Posted by Codeless
Projects are the lifeblood of service-based businesses.
Trouble is, most are unprofitable.
This month you’re billing like crazy, barely able to keep up with demand. The next? Nothing on the horizon, with little cash left in the bank to show for all your work.
You were too busy to sustain any real promotion. And there wasn’t enough profit built in to hire or get some extra help.
The good news is you’re not alone. Most small consultancies or agencies go through these growing pains at one time or another.
Here’s how to avoid this never-ending cycle of feast and famine, by implementing a few simple techniques that will turn unprofitable projects into profitable ones.
Why small projects are unprofitable for growing agencies
Rand recently released survey findings from consultants and agencies, highlighting that the vast majority who answered the survey are:
- Sole proprietors / founders
- Have gotten started in the past few years
- With less than five other team members
- And revenues of less than $500,000
I empathize with this group because my agency has gone through this exact process and is coming out the other side. It’s tough and painful. But if you stick with it and implement some of these steps, there’s light at the end of the tunnel (like this recent Hilton project we worked on).
Trouble is, before you get to that point, you have to toil away in the minors, taking small projects that offer just enough to cover cash flow, but not enough to make a profit.
And that’s the sticking point. Unless projects are of a certain size, you won’t have any cash left in the bank to sustain yourself (or worse, payroll) for the following month.
Suffice to say, small projects put agencies in a tough spot because they (a) come in batches, killing your capacity, (b) eliminate the time required to continue promoting your fledgling brand, and (c) don’t leave enough profit to sustain the dry periods.
The first step is acceptance.
The second is to get organized with a simple sales forecast.
How to avoid feast and famine using a simple sales forecast
After spending six years and hundreds of thousands of dollars for undergraduate and MBA degrees, I had exactly one class in sales under my belt.
Sales forecasting is an essential yet neglected technique to help you get a basic handle on what’s coming in over the next few weeks and months (so that you’re able to plan capacity, which we’ll cover in the next section).
But here’s the thing: Many CRMs and sales software services promise these features.
However, we’ve found most to be…
- Overly complex
- Too limiting
- Or too expensive for what’s promised
So forget those, because even a simple Google Doc will do for now. What’s important here are the fundamentals, and a few key elements, including:
- Payment frequency
That’s pretty much it. No need to get overly fancy.
Plotting these things out will look something like:
An important side note here deals with payment frequency. You might need to be conservative when forecasting, meaning there’s a big difference between when you send an invoice and when you collect.
So if a project is closing mid-February, which is when you’re billing the last 50%, you’re most likely not seeing that cash until March.
This unenviable negative cash flow position of about 45 days will have a substantial impact on your ability to meet overhead, so plan accordingly. Managing receivables is another topic that makes me want to drink myself under a table, so we’ll leave it there for now.
Instead, the next step is to figure out your estimated hourly rate and begin jotting down forecasted capacity hours committed. This will help clue you into what each project will take internally to get the job done on time (and, more importantly, on budget). Again, it doesn’t matter how you do it, only that you do it.
Super easy, right?
This took all of five minutes and already you’re able to glean a few important insights, like…
Where’s the upcoming work? January looks good, but February and March are a wasteland.
Which leads you to…
What the hell is happening with lead gen? Your clients might take roughly six to eight weeks to close, so that means you’ll need to start January 1st (Happy New Year, BTW), f you want to see any projects kicking off on March 1.
But wait, there’s more!
How is all this work going to get done on time, while still leaving time for sales activities?
Ah, this is it. That wave of nervous anxiety, followed by sheer panic.
Now that we have a rough idea of what revenue looks like, let’s look at costs and capacity.
Complex capacity planning made simple
Figuring out who’s able to do what is another essential task, one that is often made unnecessarily complex.
Done right, it will help you determine how you’re going to keep current projects on the rails. And it will help you see how future projects can be slotted in seamlessly.
I’m pulling back the kimono a bit on the process we’ve learned as a result of committing every mistake in the book. That means it’s based largely on anecdotal evidence; nonetheless, the process has proven to be effective. Unfortunately, you can’t do much to change projects already being worked, so you will not be able to implement these tips on current projects . But you can control the stuff in the pipeline, and try to prevent the same mistakes from repeating themselves.
Here’s how to analyze new projects:
Step #1: Estimate time
The first step to analyzing new projects always includes estimating the time it will take to complete the work.
(As you get bigger, you’ll want to move away from hourly billing. But still, tracking hours internally will help you more easily align project costs.)
Chances are, this is someone’s best guess (obviously, not ideal).
But doing this relies on people actually logging into the software and using it to track both time and project management tasks. Accurately, and often manually, which becomes problematic as more projects are added.
Instead, Time Doctor is a simple, elegant solution that runs automatically in the background. And it saves you from playing babysitter.
You’ll get very accurate estimates going forward because you’re eliminating guesswork. Don’t make life harder than it needs to be.
Step #2: Calculate costs
Costs are as simple as estimated hours x hourly rate. Right?
Not so fast.
First, you’re probably missing anything for profit. Second, your estimates are probably too optimistic.
For example, development estimates are notoriously unreliable. Like, not only can they be in a different ballpark than your actual costs, they can be in a different state altogether.
Honestly, you should double it. Double the time estimate they give you and double the number of weeks you estimate it will require you to finish the project (unless you enjoy working weekends and 18-hour days to finish bug-ridden projects on-time).
That’s a bit dramatic, but it’s close to reality.
And it’s a hell of a lot more accurate than the initial estimate provided.
SEO projects are similar because you don’t really know how screwed up their technical errors are until you get under the hood and get your hands dirty.
Use some kind of multiplier against the original estimate for ‘padding’ or whatever you want to call it. Anywhere from 30% on the low side, and even up to 100% on the high end should do.
Then be sure to add some more for profit, shooting for at least 15-20%.
Oh, and don’t forget that whole project management thing. You know, the endless meetings and back-and-forth that take you away from actually delivering the work. Another 15% sounds nice.
Yes, this will bump up pricing dramatically (chances are, you’re undercharging anyway). Yes, this might kill a few future deals.
But it will also prevent a lot of future hassle too.
Sidenote: Many people *think* they have some of this step built into their hourly rate. Often those are wild guesses, though, and they don’t take into account project capacity. So it doesn’t hurt to take this extra step in addition.
Step #3: Forecast capacity
Now that you have a reliable picture of what your future projects will take, it’s time to figure out who’s going to be able to do them.
The critical mistake people make is in underestimating total project length, and overestimating individual capacity.
From experience, most marketers can handle three to four projects of any size concurrently. Developers can typically handle one to two at a time.
If you assume a standard 40-hour work week, typically only 30 of those are available (or billable). Of those available hours, a project might take up 25 to 75% of someone’s individual capacity.
So on the high end, someone might be able to dedicate 22.5 hours each week to any one project (75% x 30 = yay math!).
If your adjusted project estimate called for 160 hours (see above example), you’re looking at about seven weeks, which is a healthy, realistic time frame you can manage.
You can also jot this down for that individual, blocking the time to immediately see when capacity is free. For example, April 1st is when John can take on a new project.
Or, if a new project looks enticing enough, you’ll be in a better position to find a contractor or even a new hire. The longer timeline gives you the ability to vet quality people, you’ll have some extra wiggle room to play with thanks to the increased rate through extra padding, and the added profit should go straight to your bank account, not simply covering cash flow for that month like current projects do now.
Client management is all about managing expectations.
Those expectations need to be set ahead of time, preferably at the beginning of a relationship, prior to a project starting.
But realistic expectations are impossible to define if you don’t go through these basic steps of forecasting your revenue and planning capacity accordingly.
Does your team have a similar process you’d like to share?
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