Service based organisations aren’t as easy as manufacturing business’ to calculate if they turn a profit each month. Manufacturers know the cost of the raw goods then add in the manufacturing and operational costs to arrive at a cost per item. This difference between the manufacture cost and the selling price is profit.
An agency doesn’t have set costs and the price may be different for every job. There are hours with varying rates of pay for staff working on projects. Sure it’s a bit trickier for recruitment agency owners to work out if you’re making money or you need to make some radical changes before you find your business surviving because of the overdraft.
If you can get staff costs right you are 80% the way to calculating profitability. Firstly you will need to calculate the hourly cost of each staff member. You can divide a staff member’s annual salary by the number of hours they’re paid for just don’t forget to take into account their superannuation, annual leave, sick leave and any other costs involved in having staff. Total overheads such as building expenses, utilities, insurance and miscellaneous costs are added up and divided by the number of staff. When the salary and overhead costs are added together you have the full cost of doing business.
Use the following formula to calculate the hourly cost of each employee.
Annual overheads: £15,000
Divide by the number of staff employed (10 employees): £1,500
Annual salary of one employee: £45,000
Adjusted to include employee’s share of overhead costs £46,500
Number of hours worked in a year (37 hrs per week x 47 weeks after taking into account holiday and sick leave): 1,739 hours per annum
Hourly cost of employee: £26.73 (£46,500/1,739)
Staff need to keep track of billable hours against projects they work on. Even admin staff can bill part of their time against projects they are often completing tasks for. Staff hours can be tracked by entering them into a software system or app. Many of our clients use eBoss to keep track of the hours on their projects. Otherwise you can use an app or just pen and paper to track what you spend your time on.
At the end of each project you can analyse whether the job was completed at a profit or loss. Unfortunately, many recruitment agencies are not able to complete this for many months until after the guarantee has lapsed. However, you may decide to do an initial project profitability calculation after the placement and another in a few months’ times to take into account follow up calls/meetings etc to see how much profitability has reduced in the final months.
Determining your Fees
Once you have completed your calculations on staff and overhead costs and you’ve analysed projects for a few moths you can use the information to not just check how profitable the agency is, you can also use it to set your fees.
For example, you can use the profit mark-up method to quote a job. After calculating all the costs you expect to incur, add a percentage mark-up for profit.
How to Improve Profitability
If profitability isn’t what you hoped it would be, you need to make some changes to turn it around. You have two basic choices. Either put up your client fees or reduce your costs. Neither option is easy but far better to go through the pain now than waiting until later when you have to take drastic measures.
Many agencies would say that increasing fees isn’t an option in the current climate. And pricing yourself out of a job is no way of turning a profit.
The only option left is to do more with less. Take a hard look at your costs and decide what can be cut. Look at renegotiating the terms of contracts and expenses. Spend some time calling around for a better price on agency costs like telephone contracts, internet usage, insurance, subscriptions that are no longer needed, lease or rent. If a staff member leaves or wants to drop back to part-time hours see if the remaining staff can cover their workload, even for a short-time before you re-hire.
Decide if you are over-servicing clients. Small or new agencies can get in the trap of doing too much for clients. Sure it’s important to keep clients happy but if you are offering services that they don’t use or appreciate then maybe it’s time to cut them out and save yourself a few valuable hours that could be spent servicing the next client or on business development looking for the next client.
Cost savings can be achieved by introducing better systems and procedures across the agency so that tasks aren’t unnecessarily handled by multiple people. Giving staff more authority to get jobs done using their own initiative can work to reduce the load on their superiors.
Don’t leave it until the end of the year when your accountant prepares your financials to work out if your agency is profitable or not. For many small businesses this can be too late. By putting together some simple spreadsheets you can keep an eye on profitability and put in place measures to improve it.