Want to earn more money and increase your profits?
Do you want to pay yourself a bit more?
Want to work less hours but make the same annual income?
Then it’s time to start looking at what you can do to create a more profitable creative business!
Your profits are easy to calculate:
turnover – expenditure = profit
So your profitability depends on:
the price of the product or service you deliver x how much quantity you actually sell minus the costs to produce or deliver your product or service.
Your turnover might be high, but that doesn’t mean that your profits are high too!
Many jewellers I work with have a high turnover, but actually low profits, as their material costs (gold and silver) are so high. I see many events organisers with high turnovers, but as the people cost is so high, they often just break even.
So, what is it that makes a business more profitable?
What will have more impact: increasing your billable hours or invoicing your clients quicker? Increasing your prices or lowering your costs? You will find out here!
The following profitability quiz is based on a similar quiz in the book Managing the Professional Service Firm by David Maister.
Check out the list below of 16 actions that you could take to improve your profitability. Then rank each of them from 1 – 16 on what would have the quickest impact, and what would have the most permanent impact.
|Actions||Quickest Impact||Most Permanent Impact|
|a) Justify increasing your fees to your clients (e.g. become more of a specialist, innovate, add more value)|
|b) Increase your billable hours per week per person in your business|
|c) Delegate some of your work to junior staff to create or produce your work|
|d) Drop unprofitable work|
|e) Drop unprofitable clients|
|f) Invoice clients quicker|
|g) Decrease payment terms or ensure you get paid quicker|
|h) Use targeted marketing to get ‘better’ work, not just more work|
|i) Create higher value services or products that pay more|
|j) Become more efficient (i.e. eliminate duplication, group similar jobs)|
|k) Improve your project management skills and performance|
|l) Improve your skills|
|m) Use more freelancers or contract workers to get more done or to get it done cheaper|
|n) Reduce your space and equipment costs|
|o) Reduce admin staff costs|
|p) Deal with underperforming staff|
Go on, fill in the quiz! You will get much more out of this if you actually DO it.
When you did the quiz you probably realised very quickly that your ranking for the quickest impact list is very different from the most permanent impact.
If you have been trying to improve your profitability already, you probably have been focused more on what brings in quick results than the longer term. (PS This is very normal as most people want a quick result!)
Many businesses who want to get more profitable start with minimising ‘waste’ (such as overhead costs, stock, materials, less space, less equipment) and become more efficient (quicker invoicing, doing work quicker).
Although both are important, they only have a limited impact on your overall profitability.
What can I do to improve the profit of my creative business?
According to Maister the best thing to improve your profitability is to increase your fee levels or prices:
- Justify increasing your fees to your clients: start adding more value to your work and explain that you are now charging higher fees.
- Use targeted marketing to get ‘better’ work, not just more work.
- Improve your skills, so that you can charge more and do things quicker.
- Create higher value services or products that pay more.
How can you increase your prices? Practical exercise:
Take a look at your client list from the last two years and identify the top 5 clients who contributed most to your turnover: Who spend the most with you?
Then check who contributed most to your profits.
There might be a huge difference in the two groups! You might have clients who take up lots of your time, or your material costs (e.g. gold price!) has dramatically increased, and actually you might have run some projects on a loss.
It is not uncommon that 80% of your profits come from 20% of your clients!
If you are creating and selling products then you can too look at what your bestsellers are, but also which products make you the most money. Again, there might be a huge difference between the two!
- Identify those clients that are most profitable for you, continue working with them, and ideally start to build a better relationship with them so they will start spending more often, but especially also spend higher amounts with you for higher value work.
- Identify those projects that have underperformed, find out what caused that under-performance (e.g. you underestimated the time it would take, or the client couldn’t decide) and what you could do about that in the future to manage your client better or to avoid any issues like it to reoccur.
You can read here another Design Trust blog post about how to increase your prices
Step 2: improve your leverage: add value
Leverage is about being as efficient and effective with your time and materials as possible, and adding as much value as possible.
The trick is to add more value so you can increase your fees, but without adding too much extra cost. If you would grow by 25% but your costs would go up by the same amount, then obviously there would be no increase in profitability.
People are crucial to grow your creative business as they add the most value, but they are also often the highest cost for a business (or should we say ‘investment’?!).
In theory the highly skilled, innovative, creative, consultative work is done by people who are paid more than people who do more repetitive work (e.g. admin). Leverage is improved when you can get lower paid people to work on projects that get higher fees.
However, this can be a great challenge for sole traders or small businesses as you often do all of the work – from the specialist high end to the mundane and repetitive!
If you are a sole trader or small business, you need to try to focus as much as possible on the higher earning work and delegate the more mundane work (to assistants, freelancers or technology).
So when you start to grow, should you take on a junior designer or somebody to do the administration?
It all depends on what you will do with your additional time, and what you can charge for your time!
If appointing a junior designer allows you to get better paid work in, and you can charge fees of 3x the rate of the junior designer than that is a great move.
The issue with taking on a non-designer means that you need to make sure that both their AND your time are covered in multiples, as they are non-billable staff (you can’t make any ‘direct’ sales from the work they do).
So, what can you do to improve leverage?
- Improve your project management skills and performance: become better at planning and forecasting the time it takes, become quicker in finishing jobs.
- Delegate some of your work to juniors to create or produce your work to improve the leverage.
- Use more freelancers or contract workers to get more done or to get it done cheaper
- Become more efficient e.g. plan better, eliminate duplication, minimise interruption and procrastination, do more work in the same time.
Step 3: Fix under-performers and increase your volume
Check out where you are under-performing and do something about it. Who are those clients and projects that are not bringing in enough money?
- Deal with under-performing staff through better management and training, set goals, and improve their skills
- Drop unprofitable work
- Drop unprofitable clients:those that are difficult to deal with, who can’t decide, who change their minds too many times …
- Increase your billable hours per week per person
Step 4: lower your overheads
And only then will you need to deal with the overhead costs:
- Invoice clients quicker
- Decrease payment terms or ensure you get paid quicker
- Reduce your space and equipment costs
- Reduce admin staff costs
So, there you go: a 4-step plan to increase the profitability of your creative business.
Do let us know what you learnt in the comments box below, and more importantly:
What will you be doing in your business to increase your profitability?
And what will you STOP doing?