THE PROFITABILITY CHALLENGE

Tonic Creative Business Partners

If you do good work for good clients, isn’t it reasonable to expect to be profitable? Businesses expect to be profitable as a matter of course, but in the day-to-day running of a successful organisation, it’s easy to lose focus on profitability, and before you know it, you’re simply “getting by”. In the creative services industry, the pressure to stay relevant, take risks, and retain talent can make this even more of a challenge.

So how do creative companies improve their profitability, without losing any of the ambition, drive and audacity that makes them so valuable to their clients?

PROFITABILITY, IT’S NOT EASY

As budgets get tighter and competition grows more intense, creative companies can often feel like the hardest hit. A recent survey of companies in the creative service industries found that the majority recorded average profits of less than 10%, as margins tightened for yet another year.

With high talent costs and decreasing fees, digital is under particular pressure, but design, advertising and marketing are also feeling the squeeze as they strive to make profits in a fiercely competitive market.

Profitability is one of the biggest challenges facing creative companies today, but being consistently profitable is a complex challenge.

All companies want to be profitable, but few would identify profitability as their driving focus, and nor should they. Profitability is often an outcome of a clear vision, and a strong business model, but it’s also sometimes a result of opportunism; recognising value and maximising potential through agility and smart execution. Positioning, offering, business development, pricing, people, ways of working and more, are all critical to putting a business on the path to profitability.

For ambitious, creative businesses, profitability is not just a nice-to-have, but a must-have. It delivers cash that acts as the lifeblood for investment in the future of your business; creating growth, improving standards, and developing your people.

Many businesses have resigned themselves to a low level of profitability, but it’s dangerous to be content with this position. Businesses with low profitability today can easily become businesses that don’t exist tomorrow. When operating in an uncertain marketplace, with fees now heavily project-driven rather than retained, it can take only a few months to go from exciting times to closed doors. This is especially true in creative services, where exciting, high-profile work can often paper over the cracks of low profitability.

But that’s not to say that creativity and profitability are mutually exclusive; great work can still be delivered profitably, and the better the work, the more valuable it is to clients. It’s no coincidence that many of the most memorable and influential agencies are also highly successful in commercial terms. That’s why it’s important to recognise the value of your company’s creative work, get your pricing right, and be upfront with clients about your costs. Being consistently profitable gives businesses a license to push boundaries, take chances and challenge themselves in new ways.

SET YOUR TARGETS AND TRACK YOUR PROGRESS

It’s important that you set your own profitability targets, but those targets should not be set in isolation. Goals should emerge from a plan of how you want your organisation to work, reflecting a deep understanding of your industry. Good targets aren’t just made up by the finance department; they should involve people right across the business and be understood throughout your team.

Identify a small number of relevant benchmarks for the business that the whole team can get behind; these could cover things like business development performance, staff costs and effectiveness, workspace and overhead costs, as well as overall profitability. And don’t forget to apply the same planning disciplines to clients and projects.

You should have data at your fingertips to allow you and your people to make good decisions and act fast. Be sure to set up simple information systems that will enable you to keep an eye on your progress. Track what’s going on, assess implications and move quickly to change things if they’re not going to plan.

KEEP TALENT BRIGHT, BUT AT THE RIGHT COST

Talent will always be the biggest proportion of your cost, but it’s also the biggest contributor to low profitability if not managed properly. Staff costs need to be matched by revenue; match your costs to the level of business you can be confident about and be flexible in how you deal with upside opportunities. Don’t invest ahead and chase the dream.

From juniors to senior management, it’s important to understand what each staff member adds in terms of value, and what returns you get for their salary. Know your capacity and where there are gaps in your returns.

Your people are your biggest asset so it’s vital to make sure you’re getting the best out of your team. When your workforce are happy, motivated and focused on what they do best, they’re likely to be more committed and productive, delivering outstanding work and driving the company’s continued success.

With high recruitment costs and onboarding new staff likely to take a couple of months, your bottom line will be hit hard if you don’t keep your best people. If you’re losing staff too quickly it will be expensive and you’ll need to ask tough questions about your hiring process, your culture and your management. The right hiring processes, culture and management skills are invaluable in maintaining profitability.

BE CREATIVE, THINK IMAGINATIVELY, AND BE PREPARED TO CHALLENGE

Though it’s no mean feat, it is possible to increase profitability considerably, and by higher margins than many would expect. No matter how tough the market gets, you should never put your head in the sand and accept declining profitability, nor should you continue doing the same old things expecting different results. Instead, be brave and address the issues head-on.

When your profits increase, make sure there’s something in it for everyone. Try to ensure that your workforce is invested in the continued profitability of the company. By engaging everyone in the process, and building your profitability goals into your company culture, profitability becomes part of a winning mentality that is written into the fabric of your company.

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