Using project budgets to improve agency profitability

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Hello and welcome to today’s webinar. I’m Chip Griffin, the founder of SAGA, the Small Agency Growth Alliance. And today we’re going to be talking about project budgets. And I know that that is a topic that is near and dear to the hearts of many of you. It is some of the most consumed content on the SAGA website.

It’s something I get asked by clients a lot about. And so we’re going to walk through all of the basics related to project budgeting in the agency environment over the course of the next hour. Before we jump in, let me go ahead and bring up the housekeeping that we have to do at the start of each of these webinars.

The replay will be made available along with the deck to all attendees, and it will also be available on the SAGA website for members to access. You can use the Q& A function here, the bottom of your screen probably, depending upon what platform you’re using to watch, and that Q& A function will let you ask your questions.

I will try to answer as many of those as I can at the end of the main presentation. You can ask additional questions or provide feedback after the fact by emailing me at chip@smallagencygrowth.com. If you’d like to tweet about this webinar while we’re going on, just go ahead and use the hashtag agency leadership.

And of course you can get lots more information and resources for free at smallagencygrowth. com. Upcoming webinars. So obviously today we’re doing project budgets. Next week we’ve got M& A basics. So whether you’re Thought about buying another agency or selling your own. Those are the kinds of topics that we’ll be going over at a, at a high level to give you a general understanding of how the process works and things you should be thinking about.

And then after that, we’ve got one on podcasting, hiring, we’ve got one on pricing models, which actually is a really good, follow on to today’s discussion, because we’ll talk a little bit about how budgets impact pricing. As part of the discussion today, but then we’ll have a more complete discussion about pricing on that webinar on March 31st.

We’ll also talk about productizing your agency’s services. That’s a topic that comes up quite often. And it’s a topic that came up actually in this month’s SAGA monthly meetup for members. So, and then finally using paid discovery to get clients. So that’s it. Favorite topic for Gini Dietrich, my agency leadership podcast co host, something we talk about on that podcast a lot, and I’ll walk through the steps to do that more effectively on April 14th.

So lots of good upcoming webinars. They’re all free. Go ahead and just go to smallagencygrowth.com/webinars to register for the ones that interest you. And so let’s see with that we will move on to the actual meat and potatoes of today’s presentation. So what are we going to be talking about?

We’re going to be talking about project budgets but more specifically we’re going to talk about why they’re important. Why is it that I harp on it so much with clients and with any agency frankly that will listen about the importance of creating and maintaining and managing project budgets. I’ll talk about why this needs to be a team effort.

It’s not a solo act by management or the agency owner. It really needs everybody at all levels to get involved to be effective. I’ll talk about how you set them up and make them, accurate as lease as accurate as possible. And we’ll walk through some specific templates. So this will be very hands on.

I’ll take a sample. Project budget and walk you through all of the specific elements of it so that you can build your own. And then finally, I’ll talk about the relationship between cost and price because that’s something that is essential to the project budget discussion as well. So, with that, let’s go ahead and we will jump right in here.

Let’s see. Gotta find the right buttons here. It’s always an adventure. There we go. So, so why do I harp on project budgets? What’s, what’s so important about them? Project budgets are the building block of the profitability of every agency. So let me say that again. Project budgets are the building blocks of the profitability of every agency.

Oftentimes, when I talk with agency owners, they can talk about the general profit profitability of the agency. Maybe they can cite a percentage. You know, we’ve got a 20 percent profit margin, 40 percent profit margin, 5 percent profit margin, but it’s all of those agency level profit numbers come from the profit that you’re generating at the individual client and project level.

And so to be effective, to do this right, you need to focus in on that and get it right. You need to get those budgets so that you can accurately estimate what your costs are going to be when you’re pricing it, when you’re pitching it to a prospect. You need to manage. your budget all along for that project to make sure that you’re staying within bounds or at least being aware when you’re moving outside of the bounds of those budgets.

And I’ll talk about that too because you want to be careful about not confining yourself to that budget if there’s a reason why you need to make adjustments. And then finally we’ll talk about how you need to use that building block to look back and see how did we perform, how accurate were our estimates, how can we improve them in the future.

So those building blocks are really the core of the success of your agency because if you can’t be profitable on the individual client and project level, you’re not going to be profitable on an agency level. And if you want to change your overall profit margin at the agency level, you have to do it by building on those individual items along the way.

And I think one of the key concepts here is this is a quote that’s been attributed to Everett Dirksen, former senator from Illinois many, many years ago. It’s, there’s not a whole lot of evidence that he actually said it, but it’s said so often it’s one of those expressions that’s worth using anyway. So a billion here, a billion there, and pretty soon you’re talking real money.

It’s the same thing. None of us are talking about billion dollars within our agencies. If you’ve got a billion dollar agency, you’re probably not listening to me right now, and that’s fine. But it’s, it doesn’t matter whether you’re talking hundreds, thousands, tens of thousands, whatever it is, all of those little things add up.

And so if you can carve out a little bit more profitability by getting the budgets right and the pricing right on individual projects, you will see a major difference in how your agency performs. At the same time, one of the things we’re going to talk about today is how little cost overruns, things that just don’t seem like much, we just spend an hour here, an hour there.

Well, those add up too. And those are the kinds of things that can erode profitability just as quickly. So, That’s why it’s important that it’s a team effort, right? Because if you’re talking about all of these little bits and pieces add up, the only way that you can manage bits and pieces is to have the whole team involved.

You all have to be rowing in the right direction. You have to be on the same page, understand what you’re doing. Your team needs to understand why you have a budget. Why does it matter? You need to have the same discussion with them that I’m having with you right now. They need to know the importance of getting those estimates right and tracking their expenses correctly because that’s how you can build a stronger agency and a stronger agency is good for the employee.

It means their job is more secure. It means there’s more room to improve their compensation, to give out bonuses, all those kinds of things, to hire additional team members who can help do the shoulder some of the workload that they have. I mean, most agency employees will tell you that they feel overworked, whether that’s true or not doesn’t really matter. They do. And so if you’re able to explain to them that if you’re able to find where your costs are and where your needs are, you can invest in additional resources, but only if you’re tracking your expenses correctly. We’ll talk about the importance of getting your team, or I’m going to talk right now about the importance of getting your team to be honest with you.

They have to be in a position where they feel safe to share with you the honest truth. You don’t want to be in a position where your team is hiding costs, usually in the form of their own time, because if they do that, you’re not getting an accurate picture of the profitability of an individual client or project.

And this is something that was an issue for me in my very first agency when I was just just a wee pup fresh out of college, working as a junior account executive. And we had a client who was. Very demanding and we had an agency owner who told us we could only spend a certain number of hours working for that client.

So now we were caught. We were caught in between an agency owner saying we had to limit our time in order to help maintain the profitability of the agency. But on the other hand, a very demanding client that was saying they needed us to get stuff done. And if, We were in that squeeze where we said, what do we do?

And so frankly, a lot of times we fudged our numbers on our timesheets. We would allocate less time to that client and put it in overhead or business development or other things like that to sort of hide that time because we didn’t want to get yelled at by either side. And so that was our safe way of doing it.

And we did that in part because the owner made clear to us that there was no discussion to be had. That we had to do it within the time budgets that we had been provided. So it wasn’t that we could go back and say, this takes more time. We need to go to the client and ask for more money. It was simply, you need to do it within that amount of time.

And sometimes it just wasn’t practical to do that. So you need to create that safe environment where your employees are feeling comfortable coming to you and saying, look, I know we said that this project would take a 100 hours or that we would only need to buy these plugins for the website or whatever, but we’ve since figured out we need to do something else.

We need to incur additional expense to get the job done to meet the statement of work that we’ve given the client. And that may mean that you take a profit hit on that individual project. It may mean that your profit margin isn’t what you expected it to be going in. And as an owner, as a leader, you have to be willing to accept that.

Because it gives you a learning, it gives you information that you can use to make your next estimate better. But you can only do that if your team feels safe enough to share that information with you. So you can’t use this as a place where employees feel there will be an automatic negative consequence.

Now that doesn’t mean that your project managers don’t need accountability, they do. If they’re going to go beyond what was in their budget in their in their initial proposal to you internally to figure out what it would take to get some work done. They do need to explain that to you. And they do need to figure out whether it was because they did not manage it correctly.

They did not estimate it correctly or because something changed and whatever it is, they need to be in a position where they can share that with you and then you can work with them to figure out how do we address this going forward. So it’s not relieving them of accountability from a project management perspective.

It’s simply saying that you want to take it and you want to learn from it as opposed to focusing on the punitive or punishment side of things. If you do that, you’ll start getting more accurate information. So that’s why we really need to make sure that this is a team effort. If you don’t, you’ll be flushing money down the drain.

You will have all sorts of hidden little expenses that you don’t realize you’re incurring. And this is true, whether you’re an agency of two or 20. Or 200 or 2000, whatever it is, anytime it’s not just you, there will be things that are invisible to you. And you need to make sure that your team feels comfortable making them visible.

So you know what those are. Enough about the team side of things. Let’s start, you know, delving into the nitty gritty here and what we really need to focus on. So one of the things that you’ll find in the agency leadership resource library that we have on the SAGA website, there are some free templates.

There’s a free workbook on doing project budgeting. There is a free template, an Excel spreadsheet that’s got built in formulas. I’m going to walk you through some of that in just a moment. But before we do, I want to address some of the big picture concepts that go into this document so that we’re, we’re on the same page about what we’re talking about.

And so. When I’m talking about project specific expenses, so I’m going to talk about a couple different things. I’m about project specific expenses, I’m going to talk about labor costs, I’m going to talk about overhead, I’m going to talk about margins and things like that, but let’s start at project specific expenses.

So what is a project specific expense? In the simplest possible terms, it’s a cost that you would not incur if you did not have that client or project. If you did not have a client or project, would you be spending that money? And the only sort of asterisk here is that there are some things with shared costs.

There are obviously employees that you might have that are working on multiple accounts. So there are some things where you might not zero it out, but it would not have a place to have its cost aside if you didn’t have that client or project. So obviously at the top of the list for most agencies is going to be the labor cost, whether that’s W 2 employees in house or freelancers, contractors, subcontractors, that kind of thing.

Labor costs for most agencies is by far the highest expense. But it can be other things. It can be media monitoring and analysis tools. It can be the amount of money that you spend on travel for the client. So if you’re traveling to meet with the client in a different city. If you’re traveling for an event or something like that.

Obviously, we’ve all seen our travel budgets diminish over the last year, but I think we’re going to start seeing them come back probably later this year and certainly into next year. So something that you want to make sure that you’re considering. A lot of agencies really overlook the expense of travel and it can be a real impediment to profitability.

If you’re not keeping an eye on that, if you’re traveling to a city, if you’re going somewhere, you’re sending team members somewhere simply because you have a client there, that’s a project specific or client specific expense that you need to track. And I see a lot of agencies, they’ll write off the travel as cost of doing business for those kinds of things.

And it may be in the big picture, but it’s really specific to that project because you wouldn’t be spending that money otherwise. So make sure you’ve got that there. And then all the other things that you might be doing on behalf of that client, which will be very specific to the kind of work you’re doing.

It might be printing costs. If you’re doing print collateral, it might be, you know, web design costs. It might be plugin costs or hosting costs or, you know, whatever, depending upon the kind of agency that you are. The other piece that you need to make sure that you have in there in project specific expenses are going to be client and project management.

So this is typically time that’s spent by you as the owner or other senior managers who are not working on the client day to day, but you’re, you’re perhaps having, you know, periodic strategy sessions internally, or you’re having management check ins beyond just your typical one on ones that you might be doing with employees.

And so if you’ve got those, make sure that you’re tracking those expenses because those can really add up, particularly if you’re using yourself or others who have higher salaries than most of the people who are working on the project on a day to day basis. So make sure that you’re capturing that when you’re thinking about project specific expenses.

Now, shared costs. There are some shared costs that you need to think about, and these are non labor shared costs. So these would be things like. You know, we’ve got a media monitoring platform that’s used by several different clients, or I’ve got a research tool, a media database that’s shared amongst several clients, or I’ve got a project management tool that’s shared amongst several clients.

There’s a lot of different things that agencies may use for multiple clients. And so you have to figure out how are you going to track that expense. If you’re, if you’re specialized in a particular industry, you may have subscriptions to various trade publications. And those sorts of things, just as the sort of general information gathering for all of your client work.

But it’s, you know, if you’re doing defense work, maybe you subscribe to Jane’s Defense Weekly, a very expensive subscription. It’s not the kind of thing that maybe you want to assign to a specific client or project. But if you’ve only got two or three defense clients, you’d probably want to split across them.

So you can do it in a few different ways. And I’ve really itemized the three main ones here. The first is you just say, OK, there’s going to be a fixed allocation per project. So this would be typically if you had a large number of clients and let’s say you’re using an SEO tool for all of them, perhaps you just say, okay, it’s going to be 50 bucks a month because we spend, I don’t know, 2000 bucks a month.

And so we’re just gonna use that as a fixed number because it makes budgeting easier. You can prorate it. That would be true for example, if you’ve got a metered service that you’re using, so like a media monitoring service where you’re charged based on the actual cost of the data that you’re gathering, and in those cases, you might want to do a more specific allocation on a monthly basis from the main account working with your bookkeeper or whomever to do that.

And then finally, the other option, and this is really what you might do with project management tools and things like that, is just put it into overhead for the agency and capture it that way. If you’re, if it’s really being used by all of your clients and it’s all equally utilized or equally cost, then there’s no reason not to just put it in overhead and keep it simple.

So, the biggest thing that we have, though, and we talked about this, is labor costs. Labor costs mean timesheets. And I know you hate timesheets. Your employees hate timesheets. We all hate timesheets. Fine. It doesn’t matter. We have to do timesheets. Timesheets are really the only way that you can capture the, the biggest expense that you have in all likelihood for all of your projects and clients.

Your labor costs. You need to know how to allocate it. And there are some shortcuts. You can, for example, just estimate that something takes 20 percent of an employee’s time. I will tell you that that is not the most effective way to do it because it requires both you and the employee to guesstimate and it’s not, it doesn’t have the same level of reliability.

And frankly, a lot of us will overestimate clients maybe who are painful, underestimate those that we enjoy working for, you know, perhaps underestimate the ones where we’ve been told we need to limit our hours like in my case in my first agency job. So it’s not the most effective way, but it’s better than nothing.

Right. So if you, you have to start there before doing actual proper timesheets, fine. But let’s talk about actual timesheets because I do think that the timesheets and by that I really mean time tracking because most of us aren’t doing this on paper anymore. Most of us are using a tool like Harvest where we can put the data right in, keep track of it, you can actually run a timer on your computer if you so choose.

The key here with all of these things is they have all sorts of functionality. They have so many different features that you can take advantage of. But at the end of the day, a lot of times you ask your employees to do, to provide more information than is really necessary because you can go in there with all sorts of granularity.

I mean, I can have you specify, you know, that you spent five minutes on an email, 10 minutes on a phone call, three minutes on a social media post. That’s nuts. That’s where you get non compliance because it’s too complicated and you’re not using the data anyway. So you need to make sure that any data that you’re capturing is data that you’re actually using.

So I suggest that basically there are four data points that you absolutely need and everything else beyond that is truly optional and you really need to make a strong case to yourself of why you’re capturing it. So the first is obviously the client. The second is the project. In some cases, there’s only one project per client, in which case, That’s simple.

You’re not really delineating. But if you’ve got a client who’s got multiple clearly delineated projects, then I would suggest breaking them out as projects and not just lump it with the client because it will help you track it better. So if you’re if you’re billing for it separately, for example, if it’s a different team within your agency that’s doing it or something like that, Certainly break it out.

The, the date it’s important when you’re, when you’re doing time tracking to know what day it’s for so that you can go back and, you know, just make sure that the data appears to be accurate and check on it and that kind of stuff. All of the systems have that built in. So that’s really not something that has to be entered.

You just need to make sure you put it in the right day when you’re entering it. And then finally the time spent, which I would suggest, you do in quarter hour increments. I think I think if you do them in quarter hour increments, that’s that’s more than sufficient. You really just need to get people to be as accurate as possible.

There’s still not going to be 100 percent unless they’re actually sitting there with a timer start stop getting it absolutely accurate. And if they get distracted by an email or a text or something like that, they’re stopping it. I can tell you almost nobody is doing that. So settle for getting it as accurate as possible, and if you keep it simple and you get it as accurate as possible, then you’ll be in a position where you’re capturing your your information that you need to calculate labor costs, and we’ll talk specifically about how you do that.

The actual mechanics of it. That’s how you’ll be able to know what your biggest expense likely is for that particular project. And I think when you’re thinking about this in more macro terms, so we’re talking about time sheets. Time sheets are for the individual and they bubble up. But when you’re thinking about project budgets, I wouldn’t suggest that you put in individual team members names in most cases and get down to the penny what their actual cost is.

I suggest using a banded structure, typically where you’d have three bands or tiers, where you’ve got, you know, you or any other senior managers, mid level, and then junior. And if you do that, and you apply approximate costs to each of them, that will keep it simple for you as far as building the budget.

And it, it also makes it more flexible so that if you, you know, have an employee leave or something like that, you don’t need to automatically update it as long as they’re within that same band. But the other advantage to doing this is that it makes it easier to share this budget document amongst your team members, right?

Cause we talked about the importance of this being a team effort, but most agencies don’t want to be fully transparent about the exact salary of each employee. And so if you do it in these bands, it makes it much easier to share that data without getting into those thorny conversations about, well, you know, Sally makes 3, 000 more than Johnny.

And that’s a problem. Right. So stick with bands, keep it simple. So let’s look at the calculations specifically for labor costs for an individual. And this is going to be very specific to the United States. If you’re in other countries, you’re going to have to look at it in different ways, but the fundamentals are still here.

But this specific example is U. S. based, not just because of the dollars involved, but because of how taxes and benefits and those things are structured in the U. S. So, In the United States, most employees in an agency would have an annual salary. In this case, we’re going to assume 40, 000 is the annual salary.

We’re going to assume that you give out bonuses and maybe you’re estimating approximately a 4, 000 a year bonus. So that’s 44, 000 in base compensation for that individual. And then you take a number to estimate the overall tax and benefit cost for that individual. And I suggest doing a percentage Historically, I’ve often used 33%.

You could use 40. I’ve sometimes used 50 if I’ve got an organization that I’m working with that’s, that’s either particularly generous in the benefits package or is using it to wrap in some, you know, training or tuition credits or those kinds of things. So there’s, there’s different ways that you can, do this, but whatever the percentage is, it’s probably not going to be less than 33%.

And, could be a little bit higher, but that then gives you the total annual cost approximately to have that employee as part of your agency. In this case, in this example, 58, 520. So then you have to say, okay, well, how many hours a year is this individual going to work? You can obviously calculate that out.

You have to assume how much time they’re going to take off, how much. time they work each week and multiply it out. A good starting point would be 1, 750 hours, could be a little bit less than that. I wouldn’t go much higher than that. And so once you have those numbers, you can just do simple division and you end up with about 33 an hour.

So if I were setting this up, In my project budgeting template, which I’ll show you later for this band, I would probably put the labor cost at either 30 or 35. 33 is probably too specific, and it doesn’t give you a lot of flexibility. So to figure out what makes sense, because you’d be looking at the kind of employee that you’d have in that band, and if anything, it’s probably better to overestimate a little bit.

It’s never bad to figure out that you have less costs than you anticipated, because that means more margin. And you don’t want to go crazy with that. But still, if I’m going to air, I’m going to air on the side of saying that I have higher expenses because that’s where I’m more protected against downside risk in the future.

So that’s labor costs. The other thing we need to talk about are all these numbers that we have floating around for overhead expenses. And I’m sure you’ve heard you need to figure out what your overhead is. You need to calculate that in. There needs to be some overhead included in your pricing. All that kind of stuff.

So what is overhead? Overhead really are, they’re just the expenses that it requires to keep the lights on in your agency. They’re the expenses that you would have even if you had no clients, but you were still going out there and trying to find work. And so in those cases, you would have things like rent and utilities.

You would have, your telecommunications, your phone, mobile phones, that kind of stuff. You would have the various technology, the tools that you use, whether that’s, you know, your cost for, you know, laptops and desktops or the software that you might be using. We talked earlier about project management tools.

Those things would be in there from a technology expense perspective. Business insurance, so not health insurance. That’s part of that calculation we talked about in labor costs, but the business insurance that you might carrier or things like that would be in the overhead, you know, any licenses or that kind of stuff that you might require in your state registrations, etcetera.

Your marketing expenses, your all the administrative stuff, the HR, legal, accounting, bookkeeping, that sort of thing. , and then. You know, you know, also include your the time that you spend just managing the business, right? So that portion of your salary goes to overhead versus any time that you may spend on specific client service activity.

And then finally, non client travel. So this would typically be travel for events or things like that. Or in my case, I used to fly to certain cities on a monthly basis or sometimes more frequently than that. Simply to do networking and and outreach and that sort of thing and so it was that was an overhead expense for my agency because I knew that there were two or three cities where I got most of my business out of and so it was worthwhile just for me being part of that geographic ecosystem by traveling on a regular basis.

So those are your overhead expenses and then you say, OK, well, I know what they are. Now I’ve figured them out. I can see them in QuickBooks or FreshBooks or whatever I’m using and so then how do I allocate it? And there’s a couple of different ways to do it and we’ll look at my preferred way in the template that we’ll dive into next, but you can basically do actual or target percentages, you could do fixed amounts that works better if you’ve got projects that are all roughly the same shape and size. You know, so if you’re a high volume SEO agency and all of your engagements look pretty similar, then maybe you just want to do a flat fee. You know, it’s a 500 overhead charge on the project, but more commonly, most agencies will use some sort of a percentage in there as part of the calculation.

So if you’ve got If your direct project expenses are 10, 000 and you have a 20 percent overhead charge, that would mean you would then add 2, 000 to that budget. So you’d have a total project cost of 12, 000. And we’ll, again, we’ll look at the specific examples here. So I know I’m kind of going through some of this a little bit quickly, but it’ll make more sense, I think, when we look at the spreadsheet in just a moment.

And then, This is the one area overhead is where I think you don’t want to keep your project managers accountable. They have no control over overhead. So when you’re talking with your project managers about where they’re at and the profitability of their projects, focus on their numbers before overhead gets incorporated. And the reason for this is that the overhead side of things can really mess up the numbers depending on how you’re allocating it. On a percentage basis, it tends not to be as big a deal, but in agencies where you’re doing it on a fixed cost basis or something like that, particularly if you have it fluctuate based on what your actual overhead expenses are and how you spread it out over clients.

It can manipulate those numbers in bad ways, particularly if you have a slow period where you have fewer clients, you’re then trying to allocate that overhead to more, to more other clients. I don’t really like doing that. And you, you certainly don’t want to hold the project managers accountable for things out of their control.

You want them to focus on the aspects of the project costs that they can control. So, just wanted to call that out. All right. So let’s take a look at an actual real world example because I think this is probably the most helpful part of today’s session because it gives you some actual, , things to look at.

And this, this template is available in the resource library on the SAGA website. So, you can download it and all of it is functional. So you literally will just type things in. It will handle all of the math and add and subtract and all that kind of stuff that we’re going to walk through here. So, All right.

So at the start of any project budget, you want to talk about what your revenue is. So you’d have your revenue numbers at the top of the spreadsheet, typically where you would talk about, in there, you would record what you’re anticipating for revenue. So if I’m doing this in the proposal stage and just estimating things, You know, obviously I’m putting in there what we’re going to propose if it’s an ongoing client, I have much better visibility into this, and so I’ll have probably more accurate numbers for what I know that they plan to pay based on what contract they’ve signed, but in any case, I put those in there.

So you’d have recurring fees, you’d have one time fees. So one time fees, you know, let’s say I’m building them a website, but then doing maintenance, or I’m doing media relations for them. But I know that, you know, three times a year we do events and we, we have a surcharge for those events. So you would put those in, and I really like doing this spread out on a monthly basis.

Even if it’s fixed every month, it just, it gives you something that you can base your projections off of, but you can also use it to more accurately track your real expenses over time as well, because you really want to take this budget and track actual expenses against it. So that you know how you’re performing in your budget and estimating process so that you can get better at it, because by getting better at it, you will be able to price better.

Some agencies still do markups on expenses. If you do, then those would be included here on the fee side of the ledger. So, and the reason why there’s a fee side and a reimbursable side, it’s primarily because a lot of digital agencies, for example, are doing, social media ads or Google ads or those kinds of things.

And so you would not want to include those on the fee revenue side, right? Because there are something that the client presumably is just paying for either themselves or through you. If you’re doing a markup, you would put it in that markup line item, but otherwise you put it into that other box so that you can kind of see the difference between the money that’s passing through your agency.

That’s what the reimbursables are. It’s passing through versus the fee, which is coming in to your agency. And hopefully that makes sense. , so that’s the, the revenue side of the equation, which is frankly the, the much more straightforward side of the exercise. It’s now on the expense side where things get a little bit interesting.

And so I, I like to start with, itemizing the reimbursable expenses, which are the things that we talked about just a moment ago. And this is anything that the client is paying for. And so the, the template has some sample categories in here. You may have totally different things for your agency. So you can feel free to update the template to whatever categories you want.

There’s no magic to the ones that I chose for the template. It’s really just to give you an idea of some of the common ones that I see across agencies and we talked about advertising already. I would call out the travel one in particular to think about because some agencies work with clients where the clients pay for any you.

Project or client specific travel, in a, in an overt way and some people it’s just wrapped in. So if you’ve got a situation where your client is told, you know, you have to pay for the airfare for us to come meet with you or the hotel or all of the above, fine, put it in here. If it’s something where, you’re just wrapping it into your overall price structure, which I, a lot of agencies do.

So you just say, okay, we’ll come to you every quarter for a strategy meeting, but you’re not specifically billing the client back for that travel. You’re just eating it. So that would be in the non reimbursable portion of the expenses that we’ll look at in just a minute. So reimbursable is anything just like it sounds where you’re basically providing an expense report or an invoice to the client, and then they pay you back for these things.

Again, hopefully that makes sense. So now, meat and potatoes here, reimbur or non reimbursable expenses. So these are the things that we need to capture. And so, we’ve got staff costs here at the top, and you can see here I’ve broken it out in this particular example into the three tiers. We’ll put a pin in that because we’ll come back to there’s another, a tab in the spreadsheet where it actually builds this out for you.

So you don’t have to do all the math that we did in that example earlier. You just have to fill in a couple of variables and it will do everything for you and make it flow through to this portion of the spreadsheet to make the staff cost piece just easy peasy as they like to say. Contract labor, freelancers, obviously you want to make sure that you’re capturing that if you’re farming out work to people.

Travel, this is the travel that I was talking about before. This is the stuff that you may be doing on a quarterly basis just for client relations or business development or whatever it is for that project. You don’t. Charge it back to the client. So you put it here on the non reimbursable side. Client entertainment.

That’s one that often gets overlooked. You know, taking them out to dinner, those kinds of things. Most of us do that, particularly if we’re traveling to see a client or even if they’re in the same town, we’ll often take them out to lunch or dinner periodically. I know a lot of the, the agencies or professional services folks that I work with, certainly do that.

And then various other examples in here of some of the kinds of expenses that are typical for agencies, but really just customize this to whatever is specific for your organization. Again, I like doing this on a monthly basis because sometimes your expenses will fluctuate and helps you see, some of those things.

So you can see, and this has helped from a cashflow perspective, which will be the next screen. It’ll help you understand, you know, where there are going to be blips in the profitability of the work there, where there are going to be blips and how much you’re having to outlay, typically around events or quarterly meetings or those kinds of things.

So then the next slide here, we get down, this is where we put in the overhead and the template allows you to basically just put in, you can see right here, you just put in a percentage for whatever it is that you want to assign to your projects. And so 20%, I think, is as good a starting point as any.

I think if I look at agencies across the board, you know, 20 percent is a fairly decent overhead number for most established agencies. It may change if you’re going through growth periods. It may be higher because oftentimes you’re making investments to grow, and there may be times where it may be a little bit lower.

But, And you can figure that out. You can figure out your own overhead expense, but just by looking at your QuickBooks report, looking at those expenses that are client specific and non client specific, and just basically figure out those non client specific expenses, what percentage of your total spending is that, and that will help you get to, to what percentage you should use for overhead, but again, if you’ve got nothing better use 20%, that’s what comes as a default in the template.

So finally, that brings you to the bottom of the spreadsheet, which is the summary, where it goes through how much are you taking in for fees? What are your reimbursables, non reimbursables, , your total G&A. So general administ, general and administrative is what G&A stands for. It’s another term for overhead.

You’ll hear both interchangeably if you’re talking with finance people. And so this then totals all those up and it shows you your gross profit, which is the profit that you have without. including your overhead. So this is the number that I’d like to see you hold your project managers more accountable for because this is, this is the piece that they have the most control over.

And then your net profit, which factors in those overhead expenses. So this tells you what you’re actually making. And so, you know, we’ll talk in a minute about some of the rules of thumb rule of thumb would be that you never want to see your net margin go below 20 percent if you avoid it on any particular project.

And gross margin. You know, ideally, you want to see gross margin somewhere around the 50 percent range, to be healthy. But again, the numbers will all vary. I’m not a huge fan of rules of thumb, as many of you may know, but at least it gives you something to work off of. And the key thing is that you can look and say, okay, if I’ve got this margin on my projects now, I’m satisfied with my overall profitability.

Okay, then that’s a good target to use. If you feel like your profitability is insufficient, then that’s maybe where you would go in and say, okay, well, if I’m at 20 percent profitability now, I really need to bump that up to 25 percent in order to hit the numbers that I’m really looking for. So we talked about how the spreadsheet allows you the template that I’ve got allows you to really easily calculate your labor costs, because this is the piece that hangs most of you up when you’re doing project budgets. And I think it’s the thing that holds most agencies back from doing them, at least doing them as effectively as they should. And so in the template, basically, what you have is you have a spreadsheet where you have the different tiers and you can change the number of tiers pretty easily just by copying and pasting formulas and such.

But again, if you use the three that I think probably works for most small agencies, so most of you listening are probably 30 employees or less. So three bands is probably sufficient. Some of you may only need two, depending on how you’re set up, but what it allows you to do is basically go in and just put in a number for the number of hours that those bands of employees or team members will be spending each month.

So you don’t have to put in actual dollar amounts. You literally just put in the number of hours and it will then take those and we’ll take a look in a minute at the next tab, which allows you to put in actual salary information. It then calculates out all of these labor costs. Which then flows back to that master sheet that we were looking at a moment ago.

So that’s where all of those labor cost numbers come from. So the data entry that you’re doing or your, your project manager is doing is just putting in an estimate of the number of hours that will be spent. So it really couldn’t be any simpler than that. And so then, after that, there’s a tab in there for the staff cost calculator and, so all you do is put in the average salary within that band, whatever you want to use for those, that the number of hours worked by those employees on an annual basis, again, we talked earlier, 1750 is as good a number to start with as any, same thing with the tax and benefit percentage, pick the number that you’re comfortable with. 30, 40, 50 percent, probably one of those three or somewhere in between. If you want to calculate it more granularly for your business, and your needs. Again, if you’re outside the United States, those numbers may be very different because your tax and benefit structures are very different.

And then what it does is it then calculates out what the average hourly cost for that band is. Now these are not, don’t confuse this, this is not what you would want to charge for these employees. So that would not be the hourly rate that you would use if you were selling, your services by the hour.

It gives you an actual cost as a starting point. So all of these things are designed so that it’s really easy for you to put these budgets together. It’s all very customizable. Obviously you can use any system that you want, but I’ve created this template because I know a lot of you, you know, don’t have something already.

You don’t have software in place that does it, or an existing process. So this should jumpstart it for those of you who are interested in doing project budgeting more effectively, but maybe aren’t doing so already. So, Let’s, we’ve talked about how you, why budgets are important, why you have to have the team involved and how you actually mechanically put it together.

What relationship does this budget document have with pricing? And so what I would say is, and this is something I talk about a lot, you need to know what your cost is for any given piece of work, because that gives you your floor. If you know how much it’s going to cost you to service a client or perform a project, you know how much is coming out of your pocket in staff and other costs.

And so you therefore know what the absolute bare minimum you need to charge is so that you don’t lose money. Now, To me, a floor is not not losing money, right? So for me, what I would do is I would take as a floor when I’m working on a price quote for a client, I would say, okay, I work with my team and would figure out what the cost is of a particular project.

So let’s say the cost is 10, 000. And while I’m not a huge fan of rules of thumb, I’m going to share some rules of thumb with you. And I’ve already alluded to some of these before. So what I would do is if the cost was going to be 10, 000 to perform a project, I would make sure that my price floor, the minimum I would charge that client would be 20, 000.

Okay. Now, That’s based off of the cost without factoring in overhead, right? So that’s why when I said that 50 percent would be your gross margin target in most cases, to make sure that you don’t go below that, right? That’s taking, if you have a 50 percent gross margin. Right. So 50 percent gross margin is I charge the client 20, 000.

It costs me 10 and I’ve got 10 in profit. So that’s 50 percent gross margin. If I always think, okay, it’s going to cost me 10, 000 to do this project. I will not charge the prospect, the client less than 20, 000 to do the work. That is now my floor. That doesn’t mean that’s where I should stop because there are many cases where that number is simply going to be too low because you’re creating far more value than that for your clients.

There may be times where you sit there and say, well, You know that 20, 000. No one’s going to pay me that. First of all, you’re probably wrong. My experience is most agencies undervalue their services. Most agencies are in a position where they could charge more for the work that they’re doing and clients would still happily pay those rates, but let’s let’s say for sake of argument that you’re right that that project that cost you 10, 000.

You can’t charge 20, 000 for. That to me suggests that you need to reevaluate either how you’re doing the work or what you’re proposing to do, because there’s some disconnect that’s in there, and so you either need to figure out, okay, it’s costing us 10, 000 to do this work because, you know, we don’t, we’re not efficient enough, or we can’t do things at scale because we’re working in too many different industries.

So we need to account for much more time to be learning about that clients industry or that clients needs or whatever, or we don’t take on enough of this kind of particular project. So we’re it just takes us longer, right? I mean, we all know if you write all the time, you can generally write faster than someone who only has to write once a quarter, right?

So you have to think about why is it that your cost is what it is. But let’s assume if your cost is accurate. And if the cost isn’t, it’s not something where you’ve, you’ve got some fundamental flaw like the ones I’ve just talked about in getting to that cost, then you need to look at, okay, how can I create additional value so that it is worth 20, 000 at a minimum to the client?

And that may be saying, okay, well, you know, what we’re talking about doesn’t really make sense. Yes, we know that I know the client came and they asked for, you know, a print brochure. But is that really worth it today? Right? They want a really fancy print brochure, but they’re not going to see the value out of it because that’s not the environment we live in.

Well, then maybe you need to work to find a better match in what they’re looking to accomplish then that service that they initially asked you for. And so the project budget really helps you to surface those conversations and it will help you find higher value ways of working with your clients, which ultimately means better results for the client, more profit for you, and much happier clients over the long term.

So, the floor is, is something that helps keep you out of trouble, but it’s not what you should charge. What you should charge is based on the value that you’re creating, what’s competitive in the marketplace.

You want to, if you’ve got prospects who never push back on price, you need to keep bumping your price up. Because at some point you need to get some push back on price. I always tell the story about how many years ago with my very first agencies, 20 some years ago now, the prospect flew me out to California for a meeting.

I was meeting at the CEO’s home and so he had a car pick me up at the airport and we’re driving in circles up around a hill in Beverly Hills. And so we keep getting higher. And so in my head, I’m saying, Oh, higher price, higher price, higher price. And so we get up and just gorgeous home and view of the, of Los Angeles and, private chef cooks us lunch, you know, the whole thing.

And so I’m like, okay, I’m going to charge even more, right? And so we sit down in his, personal study after lunch to, to talk brass tacks, what I could do, what it would cost. Threw out a number that I thought was, you know, frankly, pretty significant. And he said, great, let’s get started. Yeah. Not even a moment’s hesitation.

And so I knew that I left money on the table there. I knew that he saw even more value than the price that I was charging by a lot, because again, no hesitation, no pushback. And so if you’re in that position with your prospects where you’re not getting any pushback on pricing, you need to be testing higher prices. Because the more spread that you can get between the floor that you come up with by doing effective budgeting, And the amount that you actually can charge, that’s additional profit, and that’s really the goal.

If we can continue to increase profitability, we have a successful agency. The agencies that lose track of where they’re going are the ones who focus on revenue alone. And revenue alone isn’t the right thing to be focused on. Because I can have a 20, 30, 40 million dollar agency and make less money than I could in a one or two million dollar agency.

And think about that for a moment. The reason why that’s true is because they’re not making as much money on the individual projects. They’ve gotten into a volume game. Most of you don’t want to be in a volume game. Most of you want to be doing really good work that you can execute on profitably, that clients are happy with.

And that will cause your revenue to grow, but it will cause your profit to grow at the same time. Project budgeting is really the absolute essence of getting to real profitability in your agency. And I, I always finish with this slide because I just, I kind of like it. We’re tying it all up with a bow. So if you get those budgets, right, you will get profitability right.

And I guarantee that you will be happier. You need to do it in such a way that you’re getting honest answers from your team. It needs to be that team effort we talked about. And You need to pull everybody together, help them understand why budgets matter, help your project managers understand the importance of getting it right, work with them on giving you the best estimates possible, and continuing to refine them by tracking what actually is working and what isn’t, how much time you’re actually spending on projects. And if you get all that right, you’ll be in a position where you can price really competitively, but really profitably at the same time.

So with that, that will wrap up the core presentation today. We do have a little bit of time here for some questions. , hopefully that is all very helpful to you. Again, the templates available to you in the resource library on the SAGA website. So I would encourage you to grab that there. I see, someone, Jill in the chat says, this is great, looking forward to taking the templates and putting them into our project management system.

So, I’m really thrilled that it resonated with you. , if folks do have some questions, I would be happy to answer them. As I said, the template, in addition to being a spreadsheet, also has a workbook. So, it’ll walk through a lot of what I talked about today, in a little bit more detail, and explains a little bit more about, each of the portions of the spreadsheet.

So hopefully, you will understand it as you go through it. If you have questions, I’m always happy, to answer questions. Just send me an email at chip@smallagencygrowth.com and I will do my best to answer them or direct you to The right resource and I see a couple other people now are chiming in with with thanks and again this resonated.

So I really appreciate the fact that that you all are seeing value out of this. I would also encourage all of you if you have ideas for future webinar topics that you’d like to see covered. Feel free to email me a couple of the ones on the upcoming calendar schedule came out of the SAGA member monthly meetup that we did earlier this week.

And it’s, it’s always great to, to hear what you all are looking to learn about so that I can share as much of that during these free sessions, as possible. let me try to bring up, actually, let me turn off my little flashing yellow cursor here, cause that’s a little bit distracting to me. And let me see.

I apparently have explained it incredibly well because for the first webinar in a long time, I have had no questions. I’m frankly surprised by that, but, , oh, I do have a suggestion for a topic. Let’s see here. Oh, how do, how do I, actually, this is a good question for me to, to, to touch on briefly here, but it would be a good topic for a future webinar.

and so how do you, how do we have the, we have to raise your retainer conversation with a client? So. That’s actually that’s I mean that’s actually a really good question because it is the kind of thing that the project budgeting is going to surface right?. It’s going to because budgeting is not just that estimate up front as we talked about is the importance of managing it over time tracking it over time.

And so what you’ll discover, particularly for clients that you’ve had around a long time, you’re probably going to find some degree of over servicing. And we’ll get rid of that slide off there because you don’t need to see the word questions next to me. You’d see more of me. So When you when you discover that you are over servicing a client when you discover that the the price is not right. That the costs that you’re incurring are too substantial Then that is a time where you have to figure out how do I right size it?

And I can tell you that I have had that conversation on many occasions over the years with clients and frankly, I always find that the most direct is typically the best, and it’s simply to say, Look, you know, over, over time, we’ve, you know, we’ve continued to, to, to do things that go beyond the scope of work.

Cause usually that’s why your costs are higher when you’re going to a client to raise the retainer. It’s because over the years or over the months, even depending upon, , how fast that client relationship is moving, you’re servicing things that you didn’t have in the original proposal. And it’s, it goes back to that, a billion here, a billion there quote, or non quote as it were that I shared earlier.

And it’s, sure, we’ll make an exception. We’ll do that. We sure we’ll do that and and those accumulate. And once you start doing it, they don’t go away. So let’s say that in your statement of work, you didn’t have that we would send an email out every week, whether that’s members of the media or their stakeholders or whomever.

And you say, sure, we can send that. That’s, you know, it won’t take us very long to do that. So we’re happy to do that. Now, all of a sudden, that’s built in. Right, because after you do it a couple of times, they just expect you’re always going to do that. And then there are other little things like that. And so you look back 6, 12, 18 months down the road and you look at the statement of work and you say, Whoa, all these things weren’t in there.

So part of that is understanding that you have to be consistently looking back at that statement of work to make sure that to the extent that you’re doing things out of scope, you’re calling it out to the client in real time. So even if you say, sure, we’ll send that email, you need to make clear to them at the time that you’re making an exception to the statement of work, and it’s a one off. And you do that so that that then lays a marker that you’re able to use when you do need to have that we need to raise your retainer conversation. The other thing and. This is a good topic for a whole another webinar conversation because there’s a lot of nuances to it, but one of the things that you often want to do in those cases is figure out how to reframe it. So instead of saying, look, you need to pay twice as much for what you’re getting today.

Most clients don’t respond to that. So. Most of the time what you want to do is come in terms of, well, you know, we’ve now developed the expertise in what you do. We understand what you’re trying to accomplish better than we did a year, two years ago when we first started working for you. And we think that we have a better way to work with you.

And so change the conversation from pay more for what you’re doing today and change it to here’s what we suggest that you should be doing. So a different scope of work from what you’re doing today. And here’s what it’s going to cost. So then what you refocus the conversation on is instead of being focused square on the money, you’re focusing on the results and the work that you can do for them to achieve those results.

And then the money conversation becomes secondary to that. So it doesn’t mean that they won’t evaluate that it’s a budget increase. Of course, they’re going to see that they’re, you know, they’re not crazy. Oh, you may be able to do it in such a way where you can reduce your overall workload while still improving results.

I mean, that’s a lot of us know that we end up doing a lot of work for our clients in the agency world where we think there’s really no point to this. We’re going to do it because we’ve been asked to do it, but it’s not really accomplishing anything. Anyway, how many times have you asked yourself that question when you’re working with a client?

But we do it because we’re getting paid. So we do it. If you have an opportunity to discard some of that and invest time in things that are actually producing results, maybe you’ve eliminated a bunch of busy work that your team’s doing. Well, now I can propose keeping the same price while also getting better results and improving my profit margin.

I mean, that’s the kind of win, win, win type of situation that you really want to see. So great suggestion for a future, webinar topic. I, I appreciate the suggestion. I see there are a couple of more comments and such here in chat. , Pricing structure points instead of hourly base packages, fixed price.

Yeah, that’s a great one. So actually, on the upcoming webinars here, let me, let me bring this back up here and see if I can shoot back. Let’s see if, how well I do on this, huh? On the upcoming webinar schedule. There we go. So we’ve got, pricing models. So points will be one of the things that gets discussed here, in the pricing model discussion on March 31st, and then productizing will also be covered separately.

So, I think actually all three of these webinars would be relevant to that particular, question. So, , look forward to going to those in more depth. Yeah, and I see there’s a link here to the to PR 2020, which is that they were sort of at the forefront of proposing a points based structure, you know, points based has its pros and cons.

The idea really at its core is to it’s basically taking you to a quasi hourly billing system with clients without actually explicitly saying that you’re doing it by the hour. But basically what it says for those of you who are not familiar with points based pricing in a nutshell, it is, you know, if you want a blog post, it’s five points.

If you want to press release, it’s eight points. If you want, you know, social media posts, it’s, you know, three points for five tweets or whatever. I mean, however you break it out. And so you take all the work that you do and you break it into a point structure. Clients subscribe to a bucket of points typically that they can then allocate however they need to on a monthly basis.

So we’ll talk about that again, pros and cons to it, but that’s for those of you who are wondering what I’m talking about when I say points or when that person suggested the point structure, that would be what we’re talking about. And yes, if you, if you sign up, you will get the replay. And all of the replays are also on the SAGA website, so you will get it both ways.

So lots of opportunities to see the replays. Generally, the replays go up and are made available within a week or so. Sometimes it takes a little bit longer because I do do a little bit of light editing at the front and back just to make it as clean as possible for posterity. So with that, that will bring us to an end of the time that we have together here today.

I do appreciate everybody taking the time to, to be with me today. I appreciate the friendly feedback and suggestions. If you have other thoughts, other questions, again, email me chip@smallagencygrowth.com. And if you have got, other feedback, I would love to hear that as well. And I hope to see you here on another webinar.

Very soon. So that will bring to a conclusion today’s webinar on project budgeting and thanks again for joining me.