Last week, a few of us attended a very informative evening learning from Spencer Gallagher what makes a super-profitable creative agency. Here’s a few tips we picked up on the night…
EBIT (Earnings Before Interest & Tax)
The most important number I was ever taught. This is a figure worth paying attention to because one day, if you want to sell your business, this is the most likely way it will be valued.
What’s your billing capacity?
Here’s a little calculation to get you started: Take your day rate and multiply it by the number of people in your team and the number of days in the month. This is your billing capacity. Now compare this figure to what you actually billed. How much is missing and how can you close this gap?
Here’s 21 reasons why this gap exists in agencies – I certainly spent the first 8 years of my agency life making most of these mistakes!
1. poor processes = over delivery / over servicing / scope creep
2. inefficiency / not micro-managing schedule & resource
3. not charging out all of your billable resource
4. discounting day rates to win business
5. over-promise what you can deliver for the client’s budget or incorrect forecasting
6. not selling SLA’s and retainers pre project
7. missing systems to record and report where time is spent
8. the wrong team doing the wrong work
9. failing to hit 58-63% wage cost to GP (what is this figure in your agency?)
10. each billable resource should be pushing through between £5k-10K per month
11. top agencies will bill £100K per person on average, across the whole business. For us at Bluhalo, we were £91K on average. We see good agencies at £65-75K – do you know your revenue per head?
12. using freelancers for project work *in the majority of cases* doesn’t work – at £4m run rate our freelance budget was only £2.5K per month
13. directors drawings / too many directors!
14. spaghetti & sales consistency
15. killer pipeline and strict qualification, taking on the right deals at the right time
16. not pitching to win
17. demotivated team
18. lack of confidence in selling higher day rates
19. too much pitch time not recovered / too much in-house work not budgeted for / pro-bono or speculative work
20. poor cash flow management
21. office space too big for your requirements
And the most important thing I’ve learned about building a super-profitable creative agency is……… LEARN TO SELL VALUE NOT TIME.
In just one day in 2007 we moved from £800 to £1,200 per day …and our clients could not have been happier. When was the last time you reviewed your pricing?
So, how much profit (EBIT) should you be making?
9-14% – agencies in the early stages
15-20% – where the majority of agencies will be performing
20-30% – top agencies will be making these sorts of margins
30-50% – this is where you need to be to consider yourself elite