Definitions
There are a lot of different terms for the same metrics depending on your region and industry. These are the ones we’re concerned about as well as some alternative or similar ones you may be familiar with. This list isn’t comprehensive but will give you the tools to use our calculator effectively and find ways to increase profit in your agency.
Gross revenue
The total amount of money your company brings in.
Other terms include:
- Total billings
- Revenue
Agency Gross Income (AGI)
Agency Gross Income is an industry-specific term for used to describe the total amount of money coming into your organization after any expenses paid to produce a client project (CoGS).
Other terms include:
- Gross profit
- Adjusted gross income
- Real revenue
Cost of goods sold (CoGS)
Cost of goods sold are the expenses your company pays to produce a client project.
Examples include:
- Contractor fees
- CMS and plugin licenses
- Font and other media licenses
Other terms include:
- Cost of Sale (CoS)
- Pass-through expenses
Expenses
Expenses are what your company pays for regardless of how much work you produce. They get subtracted from AGI.
Examples include:
- Rent and overhead
- Salaries and benefits
- Sales & marketing
- Administration costs
Other terms include:
- Operating expenses
- Overhead
Net profit
Net profit is all the money left over after all the expenses and taxes are paid. This is what we’re trying to maximize because it gives your safety, stability, options, and room to grow.
Other terms include:
- Profit
- Surplus
- Net profit margin (expressed as a percentage)
- Agency profit
Step one: Plot your existing revenue, size, and clients
Start by inputing your:
- Agency Gross Income (AGI)*
- Net profit margin
- Number of active clients per year
- Number of full-time employees (both billable and non-billable)
Ballparks are fine. A healthy agency should aim for between $160–220K in revenue per full-time employee. In other words, for every employee that works there and bills clients for their time or commitment, you should make sure your company is generating at least this much to accommodate growth, expenses, benefits, taxes, and profit.
Check out our healthy clients guide for more details.
*Agency Gross Income (AGI) is revenue after any pass-through expenses like contractor fees and client software licenses that you pay out immediately.
Step two: Trim off expenses
Want to increase profit? Start by controlling your spending and improving project efficiency.
If your profit margin is 10%, that means you spend 90 cents of every dollar you bill on expenses like labour, overhead, and taxes.
Put another way, you’d need to sell $10 to generate $1 in profit.
Let’s say you want to make $2 in profit. You could sell $20… or you could simply save $1 in expenses while still selling $10. In other words, saving $1 on expenses is worth $10 of sales.
When you save on expenses and production efficiencies, that money goes straight to the bottom line. Those savings are converted to profit and can be reinvested in your company for growth or distributed to your employees. Small changes can make exponential impacts.
Common ways to decrease expenses and increase efficiency
- Properly estimating projects (reduces labour overages)
- Better requirements gathering (reduces meeting time)
- Tighter handovers and approvals (reduces delays and labour)
Step three: Generate unexpected revenue
Even though expense reductions have a bigger impact, don’t sleep on revenue increases. There’s only so much you can trim from expenses (at some point you need to pay for electricity to keep your lights on, right?), but a well-trained project leader can generate a significant amount of high-margin revenue in unexpected places.
Creative paths to revenue
- Converting scope creep into paid features
- Upselling client accounts or retaining clients
- Adding a new revenue stream or recurring monthly service
Step four: Check out your profitability
When you reduce expenses you have a multiplier effect on savings. Save $1 on every project and you will notice $10–20 savings across your company each time. Save $1000 on every project and you will save hundreds of thousands of dollars for your company that can be redistributed back to your team or invested in company growth.
Project efficiency is the secret ingredient to a healthy agency. Finding ways to generate more revenue is the icing on the cake.
Reflect on how you can use this new moola
Use this extra money to hire, increase salaries and benefits, or reinvest in your agency
When you save on efficiency and generate more revenue through stronger client relationships you can:
- Work with fewer clients per year
- Hire more full-time employees
- Raise salaries
- Reduce working hours
- Shut down the office for holidays and team building (hello 4-day work weeks)
Want to play with your numbers and check out your opportunity to save and generate more profit?
Related resources
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