Your agency’s revenue looks fantastic on paper, doesn’t it? Clients are paying, invoices are going out, and turnover is growing. But when it comes to your actual profit, where’s all the money gone? If your bank balance isn’t reflecting your hard work, it’s time to look under the hood and figure out what’s draining your profit.
The Revenue vs. Profit Illusion
Revenue is vanity, profit is sanity, and cash flow is reality. It’s an old saying for a reason. Revenue is simply the total money coming in. Profit is what’s left after you’ve paid for everything it takes to run your agency. If you’re measuring success purely by revenue, you might be in for a nasty surprise when tax season rolls around.
So, what’s eating your agency’s profit? Let’s dig into the usual suspects.
The Common Pitfalls Eating Your Agency’s Profit
✨ Underpricing Services
Agencies often charge too little because they fear losing clients. Maybe you undercut competitors to win business or kept your early freelancer rates as you scaled. The problem? Low pricing means wafer-thin margins. Even a slight cost increase can wipe out your profit. The fix? Charge based on value, not time, and bake profit into your pricing.
⚖️ Ignoring Direct Costs
Every project has costs attached: staff salaries, freelancer fees, software, tools, and hosting. If you’re pricing without accounting for these, you’re already losing money. A quick fix? Use this formula:
(Revenue per project – Direct costs per project) / Revenue per project = Gross margin %
If this number isn’t healthy, you need to adjust pricing or costs fast.
💼 Overheads That Quietly Drain Profit
Office rent, unnecessary software subscriptions, unused tools – they all add up. One subscription at £50 per month might seem harmless, but ten of them? That’s £6,000 a year gone. Regularly audit your expenses and ditch anything that isn’t critical.
💡 Client Work vs. Agency Work: Misallocated Resources
Spending too much time on your own marketing while neglecting paid client work is a classic agency mistake. A good rule of thumb? Follow the 70-20-10 rule:
- 70% client work (the stuff that pays the bills)
- 20% internal growth efforts (marketing, operations, training)
- 10% experimentation (testing new services, tech, or strategies)
If you’re flipping these numbers, your agency’s cash flow will suffer.
📅 Tax and Financial Planning Blind Spots
If you’re not planning for tax, you’re walking into financial disaster. Many agencies reinvest everything into growth, then panic when they realise they owe thousands in VAT or corporation tax. Solution? Set aside a percentage of revenue for taxes in a separate account and review cash flow monthly.
How to Fix It: Steps to Boost Profitability
💲 Pricing with Profit in Mind
Stop guessing and start pricing based on value and costs. Here’s how:
- Calculate your minimum viable pricing (total cost per project + target profit margin).
- Shift to value-based pricing where possible, so clients pay for results rather than hours.
- Increase prices for legacy clients who are still on outdated, low-profit rates.
🏰 Trimming the Fat: Identifying Unnecessary Costs
If it’s not essential, it goes. Use zero-based budgeting: instead of tweaking last year’s budget, start from scratch and justify every expense. Ask, “If I were starting today, would I still pay for this?” If not, cancel it.
📈 Tracking Profitability Per Project
Overall profit margins can hide unprofitable clients. Use simple tools like Xero, QuickBooks, or agency-specific dashboards to track profit per project or client. If a client isn’t profitable, either raise rates, improve efficiency, or cut them loose.
📉 Smarter Financial Forecasting
Set financial goals beyond revenue, such as profit margin targets or cash reserves. Review profitability every month, not just at year-end. Tools like Float, Futrli, or even a solid spreadsheet can help you forecast and avoid cash flow surprises.
Your Revenue Looks Nice, But Your Profit Matters More
Growing revenue is great, but not if your profit margin is vanishing. Fix your pricing, control costs, and track profit per client, and you’ll actually feel the benefits of that revenue growth. It’s not about working harder, it’s about keeping more of what you earn. Time to make sure your agency is working for you, not just your clients.