Smart in 60 seconds! Today: Profitability
A new contribution to the series in the "The agency bloggers". We regularly, concisely and with practice-orientation explain the most important terms of agency controlling here. Today: Profitability.
In recent contributions about direct costs, overheads and contribution margin the keyword profitability was often mentioned. The calculation of profitability answers the questions: has the cost/effort of a particular project or a particular customer paid off? Are my prices appropriate?
The calculation of profitability - i.e. whether one actually makes money on a job or customer, is essential for agencies. The return on sales is the most relevant measure for evaluation of projects, because it puts profit in direct relationship to sales.
The return on sales is calculated according to the formula profit divided by sales. The higher the percentage of the result, the more profitable the project was. If the percentage is very low, however, or even negative, no surplus has been achieved and thus the job was not profitable. Ideally, the profitability of an agency or in individual customer projects should be at least 15 percent. Thus it is thus ensured that the company does not immediately fall into a skewed financial situation due to budget losses.
The profitability calculation can be complicated and time-consuming, especially if the controlling is outsourced externally and thus no direct access to all figures is given. Agency software helps to get quick answers to the question of the profitability of the entire agency, or the profitability of individual customers. It allows a detailed controlling and a vulnerability assessment in order to optimise the success of an agency, for example, by lowering the overhead costs. An observation of profitability over longer periods sheds light on the development of the projects or the entire agency, including whether the profitability is increasing or decreasing.