Job profitability is like teamwork; it takes a combination of individual players all doing their part for the success of the team overall. One bad player can bog down the good ones and even more lackluster teammates can really bring down the team’s performance. The trick is to have a team full of amazing athletes. Like the team composed of your outstanding individual players, is your service based business and its clients (or jobs). Your goal as a digital agency is to have a team of profitable clients, all working forward to a truly profitable business. So how does all of this tie in to your service based business functionality? Well, it’s the next key analysis you must understand and do: job profitability.
Your P&L Could Be Lying To You
Job profitability is to understand how profitable each job/client individually is. You may be excited to look through your P and L and see a profit month-over-month, but not knowing how each client/job stacks up individually is a dangerous trap. To avoid blindly going forward, you will need to analyze each job. You could have one major client that is pulling the weight of five others costing you money and not realize it in the high level P&L views. Don’t get too worried about this new analysis just yet, it is not super complicated, if you know how to track and analyze your labor and overhead costs. It’s one of the most important areas to dig into, once you’ve mastered the time tracking and overhead and billable expense tracking costs, that are so crucial to service based business accounting.
A Digital Agency Analysis Recap: Have This Down Before Moving Forward
Remember the days of math class, where you learned all of the basics before tackling the hard stuff? For instance, that complicated word problem about trains, or the complex algebra equation that was essentially impossible if you weren't comfortable with things like multiplication, division, and PEMDAS? OK - not a math nerd like us accountants? It’s OK, we’ll get to the point.
Here are the key items you need to already know and track (If you need a recap, revisit the articles explaining each):
- Time tracking per employee for each job/client
- Labor Cost Per Billable Hour
- Overhead Per Billable Hour
- Labor Costs per employee (also taking into account their utilization rates and staff class)
- Overhead costs per hour
- Desired profit margin
- Billable Rate (taking into account your costs/employee, overhead and desired profit margin)
You will be using these calculations to compare against each job to see how they stack up, so if you don’t have these nailed down, go back and get your analysis on.
How To Analyze The Numbers
Got your numbers handy? Good. Here’s how we run the numbers. You will need to take a look at the rate you are billing your client. Let’s take a look at an example where you are charging a monthly retainer. This will need to take into consideration each month’s costs. The best way to look at this is to see how many hours you spent on that particular client for the month and match that up with your billable rate. Remember, your billable rate is what you charge your client per hour to cover both labor costs, overhead costs, and taking into account the profit you need to make.
Here are some basic calculation examples:
Basic “compare billable rate” method:
Is this number greater than, lesser than, or equal to what you are charging?
From a “cost perspective”:
Is this profit margin inline with your goal?
It’ll be a pretty straightforward calculation and answer. Is it a negative number? Not ideal. Is it a positive number? That’s good, but how “positive” is it? Does that positive number reflect the profit margin you were aiming for? Yes? Good. No? How much profit is it pulling? Is this slight deviation expected due to other factors, or is it a surprise?
You will need to dive in and calculate that percentage of profit to see how it is stacking up. Once you have done this for a month, keep analyzing each month to see if there are more deviations across the board, or if they are fairly consistent. So what if there is a meager (or no) margin at the end of the month? Positive or negative, let’s troubleshoot:
Job Cost Troubleshooting: What If It’s Not Profitable? Why Are There Deviations?
The first step in improving your profitability is understanding whether or not you are profitable in the first place, so pat yourself on the back for digging in. Sometimes the answer can be a huge “no, I’m not profitable”, or variations thereof. Remember the crafty P&L making you think you were doing just fine with its monthly overview in the black? This is where it gets called out.
Keep in mind that sometimes you may have an off month on a job that is warranted. You know your business goals (which are not to lose money, of course), but sometimes you need to take a bit more time to earn a long term client that will provide more business or a greater opportunity once you’ve proven your skills. Maybe you have a new employee that is taking longer to learn the ropes and will become a functional team member once they settle in, using less hours eventually. Don’t let these scenarios become excuses for poor performance, though. Monitor them closely and make adjustments as needed.
If these sometimes normal factors are not what’s affecting the job’s profit, it’s time to see why. Here are some troubleshooting questions to help understand where things may be losing balance:
- Time Tracking: is this happening properly and consistently?
- Labor Cost Increase: did you recently increase salaries of the employees on the job? Added benefits?
- Are your staff members hitting their utilization rates? This ties into proper time tracking - make sure they are allotting all of their time properly to each client.
- Overhead costs: are there additional costs that are throwing off the profitability of your job?
By managing these factors, you will be able to make the needed adjustments to boost your profitability overall. You can see how the intricate factors need to be addressed before getting the true overall picture. Imagine not tracking time. See how that would make this impossible?
The Bottom Line In Job Profitability
The key to better overall profitability for the service based business is individual job profitability. This means looking at each client/job individually to assess their success. To properly do this, you need to track and understand cost per billable hour, overhead per billable hour, as well as the essential basics; time tracking, utilization analysis, and profit margins. By measuring your costs against your rate for each job, you will be able to see where adjustments need to be made in order to improve. This may be simply charging more for your services, adjusting the time spent on the job, addressing overhead costs, or changing your business model to be better suited to serve more profitable clients (i.e. more skilled labor at less hours, vs. lesser qualified labor at too many hours).
Once you have mastered the art of analyzing job profitability, you will improve your business profitability, overall. Stay tuned, as we will dive into more intricate troubleshooting of job profitability in the coming digital agency focused articles.