What's Your Favorite Profitability Report? We asked Clients & Profits users to speak out on their favorite profitability reports, a subject close to their hearts-and their bottom lines . Projected vs. Actual Gross Margin "It's so important to measure how well your job estimating is stacking up to what's actually done," says Kym Tedesco of The Townsend Agency. "It's an especially important tool when you first start using C&P to ensure your estimating is right on the money." Gross Margin by Job "Sorting by job type gives the unique perspective of what type of work is most profitable for your shop," says Bryant Walton of Pentagram Design. "I wait until the jobs are closed, so I get the full profitability picture." Gross Margin by Client "Our AEs want to see profit before and after labor for all their jobs and clients," says Kelly Ruzich of Fruehling Communications. "The one client per page format makes it easy to distribute to AEs." Client vs. Client Gross Margin "I want to know how well we are maintaining our gross margin from month to month," says Sue Augustine of Creative Concepts, "so I print this report by work date range each month. I get the AEs involved in the results, too." Client P&L Analysis "It's the report our owner wants to see," says Kathi Landis of Creative Company, Inc. "She's very interested in how direct costs apply to our various clients, and this report shows that...and a lot more!

By Mark Robillard

What owner hasn't heard this statement from consultants, CFOs and pundits in the agency business: ADVERTISING AGENCIES SHOULD MAKE A 20% PROFIT ON INCOME. But statistics from the American Association of Advertising Agencies (AAAA) show that actual agency profit margins aren't close. These stats shows that 80% of agencies surveyed made a 10% or less gross profit -- and fully 12% lost money.

     Before comparing your financials to those of other agencies, here are some key terms to know: gross profit, profit before taxes, and net profit. Gross profit (i.e., agency gross income, or AGI) is not billings; it is what the agency earns by media commissions, markups on outside costs, billed staff time and fees. Profit before taxes is profit left after paying for the shop’s expenses, like rent and utilities. For small shops, a 20% profit before taxes (after deducting a reasonable owner’s salary) is the goal. Net profit is simply what’s leftover after taxes.

      A typical ad agency spends half of its gross profit on salaries. In addition, about one-third is spent on overhead expenses -- just keeping the doors open. (It’s easy to compare these percentages throughout the month by printing an Income Statement w/AGI from Clients & Profits.)

      Not making a 20% profit doesn't mean the shop is failing, especially in this unpredictable industry. If a 20% profit is unrealistic, what should your agency earn? You need a consistently good profit margin to build up your financial strength, helping the shop survive client losses, bad debts, slower payers and economic downturns. It also provides the equity every shop needs to invest in its future.

      With Clients & Profits, you have the means to easily track budgets, costs, billings and profit. All it takes is putting it to work.

Mark Robillard is the founder of Clients & Profits, Inc. and is the program's developer