Have you realized your operating profit, or net income just isn’t where it needs to be? According to David Baker, you should be shooting for a target of 15 to 20% of your agency gross income or gross profit. This means that your net income should be 20% of all of your fee income (income related to billable hours of employees) and markup (any mark up you make on your outside services). I am sure you are wondering how best to start tracking towards that 20%.

First and foremost, if you haven’t reviewed your expenses in your detailed income statement recently, you better get on it! You wouldn’t believe how many things you are probably paying for just because nobody knows you don’t need it anymore. Many bookkeepers continue to pay things because nobody has told them to stop. Make sure you have an approval process for credit card expenses as well. These can get out of hand very quickly!

Second, review your mark up on outside expenses. Many agencies continue to be full service vendors and do not take into account all of the time it takes to manage these outside resources like printing, telemarketing, etc. Keep in mind that you should be charging at least 11% just to cover the risk you are taking by running these expenses through your company. You also need to charge in services any time it takes you to manage these outside expenses.

Third, look at your revenue. Are you actually charging enough for your services? Most of the time the answer is no. Revisit your agency’s positioning and see if you need to reposition your firm in the marketplace. Are you a commodity? Do you have a service that they can’t get anywhere else? Are you lowering your brand by offering commodity services in addition to your niche service? If so, consider a rebrand and phase out your commodity services as cash flow allows.

In short:

  1. Review your expenses in your detailed income statement for unnecessary expenses that can be sunset
  2. Review your mark up on outside expenses, charging at least 11% for risk
  3. Audit your pricing model, making adjustments for value based pricing