Creative agencies often suffer waste that can drain their budgets and impact profitability. Here's how to ensure that doesn't happen to you.
Many creative agencies suffer from the issue of waste, either in terms of their time, budget, or both. Waste occurs when an agency can't determine the source of inefficiency within its processes, which leads to overspending and lost cost savings.
In the end, waste can severely affect revenue and profitability.
The good news is that it's an issue that can be resolved through certain number tracking techniques. If an agency starts doing what's needed, it can reduce or even eliminate waste.
In this article, we'll explain three methods you can use to make waste disappear from your agency's processes.
The Three Techniques for Eliminating Waste in Your Agency
Calculate Your Average Hourly Earnings
You can get a clear picture of your average hourly earnings with a relatively simple calculation.
Start with the revenue and subtract any outside costs, which can include everything from media to hiring freelancers. Then, divide the result by the total number of hours your agency spends on a project.
For example, if your total agency fee is $1,000 and it took 10 hours to earn that revenue, your average hourly earning is $100.
Note that for this example, the numbers provided were rounded up for easier calculation. But in reality, the industry average hourly earning is $72 an hour all in, not just client hours. We mentioned this because when calculating your hourly earnings, it's good to have the industry average in mind to know where your agency's standing.
However, you can do more than calculate the general average.
If you look at the average hourly earnings by client and by team member, you'll get an even more detailed picture. These numbers will be the most illuminating, as they'll show you which projects, services, clients, and team members are the most profitable.
Finally, when you have all of the data in place, you can make a side-by-side comparison and determine the lowest end of the echelon. That's most likely where the majority of waste occurs.
Outline the Expenses Related to Providing Your Service
Delivering your services comes with various costs, including the cost of goods, sales, and other expenses. Yet, many agencies don't have a clear grasp on the scope of these expenses, which can lead them to overspend and become less profitable.
The essential piece of information in this regard is how much does it cost your agency to bring in every dollar or every hundred dollars.
Here's a list of some of the most common expenses:
- Salaries for billable employees
- Media, in the event your agency does media buys
- Fees for outside freelancers
- Any software directly related to producing your service
- Administrative expenses
It’d be best to ensure that your agency spends between 5 to 8% on sales and marketing expenses. Meanwhile, administrative employee salaries, including owner salaries, shouldn't make up for more than 10%. Finally, your complete G&A cost should stay under 20%.
These numbers apply to every agency that functions as a service-oriented business. If your costs go beyond these percentages, the expenses of providing your services might be too high, which will affect profitability. In that case, adjustments will be necessary to allow your agency to start earning more profit.
Align Your Cost of Sale to Your Sales Budget
A common mistake that we see when onboarding clients is that their costs of sales do not align with their sales budgets. In fact, many agencies create a sales budget and do their general budgeting after the prospect is sold.
But after you have a signed contract, you can't guarantee that your sales budget will translate or that you can even utilize it properly.
Every agency should have its financials set up so that it can compare the sales budget to what actually happens during a project. This means it needs to have specific budget buckets with a high level of detail.
For example, an experiential agency should have its sales budget broken up by brand ambassadors, sponsorships, the cost of giveaways, and expenses that go into event production. And all of those are individual buckets.
Then, when it comes to details, this agency could break down sponsorships into different tiers and define the types of giveaways, graphic work, collateral, and assets that will be necessary for the event.
The same principle applies to digital media, creatives, and other aspects.
While creating buckets for different parts of the budget is relatively straightforward, defining additional detail can be challenging if it's not already present. All of the detail should be easily creatable so that it doesn't cause a detriment in the amount of time it takes to build it.
Once you've carefully created an alignment between your sales cost and budget, you'll be able to eliminate any waste that happens due to overbudgeting or overspending.
The crucial point in this technique is to leverage previous experience to pinpoint the optimal budget. When you know how your cost of sale relates to your sales budget in practice, it will be much easier to prepare for the new project and ensure profitability.
Eliminating Waste Creates More Efficient Agencies
Time tracking gives you an overview of what happened at different stages of a project. This data can help you understand what goes on during different projects and create better proposals.
In many cases, agencies don't accurately determine how many hours a project will take. This makes their pricing process less efficient because they aren't using empirical or historical data. In other words, they don't have a clear understanding of how much time it'll take them to complete the project.
With time tracking, you'll have precise information on what your agency did or didn't do on a project. You can also compare the time you expected to spend with what you ended up spending. Finally, you can determine the reason why the project took longer than it should have.
This analysis will show what aspect of your process you can improve and how you should price your services to make sure that your agency's always profitable.
If you can’t do it alone, or if you need more guidance, let us know. Contact us to book your profitability accelerator call and see how we can work together to optimize your business.