Episode 302 - Featuring Lee Matthew Jackson
January 28, 2021
Knowing how much things cost is essential to the profitability and growth of your agency. Many agency owners quote on web projects without a clear understanding of their business costs or how that relates to the project they are quoting on.
In this episode I break down many of the key costs an agency will incur to assist you in analysing your cost per profit ratio. Stay with me here, that might sound boring BUT what if the outcome was:
I reckon it’s worth this episode plus a few hours of your time to set yourself up for success in 2021.
We will cover
This episode has a project upgrade available that lists out in detail the costs we track for our agency for you to fill in.
Podcast – Episode 122 – How to manage costs in agency life
Podcast – Episode 215 – How to work out your hourly rate
Podcast – Episode 255 – Managing your agency finances
Podcast – Episode 281 – Managing debt in your agency
Podcast – Episode 301 – How to run a lean agency
Want to get your hands on our FREE profit and loss template?
Grab your copy below:
Welcome to the Agency Trailblazer podcast, this is your host Lee, and on today’s show, we’re going to discuss how much it costs to run a web design agency. Before we continue, I’d love to thank our sponsors Cloudways. They provide a managed cloud hosting through some of the biggest players in the industry. They are the company that we trust our agency with. You can find out more information over on agencytrailblazer.com/cloud ways.
Right, let’s get stuck in. Whether you are starting out or you have an established agency knowing how much things cost is essential for your profitability and of course, for the growth of your business. Now, so many agency owners quote on Web projects without a real clear understanding of their overall business costs or how that even relates to the project that they’re quoting on.
For example, I may know I have multiple members of staff, but I don’t potentially understand how they impact the cost of the project and what therefore I should even be quoting.
So in this episode, we’re going to break down some of the key costs that an agency will incur to assist you in analyzing the cost per profit ratio and stay with me here. I know that sounds pretty boring, but what if by listening to this episode and consuming the other episodes that I share with you today, it will result in less projects needed, less stress, more profitable web builds, a happier team and you will be a much less stressed agency owner.
I reckon it’s worth a few minutes of your time to listen to me drone on about some of those costs in your business and then maybe a couple of hours or so yourself analyzing how your business is currently set up, seeing how you can improve your overall efficiency and profitability, and getting a better understanding on what you should be charging for all of those projects.
We’re going to list out some of those key categories you should be considering and also be sure to check out the free content upgrade over on agencytrailblazer.com where you can access a full spreadsheet of all of the costs we have tracked within our agency. It will be a spreadsheet you can copy and then develop for yourselves, because obviously you’re not going to have all of the same costs as us. You will possibly need to add or remove items, but be sure to check that out over on episode number 302 on agencytrailblazer.com.
The core categories that we monitor are one-off purchases, standard costs, variable costs, subscriptions, professional costs and the unexpecteds. Whilst they all seem pretty self-explanatory, let me give you a little synopsis per category. Our one-off purchases are going to be those things that we only need to buy once in a blue moon, just like you only need to buy a car once every few years. Your standard costs will be those regular recurring costs, things that you have to pay out for every single month. They’re pretty standard to any form of business that could include, say, your utilities, etc. Subscriptions are again something that’s a regular payment that could be yearly, that could be monthly. But they’re going to cover those subscriptions, such as software hosting and so on.
Variable costs are, as they suggest, variable as they change depending on the needs of the business. That could be your office equipment, it could be travel, it could be entertaining, etc. Professional costs could include consultancy or an accountant. And finally, unexpected again is exactly what it says on the tin, unexpected costs and we’ll explain what that means shortly.
First, let’s take a look at those one-off purchases. These are things that may come around every two or three years, such as computers, such as a new printer, such as office furniture. These are costs that are harder to predict, but certainly something that we can plan for, something that we can at least set a budget for. For example, I understand that my current I.T. equipment has been depreciating over time. Most of our PCs are two to three years old, and I’m probably due an upgrade within the near future.
So it’s worth me budgeting for the upcoming year to be spending on some tech. Maybe that’s going to be a new server, a couple of new machines, whatever that looks like. But it’s good for me to budget and I kind of get confused here. But an accountant will talk to you about all this, but you can kind of cap x and spread that cost over so many years, etc., with its depreciation value, yada, yada, yada. I haven’t a clue what I’m talking about at this point, but my account is really helpful with that. So talk to your accountant about those specific items.
There might be other one off purchases as well. For example, you might be looking at getting some consultancy. Maybe you want to shift direction as a business, maybe you want to add a new service and you just need to get someone in. For example, at Event Engine we have been investing in some consultancy around software as a service so that we can understand how to launch a brand new software as a service product, which is very different to what we’ve done in the past, where we’ve provided the service along with our software. So that’s some one-off consultancy that we need to pay for. So what are those one-off purchases that you may have within a year? And what are those more predictable purchases that you can kind of plan for, such as hardware, et cetera?
Next, we move on to our standard costs. A great exercise in any agency is to take a look at the standard costs of your business. So, for example, we have to track our rent, our business rates. We have buildings and contents, insurance. We also have insurance for our employees. That’s our professional indemnity as well for our clients. There are all sorts of things we as a business have to continue to pay out for. We also have our salaries. We have a fixed number of staff. We understand what their salaries are so we’re going to be paying out for them regularly and to throw into the mix we also have the utilities that go with having an office such as our electric, the water, the broadband. We have our phone lines. We also have mobile phones for our directors. We’ve got broadband costs. If I haven’t said that one already, we have tax that we have to consider for. So we have something called VAT here, which is every quarter we need to put 20 percent away each invoice. That’s how we manage our VAT to make sure that we’ve definitely got enough to cover that and we also then have our corporation tax as well. We also have PAYE tax for the salaries.
So there are certainly things we need to make sure we have costed for and planned for in our spreadsheet. A reminder in Episode 102, all the way back on March the 19th, 2018, I discuss the benefits of a profit and loss spreadsheet. This will be ridiculously helpful to you in monitoring everything that you spend and gives you the ability to project all of the costs you’re going to have over a year and you can then compare that with your predicted income and see how profitable your business would be overall.
So I’d encourage you to check out episode number 122. There is a link in the show notes agencytrailblazer.com, and there are some links to some resources, including a profit and loss template. For us, understanding our profit and loss is essential. Also, be sure to check out number 255 agencytrailblazer.com again and there we do a higher level overview of the benefits of managing your agency finances and kind of discuss end to end what we do. So definitely worth checking that out as well.
Next up, we have subscriptions. What are you paying out for on a monthly or yearly basis? Like I said earlier, we have software licensing to start off with. For a long time, we were in the Adobe ecosphere architecture, I don’t know, in that kind of big adobe bubble and it was costing us an awful lot of money, especially as we stepped up. We had to pay more monthly licensing. We also have Google Workspace, so we’re paying monthly for that. We’ve got our accountant software costs. So we’re currently using Quickbooks to manage all of our finances.
We host our own websites, but we also support clients with their websites, therefore, we do have an awful lot of server costs there’s a lot of ongoing, repeatable, predictable as well, subscriptions that we need to make sure we monitor. And when I say make sure we monitor, I mean really make sure you keep an eye on how much that is every month and make sure that that doesn’t start to creep up. It’s really easy to add a quick time tracking tool or a little upgrade here or there and before you know it, you’re spending thousands per year just on software licensing because it may seem like a small amount at the time when you’re incrementing to the next level on the software as a service product. But all of those little increments really do start to add up.
I can’t remember how many years ago it was now maybe two or three years ago when I shared on one of the episodes where we’d saved 4000 pounds in one year by cancelling a whole load of subscriptions and downgrading a whole load of levels because we weren’t using all of the stuff that we were paying for and we could save all of that money.
It’s important that we do save money because if we can save money, we can be more profitable as a business. I know that sounds freakin obvious, but most people go running after more clients rather than looking at their own costs and seeing how they can improve on those. Remember, you can check out our spreadsheet where we list out as much as we possibly can within reason the costs that we have, which hopefully will prompt you as you are going through your bank statements and really starting to unpack how much it’s costing you to run your agency.
Be sure to check out that free content upgrade in the show notes as we move on to variable costs. Whilst variable costs may be a little harder to predict. We can apply some rules to them, for example, for say office equipment we can look at previous years and what the spend was. That should give us a fairly decent model to understand what might be coming up over the next 12 months, making any adjustments for, say, an increase in staff or an increase in projects or perhaps a change in your workflow and processes.
You can also take a look at what’s involved in certain activities that you engage with. Perhaps to generate leads you need to attend certain events each year. So understanding how much that’s going to cost you is essential. Maybe there is an average cost for converting a lead. Again, look at the past to help you understand how much do leads on average cost you. What’s involved in converting that lead? Do you have to travel to them? Do you need to entertain them? Do you need to buy food, etc.?
Look to your average conversion. How many leads did you need to nurture to eventually convert the right amount to cover your costs and make profit? Because again, you can use your past history. All of this history should be available from your accountant. You can look at that past history and make some average projections or some guesses at how much it’s going to cost you over the year to get leads, to convert leads, to run the day to day of your business, say with office stationery, etc.
So your historical data is always, always, always useful. I understand if you are a brand new business, you are not going to be able to look at your historical data. However, the hack is talk with a trusted friend who may already be running an agency and take a look at their costs if they will allow you or at least make some educated guesses for year one and then sanity check them with another business owner. I remember when I was making my very first projections, I was predicting far too low a number.
So having another business owner taking a look at the numbers I had was super, super important. And they were able to put me on the straight and narrow. And in fact, I still underestimated. I think the rule of thumb is anything you estimate time’s it by three minimum, because that’s probably what it’s going to end up costing you. But that’s super helpful or super helpful. Exercise for a brand new business is to kind of work out some average costs.
So, again, you can then work out what you’re going to charge, how many leads you need to convert, etc.. I’ve realized that, etc. is probably my filler word and it gives me a little bit of time to think as I get to the next topic, which is your professional costs, there will be a whole range of professional costs. Some of these will kind of come under the standard costs bracket as well. So again, your insurances, etc. But other professional costs would include your accountant. What are you spending on your accountant? Are you investing in contractors or freelancers? Do you have any other costs like cleaners, etc.? So there are a whole range of professional costs that are essential to the running of your business and things that you need to track.
We like to separate them out from our standard costs specifically so that we can see under a category how much we are spending on those specific extra services. So whilst we would tag, say, accountancy under our standard and our professional costs, it just gives us a way to categorize what’s going on and then we can see what the numbers are on those core areas.
And finally, the unexpected. How on earth can you predict the unexpected? Because it’s unexpected, right? Well, that’s the beauty of the unexpected category, because what we do is we apply 30 percent on top of everything that we’ve already projected predicted. So we will budget 30 percent of everything for the unexpected. That could be a new employee we need to help us on something. That could be to rebuild the roof, because Hurricane Dennis in the UK blew the roof off our office at the beginning of the year, although thankfully insurance covers that.
Whatever the unexpected is, it’s always great to have in your budget as a business a pot, as it were, set aside for things that you cannot predict. We do this in the home as well. We have a pot in case the boiler breaks or a rainy day or or whatever else. But it’s really good if you can budget for those and include that as an estimate within your costs for the overall projected year.
Now, the reason we’ve gone through all of these sorts of costs under all of these categories is it’s essential to understand your costs so you can then essentially reverse engineer how to cover those costs and to get the profit that you are looking for.
If your costs are 100,000 pounds a year as an agency and you want to make a profit of fifty thousand pounds that you’re going to put into your back pocket, then you obviously need a revenue of 150,000 pounds minimum.
Therefore, with the resources that you have, how can you generate 150,000 pounds for you to be able to put that 50K in your back pocket? Are the prices that you charging enough for you and the existing team that you have to output that many websites or services to get that 150K without you hitting the wall? And I recognize that 100 and 150K is a ridiculously high number, but my math skills are terrible on the fly. Let’s do that again.
If you are a small team of, say, five people and you’re looking to turn over 300,000 pounds to cover all of your costs and give you at least that 50K profit, then again, you need to look at do we have the resources to be able to do enough work to the value of 300 K that will give me that 50 grand in my pocket as the agency owner, this helps us to understand the prices we should charge and the potential losses we might be making on our work.
Now I discuss oh, which episode is it? Just working out your rate. Let me just do a quick search live on the podcast and I talk about calculating your hourly rate. There it is, episode number 251. I actually break down what’s included in building a website and I talk about your available hours versus your capacity, your sales target and your billable hours, i.e. your base rate and also your base rate plus margin.
So I go into a whole load of detail there. I highly recommend you go ahead and check that out as well. That will help you understand the concepts of understanding your costs, understanding what you want to make, understanding the resources that you have available to you as a business, understanding the products and services that you are selling to your target client, and therefore enabling you to set up some clearly defined targets which will help you as a business meet those targets.
Let me try and simplify that, because I realized there was a whole load of words there. Let me simplify that with that agency that needs used to make 300K if they want to turn over 300K and take fifty grand profit to go into the owner’s back pocket, then they are going to need to sell, for example, three 100k websites in a year. That’s super simple, I know, but if you can’t sell a website for 100K, which I recognize is probably very difficult. How about 650K websites or do we need to divide that again? And again, I’m simplifying it probably a little bit too much, but that’s essentially the idea. What products and services do I have? What do I need to sell them for to cover all of those costs? And also to allow me that 50K or that money in my back pocket.
I’ve potentially oversimplified this, but don’t worry, there are a whole range of podcasts on agencytrailblazer.com that are going to help you. You can take a look at episode number 122, like I said, how to manage costs in agency life.
We also have episode number 255, that’s managing finances in your agency. I mentioned episode number 215, talking about working out your hourly rate and understanding your available hours versus your actual capacity, etc.. A recent episode, it was only last week I talked about how to run a lean agency that’s getting your mindset right, et cetera. Episode number 301, back in time again to mid August of last year. I talked about managing debt in your agency that’s number 281.
And finally, I encourage you to take a look at your personal finances as well, because your personal finances will affect the decisions that you need to make in your business. And if you can get your personal finances right at home, then it goes to stand that you can probably get your business finances sorted because everything is right at home too. That episode number 261, all of these episodes will be in the show notes.
I encourage you to spend some time, maybe go for a run, go for a walk, sit in a chair, listen to those episodes and then find a way forward for you and your business where you can spend that time, get those costs down historically, come up with some sort of prediction for the future, then create some form of target, a number that you want to achieve, and then reverse engineer that number you want to achieve by breaking it down, looking at the products and services that you sell, the resources that you have, and come up with a realistic plan for this year.
In 2021, my agency is going to make X amount of thousands of pounds. We’re going to do that by selling X number of websites and providing X number of consultancies. Our costs are going to be blah blah blah.
You can do this. This is a simple enough exercise. The problem for most is that feeling of I don’t have the time. I would encourage you to make that time. By making the time to understand your costs, you can spend your time way more effectively when you have a clear strategy to achieve the targets that you have set based on the costs that you have calculated. Otherwise, you are fighting feast or famine all the time, and you will never have time for life. You’ll never have time for a happy business or a happy home and I’m speaking now from my own experience where we never used to do this. We never took the time to look at our costs, to manage things effectively and we were constantly battling for more and more income because our costs were spiraling. We had projects coming in. We then had no projects for several months and we thought an awful lot a month at the end of the month. It was a horrible, a horrible experience.
So, I would encourage you to take some time out. Now, if you do struggle with creating time, I would encourage you to do a small, achievable action every single day and perhaps set yourself a target of 30 days, break down those categories that we’ve shared with you in this episode, and maybe do three or four line items in each category every single day until you really feel you’ve nailed it. So that’s just 10 or 15 minutes per day, five days a week, nailing three or four that you can think of in each one of those categories. I guarantee by the end of 30 days you will have a huge list of everything that you can then pass on to your accountant to review.
Small, achievable actions really do lead to big change. You don’t always have to do everything in one fell swoop. If you feel you want to listen to these podcasts, then most of them are about 20 minutes long. So go ahead and and go for five or six runs of many links I’m going to share with you runs or walks over the next two weeks to take on this information and then again, small achievable actions. Create yourself a plan where you can do something small each and every day building up towards that target.
So often we don’t get things done because it seems too big, however, if we can break it down into those small actions, do a little bit each and every day, we will actually achieve what it is way, way sooner. Cliche, Rome wasn’t built in a day. They say that’s true. My house wasn’t built in a day. It was built brick by brick over the period of a few months. But then it’s now been standing for over 120 years. It’s a pretty cool old house that we live in right now.
Your goals don’t have to all be done in a mad two days over the next week they can be done. Over the next two months, you can plan for something. You can do the research. You can do it over a couple of months. It makes it far easier for you to find that little bit of time each day or each other day to get to the end of something that might feel completely overwhelming.If you’re just going to sit and dedicate a whole week to something as depressing sounding, as calculating all of your costs, etc..
So I didn’t plan to say all of that. Kind of felt like a bit of a preach at the end. But I’m preaching to myself, really, this is something that I really have to practice breaking those things down into small achievable actions otherwise I don’t get things done. They just seem to overwhelm me.
I hope you are encouraged and inspired by this episode. I would like again to thank our sponsor Cloudways. You can find out why we love them over our agencytrailblazer.com/cloudways. There is also a brand new blog, talking about using cloud hosting and why we prefer managed over unmanaged. You should go ahead and check that out. There will be a link in the show notes, but it’s over on agencytrailblazer.com, thank you again, Cloudways for sponsoring this episode.
If you want to be a part of our community, then I’m over on Mastodon. You can connect with me, @[email protected], or you can jump in our new Reddit. We’ve got to Reddit. Yes, because we’re so cool. Or you can connect with us on Facebook agencytrailblazer.com/group. Again, all of these wonderful links will be in the show notes. And finally, if you’ve had value, can I ask you a massive favor? Go to our YouTube channel agencytrailblazer.com/youtube and subscribe. That would be fantastic.
All right, folks, if we don’t see you in any of the communities, if we don’t see you in any of the comments in any of the podcast that I’ve shared today, we don’t see you on the YouTube channel or in the comments of the YouTube channel or if we don’t see you hitting that subscribe button because you’ve already done it or you don’t want to, that’s all fine. Then, let’s see you in next week’s episode.
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