Running a business isn’t easy. Whether it’s software development, consulting or communications, demand is growing all the time, and so is the competition.
Between satisfying customer expectations and striking a balance between recruitment and sustainable growth, you can’t have the added concern of eroding profits, or worse: not having a clear picture of where your agency or practice stands in terms of profitability.
That’s why we’re answering some of your most important questions:
How to calculate your margins and, more importantly, how to increase them?
What is a company's margin?
Margin is generally calculated as follows: your company’s profit (customer revenues minus all your operating costs) divided by revenues (commissions, fees, bonuses and other remuneration).
How can you easily calculate your company's margin?
As a business owner, you’re constantly faced with unforeseen costs and changing budgets, so calculating your margins can be extremely difficult.
Remember that client who brought your agency a profit of 15,000 euros with a margin of 25%? Add to that a few returns and campaign modifications from that same client and your profit drops to 7,000 euros.
To make informed strategic (and tactical) decisions, you first need to know your company’s actual margins.
In a survey conducted by The Wow Company for BenchPress 2021, only 80% of agencies reported making a profit in 2020, while 14% recorded a loss and 6% broke even. According to The Wow Company’s survey, average gross margins were 44%, while agencies should be aiming for a gross margin of 50% or more.
In the same survey, it is interesting to note that over 61% of agencies received funding in the same year. This raises the question of how to manage these additional revenues.
"Profitability is the cornerstone of a sustainable agency. Whatever plans you have for your future, you won't get very far if you don't make money. To get an idea of what your margins should be, you need to enter all your expenses into your management tool: staff costs, overheads and any additional expenses your business generates."
Let’s take a look at these expenses:
1. Personnel costs (salaries and other)
Entering your employees’ costs into Furious is one of the first and most important steps in getting a clear picture of your profitability. By adding their number of hours worked per week and their monthly salary, you’ll get an estimate of their hourly cost. and ultimately their YMPE.
2. Freelancers
When your agency lands a new contract and you don’t have enough in-house resources to cover the load, you call on your freelancers. Furious keeps track of all your project-related purchases.
3. Overheads
Overheads are not just your company’s fixed and variable expenses. In the case of service companies, overheads are also all non-billable costs. These may include :
- HR salaries
- salaries of office managers (and they are indispensable!)
- marketing / SEO / internal budgets, etc.
- Accounting
- pre-sales expenses
4. Any additional expenses
Your stay in Cannes or participation in a trade show, being expenses linked to your own corporate communication, can be considered as additional expenses.
Once you’ve integrated all your costs into your ERP/management tool, you need to think about how to offer rates that will not only cover your expenses, but also enable you to be profitable.
Why is it essential to analyze these costs in detail?
Analyzing your costs in detail is much more than a simple accounting step. It’s a strategic step that can give your company a significant competitive edge. Here’s why you shouldn’t neglect this step:
- Deep understanding of your business: By dissecting each cost, you get a precise view of where every euro goes. This helps you understand which items cost the most, and why.
- Resource optimization: By identifying areas of overspending, you can allocate your resources more wisely, maximizing return on investment.
- Improved pricing strategy: A thorough understanding of your costs enables you to set your rates with confidence. For this reason, it can be a good idea to draw up a price scale tailored to your services, to better cover your expenses and optimize your margins.
- Loss prevention: By keeping a close eye on your costs, you can quickly identify and correct any leaks or financial inefficiencies, protecting your company’s financial health.
- Better decision-making: With a clear picture of your finances, you’re better equipped to make strategic decisions, whether to invest in new technologies or hire more staff.
So, if you aspire to see your business or consultancy prosper, taking the time tothoroughly analyze your costs is not only recommended, it’s essential. This not only positions you for success today, but also for anticipating and successfully navigating future challenges.
Why not use Excel?
Simply because Excel offers a “flat” view of your projects and costs: you enter your project budgets on one side, and your costs on the other. A well-adjusted formula and you think you have a fairly accurate view of your profitability.
Then all it takes is a few unforeseen expenses (more time spent than planned, an unanticipated external purchase, overheads that increase without having been anticipated (hello toilet leak), pre-sales that were over-invested and yet lost… And you juggle with the additional expenses… You forget some, you underestimate some (the CJM of these 2 new account managers is not the same…).
And your margin has melted away without you even realizing it, or realizing it in time!
So rather than Excel, why not get a tool that lets you monitor your profitability by customer and by project? In a system that will take into account all your expenses, all your overheads and all your additional costs… And that will generate real-time reports that will tell you what you need to decide next.
"Using a very user-friendly and effective interface and UX, Furious is proving to be a fearsomely powerful, creative and innovative tool. After just a month and a half, we finally have a clear and pleasant view of all aspects of my company's business.
Piloting really becomes a pleasure, whatever the position, and the whole team has taken to the application quickly and enthusiastically."
Furious customer view
How can you maximize billable time to boost your company's margins?
To determine how much you should charge, you need to answer the following question: what are your company’s actual occupancy rates?
Perhaps you’re already using some tools to combine data and determine your occupancy rates. Perhaps you have no data available at all.
There’s no standard way of measuring your occupancy rates, but one thing’s for sure: it’s essential that your employees track their working time, whether billable or not, in a tool that will then show you their level of availability and occupancy.
In general, employees in service companies work an average of 120 hours a month, which works out at around 1,440 hours a year (including vacation, sick leave, training, etc.). If your actual occupancy rate per employee is around 75% on an annual basis, that’s a pretty good result.
Here are our top tips for keeping track of your employees’ time.
Once you have a clear idea of your occupancy rates and all your expenses, it’s time to use a simple but proven formula to calculate how much you should charge for the services you offer.
Basically, you first take an employee’s gross monthly salary, multiply it by 12 months, then multiply that figure by three.
This gives you an employee’s gross annual salary multiplied by three.
Next, divide each employee’s gross annual salary by the number of hours actually worked per year. Let’s say the average number of hours worked is 1 ,440 for a 40-hour week.
By dividing the gross annual salary by the hours worked, you’ll get the hourly rate you need to charge for your agency to make a profit.
Use a single tool to boost efficiency and margins
Having all your financial data, opportunities, budgets and project communication in one place, in a reliable and secure space, helps you increase your company’s profit margins by reducing the amount of time that is usually wasted:
- Unconsolidated communication on projects and tasks across multiple tools.
- Resource planning data in 2 or 3 different systems
- Financial information in several places
- Administrative work related to invoicing and payroll on various platforms.
Profitability information in Furious includes your overheads, your employees’ ADCs (Average Daily Costs) and all additional expenses… all automatically and in real time, thanks to a business management solution that centralizes this data and enables you to optimize your strategic decisions!
Why is differentiation essential in the competitive consulting landscape?
In a world where information is at your fingertips and skills are multiplying, standing out from the crowd is becoming a necessity for any consulting firm. Here’s why differentiation is key:
- Market saturation: With a growing number of consulting firms, without a unique value proposition, you risk drowning in the mass.
- Customer expectations: Customers are looking for solutions tailored to their specific needs, not generic ones. Differentiation enables you to offer this personalization.
- Adding value to your expertise: specializing in a field or adopting a unique approach enhances your expertise and attracts customers looking specifically for your know-how.
Current challenges facing the consulting sector
- Technological adaptation: In this digital age, consulting firms need to keep up with the latest technologies to remain competitive.
- Globalization: Serving a global customer base requires an understanding of local markets and cultural challenges.
- Changing expectations: As businesses and industries evolve, firms must constantly adjust their services to meet new needs.
How do our tips align with the changing needs of the industry?
- Continuous monitoring: We keep abreast of market trends to anticipate future needs.
- Ongoing training: Our team is constantly trained to ensure that we offer the most up-to-date and relevant solutions.
- Close collaboration: By working closely with our customers, we ensure that we understand and address their specific challenges.
How do consulting firms set their rates?
Consulting pricing is not an exact science, but the result of a combination of factors:
How is a consultant's daily rate determined?
- Experience and expertise: The more experience a consultant has, the higher the rate.
- Market demand: In high-demand areas, rates can be higher.
- Operating costs: A firm's cost structure also influences the rate.
The importance of analysis in pricing
- Evaluating costs: Understanding costs in detail enables us to set competitive rates while guaranteeing a profit margin.
- Competitive analysis: knowing your competitors' prices enables you to adopt an appropriate pricing strategy.
How does the pricing formula adapt to the level of expertise?
- Specialized services: Services requiring special expertise may justify higher rates.
- Added value: The more value a consultant brings to a project, the more he can charge.
- Return on investment: If a consultant can demonstrate that he or she will bring considerable benefits to a company, this can also influence pricing.
What is the correlation between the gross rate and a firm's profits?
The gross margin rate gives an idea of the gross margin generated by a firm in relation to its total revenues. The higher the rate, the higher the margin. It’s an indicator of the firm’s ability to manage costs effectively. So, how does this relate to profits?
- Operational efficiency: A high gross rate means that the firm retains a higher proportion of its revenues after covering its direct costs. This can translate into higher profits if fixed costs are well managed.
- Financial flexibility: A high gross interest rate provides a certain amount of leeway to cover other expenses, invest in development or manage difficult times.
EBITDA analysis: how to interpret these figures for a consulting firm?
EBITDA (earnings before interest, taxes, depreciation and amortization) is an indicator of a firm’s operating performance.
- Financial health: A positive EBITDA indicates that the firm is operationally profitable, irrespective of financial and accounting factors.
- Sector comparison: Comparing EBITDA with other firms can give an idea of the firm's relative performance in the sector.
Staffing rates: how do they affect profitability?
The staffing rate refers to the proportion of consultants currently working on billable projects.
- Revenue maximization: The higher the rate, the higher the revenue generated.
- Cost management: A low rate may indicate a surplus of staff, resulting in additional costs for the firm.
How to stand out from the crowd?
Consulting compensation has evolved over the years, reflecting changes in the industry and increased competition.
Current trends in consultant compensation.
- Performance-based compensation: Many firms are adopting performance-based compensation models to attract and retain top talent.
- Non-financial benefits: Benefits such as flexibility, training and well-being are playing an increasing role in compensation packages.
Consulting as a Service (CAAS): the future of consulting?
CAAS is an approach where consulting services are offered on a subscription basis, similar to SaaS models.
- Flexibility for customers: This enables companies to access consulting services on demand, without making long-term commitments.
- Recurring revenues for firms: This offers firms a stable source of income and a long-term relationship with customers.
Consultant price list: why is it crucial to have one?
- Transparency: This gives customers a clear idea of the costs associated with each level of expertise or service.
- Standardization: This facilitates pricing and ensures a consistent approach for all customers.
- Competitiveness: A well-established can help a firm position itself advantageously in the market.
Want to boost your company's profits?
Here’s what you need to know from this article:
- If your company's margins are too low, consider moving to value-based pricing, re-evaluate your occupancy rates per employee, and rethink your current resource planning;
- Use a proven method to calculate how much you should charge for your services;
- Count your non-billable time as overhead.
