How to Truly Define and Measure Client Profitability in Creative Agencies

— May 11, 2017

Your highest paying clients aren’t always your most profitable. While this statement may sound illogical at first, much more goes into determining and measuring client profitability across creative agencies than revenue generated from your biggest retainer accounts.


Often, such factors as budgets and project scope take center stage when discussing profitability. On the other hand, soft resources—like productivity and efficiency—are more difficult to track. However, they make all the difference when calculating project profitability. Many times, an agency’s biggest projects have the smallest yields for clients, while smaller, more frequent projects have far less overhead and a greater return.


Reports can identify important information to help maintain positive agency-client relationships, optimize budgets, track project processes, and identify areas for opportunity. Tracking and reporting are among the most critical functions for creative agencies of all sizes. From project health and client satisfaction to budgeting and resource allocation, reporting can help an agency work smarter—not harder.


Knowing what and how to measure impacts your bottom line. With the right automated, integrated tools and technology, tracking, measuring, and reporting become easy. To help illustrate how to truly define and measure client profitability, let’s review some key components of every creative project—and the corresponding reports that help make sense of data.


Project Overview & Health


Project status reports are tricky. While they should ideally follow consistent, standardized templates, more often than not, stakeholders tend to have their own idea about what should be included. From metrics and statistics to dates and other information, many clients ask for something different.


To help standardize the process, it’s important to utilize tools that provide a detailed view into project health while also allowing agencies to customize them with multiple fields. Color-coded health meters for project tasks and financial status help managers get an instant overview of their projects. These reports compare and compile budgeting and actual spending in one simple report that multiple users can share and manage based on user permissions.


Robust project health tools should indicate a project’s real-time budget versus actual spend. They should also produce “burn reports” to show how much work is left compared to how much time is allocated for a project. When measured correctly, project health should not require users to wait for a project to be finalized to gain insight. Instead, it should provide one centralized location where budgeting and actual spending are grouped together.


Profit & Loss


For a financial tool to be truly all-encompassing, it must provide robust reporting capabilities that include all financial aspects, including overhead. After all, that monster of a project may not be as profitable as you thought it was when you first sent out a contract. Project profit and loss (P&L) reports enable agencies to view all their financial aspects in one place and gain an overview of client profitability. Basically, they deduct the expenses of goods or services sold from total sales revenue to calculate gross margin and provide an overview of estimated, in progress, actual, and write-off expenses.


These detailed reports also incorporate overhead allocations that, in turn, help businesses arrive at the net profitability of their projects. Project P&L reports should be generated at least monthly or quarterly and even weekly in some cases. By providing true financial reporting, P&L reports enable agencies to calculate real profit margin across projects to determine the true profitability of clients.


Chargeable Hours


As creative service providers, billing time is an integral part of you and your team’s work day—your team members track their time diligently and work hard to meet billing quotas. Chargeable time refers to any time your agency can bill a client for using your services. In a billable hour agreement, the client and an agency generally agree upon an appropriate rate for all projects and campaigns.


Chargeable hour reports allow agencies to compare actual time on billable and non-billable tasks against company goals. By establishing labor budgets, they enable account executives, executives, and resource managers to compare logged time to budget goals in real time. In turn, this illustrates how well a project team is moving toward these margins—and when and where an agency is profitable.


Realization Rates


There’s more to client profitability than billable hours. Realization rates help agencies outline profitability by measuring the difference between the number recorded as billable time and the percentage of that time the client pays for.


An agency’s realization gap is the total number of billable hours not being billed, multiplied by an average or blended hourly rate. In plain English, it’s the number of hours you are not being paid. While all agencies strive for a realization rate of 100 percent for each project, they’re often lower than expected:



  • Some clients may not pay the invoice.
  • Some clients may request a fee reduction.
  • Some clients may even contest your billable time entries.

Having a sound realization reporting process in place helps agencies see the actual hourly rate earned on projects. By displaying rates based on filters and options, agencies are able to maximize their reports, find their true realization rate, and make decisions based on actual numbers—without hours of calculations.


Labor & Resource Analysis


Just as keeping your entire agency on the same page is crucial for managing interactions across all departments, labor and resource analysis is vital to keeping your client’s financials in check. Project labor analysis reports highlight the total hour billing or write-off summaries per project, task, and team member. In addition to tracking the quantity of time being used, however, it’s equally important to measure the quality of time being used by your resources. These rates provide management with the following information:



  • How many hours staff members have logged time for a specific project and task
  • The hourly rate for each project and task
  • How many hours have been budgeted
  • How many hours have been billed

It’s important to note that project labor analysis rates also show a project’s qualitative output compared to its quantitative hours.


 

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