Profitability Analysis: The Complete Guide

Several metrics measure different aspects of profitability:

Gross margin: Revenue minus direct costs (cost of goods sold or, for agencies, direct labor and expenses). Shows profitability before overhead.

Operating margin: Revenue minus all operating expenses. Shows profitability from core business operations.

Net profit margin: Bottom-line profit as a percentage of revenue. Shows overall profitability after all costs and taxes.

ROA (Return on Assets): How efficiently the company uses assets to generate profit.

ROE (Return on Equity): Profitability relative to shareholder investment.

For agencies, project-level margin is often the most actionable metric—understanding which projects make money and which don't.

Follow these steps for effective profitability analysis:

Gather financial data: Compile recent financial statements including balance sheet, income statement, and cash flow statement.

Calculate key ratios: Compute the profitability metrics relevant to your business and industry.

Analyze trends: Compare ratios over multiple periods to identify whether profitability is improving or declining.

Benchmark against industry: Compare your metrics to industry standards to understand competitive positioning.

Identify drivers: Determine which factors most influence your profitability—pricing, costs, utilization, client mix.

Take action: Develop strategies based on analysis to improve identified weak areas.

Agencies need granular profitability visibility:

Project-level analysis: Understand margin on each project by tracking revenue against all direct costs including time.

Client profitability: Some clients are more profitable than others. Know which and why.

Service-line analysis: Different service offerings may have very different margins.

Team member contribution: Understand effective hourly rates and utilization by person.

Monton automates agency profitability analysis by connecting time tracking to project budgets and calculating margins in real-time. Instead of discovering profitability problems after projects complete, you see them as they develop and can take corrective action.