How to determine whether your agency is profitable

Why the bank balance can say yes when the answer is no

If you judge profit by the bank balance, or by a report built from money in and money out, timing decides the answer. The work does not.

A client who prepays a quarter makes one month look rich. A freelancer bill paid a month late makes the month the work happened look cheap.

You then price, hire or pay yourself from a number that was never true. The mistake shows up later, as a month when the cash runs short.

One month, counted two ways

Run the numbers on an invented month. The agency did $70,000 of work. A client prepaid $30,000 for the next two months, and $4,000 of this month's invoices are still unpaid.

A freelancer's $8,000 bill for this month's work arrives next month. You pay yourself through owner draws, which never appear as a cost.

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

The bank says the month made $39,000. The work lost $5,000. Nothing was hidden or wrong. The cash simply moved at different times from the work.

Four checks to run on your own books

Real profit = fees earned in the month - costs of the month - a salary for you

1. ( 01 )

   Count fees in the month you did the work

   Prepayments and late payers move cash, not profit. A prepaid quarter is work you owe the client until you deliver it.

2. ( 02 )

   Count costs in the month they belong to

   A freelancer's bill for this month's work is this month's cost, whenever you pay it. Leave it out and the month looks better than it was.

3. ( 03 )

   Put your own salary in

   Add what you would pay someone else to do your job. Profit that only exists before your salary is your wage, not a return on the agency.

4. ( 04 )

   Close and reconcile every month

   Match each account to its bank statement before you read the report. A profit figure from unreconciled books is still a guess.

What to do with the answer

Look at three months together, never one. A single month can swing on timing, and three months of real profit is the figure to decide from.

If it is positive after your salary, you can price, hire and pay yourself from it with confidence. If it is negative, you have found out while there is still time to act.

If your books cannot produce this within two weeks of month end, fix that first. Every pricing and hiring decision waits on it.