How to calculate profit by client for your agency

Why revenue by client hides the client you carry

Your books can show what each client paid you. They cannot show what each client cost, because the largest cost is your team's time.

So the client with the largest fee feels like the most important one. You staff it first, answer it fastest and say yes to its extra requests.

If that client takes more hours than its fee covers, you are paying to keep it. The cost never shows as a line on your P&L. It shows as a busy year with thin profit.

The profit by client formula

Profit by client is what each client leaves you once every cost it causes is counted. Four costs come off its fee.

Client profit = fee - (hours x cost per hour) - direct costs - share of overhead

• Hours: every hour spent on the client, including calls, revisions, reporting and your own time.
• Cost per hour: salaries plus everything paid on top, divided by the hours spent on client work.
• Direct costs: freelancers, tools and media you pay for this client and never bill back.
• Share of overhead: rent, software, admin and any role that never touches a client, split by each client's share of the hours.

Four clients, ranked two ways

Run the numbers on an invented agency billing $30,000 a month across four clients. An hour of its team costs $50.

Overhead is $6,500 a month across 325 client hours, so each hour carries $20 more. Client A also needs a $1,000 freelancer that is never billed back, and Client C a $500 tool.

Full cost below is each client's hours at $70, plus its direct costs.

These figures describe an invented agency chosen to show the arithmetic. They are not a client result.

Client A pays 40% of the fees and takes 52% of the hours. Ranked by profit instead of fee, the order is B, C, D, then A.

Why you fix the fee before you drop the client

A loss after overhead says the fee or the scope is wrong. It does not say to end the contract tomorrow.

Salaries, rent and software stay when a client leaves, unless you cut them. Lose Client A with the same team, and only its $1,000 freelancer goes.

The month then turns from a $5,750 profit into a $5,250 loss. Dropping a client pays only once its hours go to better-paid work, or its cost goes too.

How to rank your own clients

1. ( 01 )

   Take the last three months

   One month can catch a client mid-launch or in a lull. Three months of fees and hours give you a ranking you can act on.

2. ( 02 )

   Count every hour on each client

   Include calls, revisions, reporting and your own time. Where nobody logged the hours, ask for an honest estimate rather than leaving them out.

3. ( 03 )

   Work out what an hour costs you

   Add up salaries and everything paid on top for everyone who works on clients. Divide by the hours they spent on client work.

4. ( 04 )

   Add direct costs and overhead

   Put each freelancer, tool and media bill against the client it was for. Split everything else by each client's share of the hours.

5. ( 05 )

   Rank by profit, not by fee

   Then put the fee ranking beside it. The clients that move furthest between the two show where your margin goes.

What to do with the ranking

Start with the clients at the bottom. Work out the fee that covers their hours at full cost, and take the hours to the next renewal.

For Client A, that fee is $12,900 a month for the same 170 hours. If the client will not pay it, cut the scope until the hours fit the fee.

Keep a loss-making client only on purpose, for the referrals or the name it brings, and know what it costs you each month.

Then rerun the ranking every quarter and watch the profit of the client at the bottom. While it stays above zero, every client is paying its way.