Margins in the agency sector are generally not brilliant. If you’re honest and pay yourselves a decent salary you’re doing well to reach double figures – so, if you turnover £1m, your EBITDA* will be £90k @ 9%.
In reality a lot of agencies are not doing that well – why is that?
There is no easy answer, but there are some common industry challenges that might help us to understand the situation a little better;
• A lack of commercial skills within agencies is a critical element. This impacts so many aspects of the business from establishing the rigour internally to control costs, plan and forecast finances, to negotiate purchases and your ability to chip another 5% margin here and there. It impacts your negotiations with clients, do you have the confidence to ask for an additional 5% budget or to justify the price that you’ve submitted when you come under pressure to cave in?
• There’s the challenge of managing projects to a profitable conclusion. It’s fine getting a £20k budget and having very little cost of sales but if you spend 500 hours delivering the job you’re not making the margins you should.
• How about the client service you offer, do you manage your clients or service them – there’s a difference. As an example, how well do you manage scope creep and how many clients contribute additional budget?
• And don’t get me started on free pitching….
We work in a creative space I know, where it’s tempting to think the ‘normal’ rules don’t apply, but they do – you’re running a business and if that business doesn’t make a profit you won’t be in business for long.
There’s a great deal to focus on in order to grow profit margins and that focus needs to be ongoing. By breaking the challenge down and addressing the detail behind the points raised above, you will make positive progress. From there you can get into a longer term plan and address any other areas in need of attention.
If you can make small improvements here and an incremental gain there, you’ll soon find they add up to a substantial margin improvement and double digit EBITDA will be more than achievable and importantly it will become part of your culture.
For an informal discussion about how Propelled can help with any of these challenges why not give us a call?
*EBITDA Earnings before interest, tax, depreciation and amortization (EBITDA) is a measure of a company’s operating performance. Essentially, it’s a way to evaluate a company’s performance without having to factor in financing decisions, accounting decisions or tax environments.