STANDOUT agencies focus on profitability

STANDSTILL agencies focus on profit

STANDOUT agencies focus on profitability

They are related, but they are not the same. Profit is an absolute amount, profitability is a relative one.

STANDSTILL agency owners focus on what actual profit is left at the end of the month or year. The monetary figure derived from the difference between what it makes and what it spends.

There is no question that this is important to both the business and the agency founder. Very important.

There is a danger here though…

STANDOUT agency owners monitor profit, but they place more focus on their profitability (margin). This is not a monetary figure but a percentage. It’s a more robust measurement of a companies performance, especially over the longer term.

STANDOUT agencies know that growing your profit is a good thing, but it’s not always great (especially if your revenue and costs are growing at a faster rate than your profit).

For example, Agency X could have made £48k profit off £300k revenue last year, and £58k profit off £450k revenue this year. They’ve grown the business by 150% and delivered more profit year on year, but their profitability has actually dropped from 16% to below 13%.

There could be a good reason for the above. The agency may have decided to invest more in the business this year. But unless they are closely monitoring profitability, they could fall into a trap of growing their top line but eroding their margin. Essentially working proportionally much harder for proportionally less return.

Profit measures the bottom-line income but profitability measures your return on investment.

Key message: Don’t grow the business by eroding the margin.