Are you wasting time?
STANDSTILL agency owners don’t like to waste time on the detail and minutiae of running their agency. They’d rather spend their time looking for new projects and new clients to give them more revenue. Nothing wrong in that, but they risk missing opportunities that are right under their noses.
STANDOUT agencies don’t like to waste time at all. They don’t just look for more fuel for their business, they tune the engine so that they can deliver optimum performance from the fuel they already have.
All agencies know what they ARE billing their clients, but STANDOUT agencies also know what they AREN’T billing. Armed with this information, they can release the latent capacity in their firm.
What is latent capacity?
Latent capacity is the gap between the time you ACTUALLY bill to your clients and the total available time that you COULD bill.
Left unchecked, latent capacity is ultimately waste. It’s time you are wasting running your agency. It’s also a huge missed opportunity to deliver more revenue with the same resources. Calculating latent capacity is relatively simple, yet few agencies take the time to do so.
SPOILER ALERT: Calculating latent capacity does need you to embrace, track and charge billable hours. Look away now if billing hours is something you have a fundamental issue with(!) Stay with me though if you’re on board with tracking hours (even if you don’t do it). This stuff is definitely for you.
Identifying your latent capacity
No agency can charge 100% of their time to clients. People are not machines. We need holidays, well-being time, L&D, time to socialise and time to run the business itself. We also make mistakes, take longer to deliver work than planned, get distracted, and sometimes, of course, we can’t work at all due to illness.
Even taking these considerations into account, agencies often still bill way below the time they should each month. There are numerous reasons for this,. Often time is being wasted in over-servicing, duplicating work, re-work etc. The bottom line is that if you’re running an agency and your time is not being effectively converted into revenue you have a problem. Don’t despair though, where there are problems there are also opportunities.
Your opportunity is to minimise your latent capacity. To close the gap between what you could bill and what you actually bill. In doing so, you’ll become more efficient and make more money with the same resources. You’ll be truly scaling your agency as opposed to just growing it.
Calculating latent capacity
Latent capacity can be calculated a number of ways. It can be expressed annually or monthly, in financial terms or in time (hours). It can even be monitored as a percentage.
To keep things simple, lets focus on identifying the monthly financial latent capacity for your agency. Before you start, you’re going to need to know the following:
– The total amount of time you billed last month in £. N.B. We’re working with billable time / fee income only here. Split out any media or other such billings if you have them. (A)
– The number of chargeable – fee earning – people you employ (include contractors if applicable). N.B. This might not be a whole number as you may need to account for part-time people. (B)
– Your chargeable ceiling. The maximum hours that a chargeable person can bill in a year. This is a bit trickier as it includes a few more variables. I work with 1665 hours per person per annum. Your agency may differ due to your geography and/or policies. The figure of 1665 is derived from: 222 chargeable days per annum (222 = 5 days per week x 52 weeks minus 20 days annual leave minus 8 Bank Holidays minus 10 days average sick leave allocation) multiplied by 7.5 working hours in a day. Adjust and use your own figure if you need to. (C)
– Your utilisation rate. You won’t bill every hour available so you need to apply a utilisation rate. I work with 75%. You might want to go higher or lower, but essentially we are saying that of the hours available, we only expect to be able to charge a maximum of 75% of them. The remaining 25% is breaks, other activities, etc. N.B. Use the rate you think you actually achieve, not an aspirational target. (D)
– Your hourly rate. Some agencies charge different rates for different people and different clients. Some agencies charge a blended rate. Your rate will also differ due to your location and the type of work you do. Ultimately you need a figure to work with. I commonly use £85 per hour for my work here in the UK. N.B. Use the rate you think you achieve, not a rate you wish you could charge or others charge. (E)
Doing the maths
Now you have the data, you can do the calculation. I know this looks a little daunting, but with the data above, it’s really quite simple.
To illustrate an example, lets consider an agency currently billing £55,000 (chargeable time) per month using 8 chargeable people. They have a 1665 hour chargeable ceiling, a 75% utilisation rate and use an hourly rate of £85. Our calculation would look like this:
This agency’s latent capacity is £15,763 per month. They are billing £55,000 but they have the potential to bill £70,763 per month.
They could go from a £660k agency to a £849k agency without increasing the size of their team. Moreover, much of that increased revenue would fall straight down to net profit level. They could go from breaking even to making a £189k profit.
These calculations are not perfect, they should be used as a guide. It is unlikely that you will close the latent capacity gap completely. It should also be noted that the extra hours will not fill themselves. You may need additional client work to fill the gap.
Crucially, you have identified efficiencies you can make and capitalise on. You can focus on closing the latent capacity gap and you finally have a use for those timesheets!
Please don’t let anybody tell you looking at latent capacity in your agency risks making your business into a sweat shop. Your chargeable ceiling and your utilisation rate already have holidays and downtime included within them. If you want to adjust your rates to be less aggressive than mine then please go ahead, you may well still uncover some capacity that you didn’t realise you had. It could transform your agency.