which projects are over, under, or on budget. 

Accelo lets you focus on profitability and respond to changing resource needs in real-time. Start today with a free trial and download our ebook, Profitability Lessons for the Agency Owner: Book One, to learn actionable steps you can take to develop a profitability mindset. 

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