How to calculate gross and net profit for digital agency

[C.Sky]

I run a small digital agency specialising mainly in web development and SEO. As the main cost to me is staff (x4 full time plus x1 freelancer) I'm wondering what the best way to calculate gross profit and net profit is on our services?

Each job can be different, one month we could be doing small jobs (£500 to £2,500 per job) and the next larger projects (£5,000 to £15,000). Also sometimes we can charge more in the larger bracket due to expertise but the job might not take so long. So the result is that ever job is different in length of time to produce an cost to the client.

We also turn over roughly £15,000 ex vat per month if that helps apply some structure?

Could anyone give me some suggestions on how to deal with this please?

 

[Karimbo]

Depends how complicated you want to go really. I would just do the cost in terms of average cost of staff, and work out how many hours the project took. That's how I would cost it out.

if you want to make it really complex you could do the exact earings per hour and systemise the projects so you get the exact total hours worked on. But that's just too costly to implement and pointless doing.

I take it this is for a management point of view. For financial accounts it's a bit more straightforward. Wages are overheads so you can't expense it off a project, unless you're working with a freelancer.

 

[Walkol]

As the above poster has said, assuming these are for management purposes....

While to get off the ground, this takes a small bit of effort, once set up, it is a doddle to do.

First, you need to work out your cost per hour for each staff member. For freelancer, this is easy, just their cost per hour. For staff, take their gross wage, add on employers NIC and employers pension (if applicable). This gives you their total cost for the year.

Then you need to work out how many hours they are actually available to work. So, assuming they are on a standard 37.5 hour week, over 52 weeks that is 1950. However, they have 28 (again, assuming here) total holidays, and you have an average of 3 sick days per year (assuming again). That means for 31 days, they are not physically working. So, you have a total cost per year, and total working hours of 1,717.5, divide the two and you have a total employee cost per hour.

On each job, put in the hours worked for each employee, multiply by their total hourly cost, and you have your gross cost. Subtract from your Net sale, and you have the Gross margin.

To get the net margin, will require a bit more work. What you need to do is estimate ALL your overheads for the next 12 months. So, all non billable hours (outside of holidays and sick days, as we have already accounted for this in our employee cost), admin staff, rent, rates, insurance, transport, meetings, printing, phones..absolutely every single cost to your business that is not your cost for billable hours. You will then have a total overhead cost for the year.

Next stage is to calculate your expected billable hours for the year. So, assuming what we said about the about staff was correct. We have 4 staff, who are in the office for 1717.5 hours. Now, assuming they are fully billable each hour, that is 6,870 hours. Assuming freelancer is in a day a week, thats another 390 hours. So you have a total of 7,260 billable hours to cover your overhead cost. Divide your total overheads by your total hours, and you have a cost per hour for overheads.

So, your spreadsheet would go something like this, assuming you had one member of staff on this one job.......

Employee 1
Total Man Hours 100
Employee Cost £15
Total Emp Cost £1,500
Net Sales £3,500
Gross Margin £2,000
Overhead p/h £15
Total Overheads £1,500
Net Margin £500