Stuff I wish I’d said …

Ever have that thing where as soon as you walk out of the room, hang up the phone or press ‘send’, the best answers rush into your head? …your vocabulary suddenly swells, and if asked you could eruditely explain the difference between fissure and fusion?

Last week I was a guest on the Streamtime regular webinar talking about DIY business health checks. This article is full of stuff I wish I’d said …

What’s a DIY health check?

A business health check is exactly what it says – a spot check to assess the (usually financial) health of your business. DIY means having the knowledge to do it independent of your bookkeeper or accountant.

Why should you do it?

Because the knowledge gives you control. That’s important because in 2019 the World Health Organisation linked burn out (common in designers) to feelings of being overawed or lacking control. Understanding the financial health of your creative business is one way to maintain better mental health. (Should have said that #1.)

When should you do it?

1. Monthly after invoicing/creditor payments are finalised to identify cracks
2. Quarterly because many projects overlap months and some work is cyclical, and
3. Annually to assess a bigger picture. (Should have said that #2)

We’re big users and supporters of Streamtime, and of course, their webinar is based on their reports, but most project management software will be able to run similar reports.

We discussed seven reports … truth is a DIY health check can involve just four reports and be done in under 30 minutes. (Should have said that #3)

Four reports – 30 minutes

Here’s an outline of the four reports I think important enough to spend 30 minutes assessing.

Client profitability report: 5 minutes

This report is client-focussed. You want to see

1. every invoice billed to each client
2. the total cost to the studio (including your internal hourly rate and expenses)
3. the total invoiced to each client
4. the profit made for each project
5. the profit margin of each project.

What to look for:

The most profitable and the least profitable clients – that is, which of your clients make you ‘busy’ and which makes you profitable. (They are often not the same one.)

Why is it important?

Because this report helps identify the valuable clients –those that generate the greatest profit are generally the ones worth investing in.
And talking new business, profitable clients are those worthy of a proactive pitch. The report will also help assess whether retainers are viable.

Expense report: 5 minutes

This report lists all expenses (external costs/purchase orders), the cost price, the sell price and the profit made.

Use this report:

1. Monthly to check firstly that each expense has been invoiced to the client, and secondly you are making a sufficient profit margin. We would recommend setting a minimum of 15%. Any lower and you would need to question why you are supplying the skill.
2. Quarterly to assess the total costs of each external supplier. Look for costs that, with some training, you might be able to take inhouse (at least the lower end of the skill).
3. Annually to identify any ongoing needs for a specific skill. Perhaps the total external cost exceeds a wage, making it possible to employ someone with the skill. Similarly, it might be worth looking at the total expense to negotiate a win:win scenario. You buy at a better rate (a retainer?), the supplier has a guaranteed income. Or perhaps there’s an opportunity to merge with or acquire the supplier.

That said, be smart about expenses. It makes absolutely no sense to take inhouse a specialist skill that you can buy for less than your cost rate. For example, most agency owners taking a fair wage have an hourly cost rate of at least $90 and they would bill themselves out at anything upwards of $150 per hour, depending on the task. Most bookkeepers bill themselves out at anywhere between $60-$110, again depending on the skill. That means it just isn’t economically viable for creative business owners to spend time bookkeeping when they could be billed out at a higher rate.

Similarly, don’t skimp on our tools of trade. Our hardware (up-to-date computers) and software (Adobe and the best project management software you can afford) are tools of trade. I know that Adobe – the huge conglomerate it is – is offering free monthly subscriptions during the pandemic – but protect the smaller suppliers as you would like your clients to protect you.

Item overruns report: 5 minutes

Depending on the project management software you are using, this report may be called different things. Essentially, it lists all the services or tasks that have taken more time than was estimated or can be billed back to the client.

I love this report. It delves inside each project to assess the profitability of each phase.

What to look for:

• tasks x team member: it will identify the most efficient team members. Internal issue.
• tasks x clients: do the same tasks take longer (and therefore not as profitable) for different clients? An external issue.
• do some tasks consistently over run regardless of who does them – is it an estimating problem? An internal issue.
• is there scope creep? A project management issue.

Why is it important?

It helps identify who should do what for maximum efficiency.
It helps identify where/how/what upskilling is needed.
It helps identify systemic estimating issues.
It helps identify briefing or project management issues.
From this one report you can identify whether overruns are an internal or external issue.

(I said all that :)

Non-billable time report: 5 minutes

This report is gold. Unfortunately, not all studios track non-billable hours – two reasons why you absolutely should.

1. New business is oft-quoted as our biggest challenge. It is much easier to work as effectively and efficiently on existing projects than find new ones.
2. We estimate most studios bill at 70% productivity – the other 30% is spent on non-billable tasks. Improving that ratio leads to a huge increase in profits.

The difference if all designers just moved from 70% to 75% productivity is outstanding. Improving productivity by 5% just means each designer needs to bill one extra hour per week.

Take for example a designer on an annual wage of $110K:

Working at 70% productivity: probably has an inhouse cost rate of $120 ph and is billable upwards of $150 ph = profit margin of $30 ph

Identify the non-billable time and make changes to increase the productivity to 75% – that is change something so the designer bills one extra hour per week and the scenario becomes:

Working at 75% productivity: inhouse cost rate drops to $112 ph – billable upwards of $150 ph = profit margin of $38 ph
Working at 80% productivity: inhouse cost rate drops to $105 ph – billable upwards of $150 ph = profit margin of $45 ph

Savings of $8 or $15 per hour may not sound much but multiply that across a team, across a week, across a month, across a year and it’s a tidy sum. No one is working any harder, they are just working smarter, more efficiently for an extra hour, or two, each week.

(That’s a nugget – I wish I’d said that. #4)

So, it is well worth identifying where profits leak.

The easiest way to track non-billable time is to set up a job called – believe it or not – non-billable time. The better the explanation of the time used, the better the report. Use this report to question:

• is the unbillable time just due to a project being over budget? Is it an internal estimating problem? Is it across the board or one client? Is it a lack of skill that slows production? Is it creative scope creep, delivering bells and whistles to clients requesting bare essentials?
• is the unbillable time due to redo’s? Do you have communication/briefing problem, either account service to design team or client to account service — that is, are the redo’s caused because of an internal or external communication issue?
• do some tasks consistently take longer than estimated regardless of who does them – which sounds like a systemic costing issue. Perhaps you’ve identified a task that should be externally sourced or a dire need for upskilling?
• is the unbillable time because of a non-profitable retainer?

Compare the reports: 5 minutes

All of these reports work individually, but they can also reveal systemic issues when compared. (Wish I’d said that #5)

For example:

Compare the client profitability with the expenses report. 
Is one client not as profitable as others because a majority of the tasks are completed by a specialist external vendor? Do you need to bring the expense inhouse/merge/acquire/negotiate/stop? (#6)

Compare the unbillable time with the client profitability report. 
It could be one of your ‘profitable’ clients actually accrues a lot of ‘hidden’ nonbillable time.

Compare the unbillable time with the item overruns report. 
It could be that the overruns are actually unbillable time that, with a small tweak, could be made billable.
 It could be there are both overruns and unbillable time allocated to one team member or one task – an urgent issue.

Last 5 minutes, make a cup of tea and plan

These are just four of many reports that help identify profit leakage. They prove the value of your project management software.
Their true value is in the trending — you’ll be able to track the results of making small tweaks to your studio practice.

Just some of the changes we’ve helped studios make as a result of diagnosing these figures:

• a change to the traffic flow. Instead of one designer following a projects from start to finish, one studio we work with collaborates on every project — each designer doing the task they do most efficiently
• introducing an inhouse university. Designers are allocated time to upskill each other.
• one studio dropped a long-term retainer once they recognised it kept them busy, but not profitable. They only need to spend half the hours on a more profitable client to return the same profit.

(I didn’t say any of that bit!)

As always, happy to chat, discuss.
Email me here.
Check out the original webinar here. Andy and Poli said some really interesting stuff.

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