It’s Time to Check in with Your Profitability Numbers

How did 2019 end for all of you? Did you have any unexpected changes in revenue or profitability? Nobody likes to see those numbers sink. When you created realistic budgets and you’re tracking the right metrics, sometimes the outcome can be discouraging. I’ve seen agencies focus on their revenue and become obsessed with declines in that number. But if you’re only looking at revenue and not profitability, you can miss the trees for the forest.

Make sure you get a good look at what your profitability truly is. A great target for agencies is between 15-25%. This number varies depending on the company’s current client load, employee capacity, and other strategic decisions. For example, if you’re investing in your company internally, this could cause a temporary dip in the profitability numbers. When those numbers dip, I’ve seen many agency owners react in frustration and label the profitability numbers as bad. This happens especially when the numbers are unexpected. But maybe we can reshape what these numbers are telling us; maybe we can remove the “good” or “bad” qualifiers for a moment and listen to what the numbers are saying to us.

Reframing the Good vs. Bad Dilemma

When we ascribe an emotional value (i.e. good or bad) to an impartial profitability number, we cloud our critical thinking skills. Once labeled, we then make judgements on those numbers and can unintentionally create blindspots for ourselves. Profitability metrics are unbiased numbers that can be muddied when we try to superimpose how the numbers make us feel. Withhold those descriptors and we have an opportunity to learn from the results, even if they’re disappointing.

Let’s try a new approach.

Start with Curiosity

Our first questions should be: Why is our profitability lower than the goal we set? Is this new or part of a pattern? To answer these questions, you’ll need to look at your billing rate, utilization target, operating costs, and other metrics that affect profitability. This will help you identify all the factors that affected that unexpected number. If this is a new trend in your metrics, look at the changes your company made. If you can see and understand why the change happened it is easier to not label it bad. Is your profitability low because you did a full rehaul on your own website? Well that’s a win!

Once you’ve identified the reason the numbers dipped low, you can make adjustments to bring it back up. In the example above, you can predict and account for the investment of redoing your site. Then you can expect profitability to rise when your employees pivot back to client work. Play around with adjusting metrics that help you trend toward higher profitability. Utilization rate is a great place to start. Push your team to increase their utilization rate and get closer to the goal! Getting closer to that target will help you increase profitability without having to go through the hassle of changing your billing rate. If we get caught up in ascribing numbers as bad or good we might miss the wisdom they are giving us!

Saving Your Energy for the Important Stuff

While I don’t think it’s wise to pretend the numbers are better than they appear, I think we can get too caught up in discouraging numbers or glaze over them altogether. I’ve seen too many people stick their head in the sand instead of making impactful change that will point the agency in the right direction. As an owner, you only have a certain amount of time and energy to pour into your company. Acknowledge the hard truth of the metrics, but don’t let yourself wallow or react in fear. Use that emotion to make positive changes for you and your team!