An ultimate guide for agency finances📚Part 1: Essentials & Fixed price projects

A quick guide on finances in service agency. Fits best for digital, design & IT firms.

How much does it cost to make a logo?

If you’re into software development, design, ads, or content creation business — you’re aware that your product finances are flexible. Like, if you’re trading cars, the math will be much more straightforward. A car is a car — simple as that. You can calculate the purchase price, logistics, overheads, and sales costs quite easily.

But things always get tricky if you’re into digital services. So how do you come up with a price if your product is something as abstract as logo development?

To answer this question, you need to break it down into specific points:

• Do we estimate a logo design or the entire brand identity?
• Is there any legacy design, or we’re starting from scratch?
• Where in real life should this logo be used?
• Is there a clear deadline for the delivery?

Imaginary additions to the quote that come to mind once the client shares extra specifics of the project

These are the “external” questions that have to do something with the customer. However, there are still internal issues related to the designers’ salaries in the company, overheads, legal & operational expenses, execution specifics, etc.

The formula that can help you set a relevant logo development price is big. The trick is that the complexity of this formula grows from day one. It all comes not to the business objectives but to the team specific.

Founders are craftsmen, not salesmen

The service agency is unique since you can start this business at almost zero investment cost. If you and your teammates have the necessary skills, you just start a company. There’s a big chance you can break even the very first month you run the agency.

Of course, this is not guaranteed, but it is a fairly common scenario.

Agencies, IT outsourcing, design bureaus, and other service companies start with one or more professionals who grew out of their jobs and are ready to go independent. They want to create good products, and so they do. However, finances and accounting usually are neither their strong skills nor their top priority.

A set of question agency founder and his colleagues may be wondering about

So what’s the problem?

In a service company, finances are the way to capture efficiency within abstract products. Imagine calculating a renovation cost in an apartment where new rooms could appear out of nowhere. That’s what it is like with graphic design or web development.

Agency owners are often young entrepreneurs who don’t have time to get an MBA or listen to a Harvard finance podcast on YouTube. So complex calculations are often done very intuitively.

Service business means dealing with people, and people are full of surprises. This also affects finances since unexpected dismissals or client requests can inflate the budget and create a perfect storm.

In theory, it seems simple: you gather the team, add up 30% to your production cost (which is just the sum of salaries), and everyone is happy. However, real life is more complicated than that. Let’s take a closer look.

Seven agency finances essentials

There are seven main financial components for any service business model. They apply to every agency, regardless of the company size.

You need to understand them for two reasons — first of all, this is your business, and business is numbers. Not knowing your business model is like approaching a horse from behind — not the winning idea. And secondly, you need to set your pricing based on some math, not a gut feeling.

So here are the essentials:

Agency cost structure

1. Team cost. Full-time or part-time, in-house or remote, team cost include salaries and payments that you pay for the talents who provide services to your clients.
2. Project costs. Any expenditure needed to either sign or keep the specific contract going. That could be a flight to the client for a meeting in Dubai, a business lunch, the purchase of mockups, or the client’s ads budget within a project.
3. Subcontractors. The difference between the team and subcontractors is simple: you don’t include overheads in the subcontractor’s rates because you don’t have to provide work tools and conditions.
4. Overheads. These are expenses necessary to enable your work: from subscription software to office costs and budgets for parties & mingles. Overheads are shared costs, so they don’t relate to some specific projects but to the company as a whole.
5. Taxes and fees. These could be sales / profit / income taxes for your company (depending on your country), bank fees, Upwork commissions, etc.
6. Investments. Something strategic, like buying equipment, paying for tuition, moving to a bigger office (and a new litter box for the cat who lives in this office).
7. Profit. Basically, the main reason why founders were crazy enough to found the business.

The last point in this list is the most pleasant. Also, this is the variable that gets sacrificed the most.

Agency costs structure breakdown: from project revenue to NET profit

Team

The core of your business model is your team. So the first piece of puzzle is to know the team cost. This is the sum of all salaries of executors with taxes.

👉🏻Pro tip #1: it’s better to include only the salaries of direct executors in Team category. The direct executors are the ones, who’s can be estimated for each project: developers, designers, business analysts. If you have ones who’s hours can’t be allocated to some exact projects (accountant, CEO, office manager) — you should include them to the Overheads

👉🏻Pro tip #2: Include the salaries in gross. Meaning that the sum should include social taxes & fees. So use the total cost that is sent to employee on your company side.

Overheads

Overheads are costs necessary for the team to work: office, software, hosting, equipment, coffee, tea, and French croissants 🥐. As mentioned earlier, overheads also include all the indirect executors, such as HR, Management, Sales, etc.

There are two main points concerning overheads: keeping records and, more importantly, changing overheads dynamically when your expenses grow. What do we mean:

• The overhead size is affected by many factors: new managers, higher rent, new subscriptions, currency rate, etc.
• The overhead numbers are recorded in your expenses and affect your rates.

Team rates

Building a product (website, logo, campaign) for a service business is a matter of time spent. So its price starts at a rate — the cost of an hour needed to build a product.

Rates can be:

• Basic: a salary divided by the number of work hours.

• Internal: basic rate + overheads, which are evenly distributed between the team and included in the rate.

• Commercial: internal rate + profit

But what about indirect executors, like management, assistants, and HR? First of all, ask yourself a question: “Can I calculate the exact hours this person works on the project?”. If yes — you can add the person to direct executors. If not — they become a part of overheads.

We use the second approach — all the team members that don’t execute calculated work are always a part of overheads.

Project expenses and contractors

The math is simple: project expenses are the costs that only exist within a particular project. These are contractors, mockups, tools, commutes, etc.

To estimate the project correctly, you should consider each expense before signing the contract. If certain costs are not clear — for example, you have a contractor who can’t accurately estimate the price — it’s always a good idea to pledge more (captain obvious here, guys).

Profit

Profit requires accurate calculation, like any expense item. Some newbie founders consider profit as income minus expenses. A better way to think of it as a necessary part of the business model. If your company doesn’t spare on people, it should not spare on its profit. Consider that, and your company will thank you.

You always risk the profit

Imagine your team is developing a website, and client requests extra pages or layouts. This type of project usually has a fixed cost, so an increase in project duration means a loss of profit for you.

What’s the change in cost — you may ask?

• Your employees still get their salaries. The longer the project or a project task lasts, the more paid days / hours there are.
• You keep using your company resources. That means you pay your overhead costs like subscriptions while there can be no client checks.
• Project costs may remain within the expected range, but they can also increase. Especially, if you need a dedicated subscription for this project.
• Your taxes, fees, and sales bonuses will be constant since the project is a fixed-cost one. So the sum you pay is related to project budget, which is not changing.

So here we are: all the components are stable or can increase, while the profit is the only thing that can shrink to help you make both ends meet.

Sometimes the profit can be even negative. This happens when you have dramatic overspends in some pieces of work. In this case it costs more to deliver a project compared to the price the client is obliged to pay by contract

☝🏻 This is the way projects end up in the operational red. The unprofitable projects are covered by the ones that have some profit. This can either lead to the company earning less than planned or ending up in a painful cash gap.

Profits and loses on different company projects

Investment

It’s often ignored in pricing, which is a mistake. It’s better to approach investments as a component of the project pricing than as an expense that the company will make later from profit. Let’s take it as a mandatory pricing part.

Investments can be related to any goal — new and better office, health and education of the team, a “stash”, etc. We even saw some cases of using investment money to trade crypto and make some profit. Disclaimer: This is not financial advice.

Taxes and fees

Your tax money purely depends on your legal entity, so it’s up to you. Calculate it after your team rates, overheads and profit are in place.

In addition to taxes, you should add sales commissions, referral fees, and other fees you may have.

By the way, we don’t consider marketing costs as a separate item in the business model and pricing formula because it’s quite a challenge to keep CPA on the same level all the time. So it’s better to include marketing into the overheads and divide it between executors.

How does pricing work?

1. Step one — calculate the internal rate.
2. Step two — add contractors and project expenses to get the project cost.
3. Then, you decide on the profit (we recommend not falling under 30% margin).
4. In the end, you add fees and taxes to see the cost for client.

Then you have it — project cost and project price.

Cost includes your team, contractors, and overheads. The price consists of the cost with profit and all the fees and commissions.

Almost 100% of agencies and service companies that recalculated their economy properly found that they sell services cheaper than they should. This, of course, comes at the cost of profit.

What to do next?

To start, calculate your business model. This is some general advice because we are not aware of your finances. If you feel that your money is in chaos, you don’t control expenses, or you sell services cheaply, start by calculating business model components:

1. Calculate the basic rate of your team members.
2. Build a dynamic system of overhead calculation to take into account all changes in your expense structure.
3. Calculate internal rates, and always stay over it selling projects.
4. Build a list of project expenses with precise prices on every.
5. Decide on the margin, and don’t be afraid to make it high (this is business, not some expensive hobby of yours).
6. Add fees and commissions.

All set? Congrats, you are incredible! Now you can price projects correctly and see the basic level of your business health.

If the founder does not know its business model, there is almost 100% chance that they will sell its services at a loss.

During the work, we witnessed many cases when calculations showed that the commercial rate should be 50–80–100% higher.

To sum up, we see that creative and IT companies should not start with creativity and code but with finances and operations. Treat money with respect and care because it’s always better to prevent problems than to solve them.

PS. By the way, you can calculate your economy in Fintellect. Email us to get access to the beta test of the app.