Re-priced their service offerings after exposing 30% of clients were unprofitable.
Creative Labs
The Challenge
Creative Labs is a 35-person digital marketing and branding agency in downtown Toronto. Their top-line revenue of $4.2M looked healthy, and the founder believed the agency was running at approximately 25% net margins — based on dividing total profit by total revenue on the annual P&L.
The reality was far more complex. Creative Labs had no project-level profitability tracking. All labour costs were recorded as a single salary expense line. There was no mechanism to track how many hours each designer, developer, or account manager spent on each client's work. The agency operated on fixed-fee retainers, and the assumption was that each retainer was roughly equally profitable.
Additionally, their accounts receivable was a mess. Average DSO was 52 days — meaning the agency was financing almost two months of operating costs out of pocket before getting paid. Several clients had balances over 90 days with no formal follow-up process.
The APX Approach
The Solution
We deployed a Fractional Controller engagement focused on three initiatives.
Initiative 1 — Project-Level P&L: We implemented time tracking using Harvest, integrated with Xero. Every team member now logs their hours against specific client projects. Each employee has a fully-loaded hourly cost rate that includes their salary, employer CPP/EI contributions, health benefits, and an overhead allocation for office space and software tools.
Within 60 days, we produced the agency's first-ever Client Profitability Report. The results were eye-opening: of their 22 active clients, 7 were operating at negative margins. The largest unprofitable client — a $180k/year retainer — was consuming 40% more hours than the retainer covered, because the scope had crept over 18 months without a rate adjustment.
Initiative 2 — Pricing Overhaul: Armed with accurate cost data, we worked with the founder to restructure their pricing model. Fixed retainers were replaced with tiered packages that included defined hour allocations with overage billing. Three clients who refused the new terms were respectfully offboarded.
Initiative 3 — Collections Automation: We implemented Plooto for automated payment collection with scheduled reminders at Net 15 and Net 30 intervals. For clients over 30 days, the system automatically sends escalating follow-up emails before any human intervention is needed.
The Outcome
Within 6 months, Creative Labs' blended gross margin increased from 25% to 37% — a 12-point improvement driven entirely by eliminating unprofitable work and right-sizing retainer pricing. DSO dropped from 52 days to 34 days, freeing up approximately $120,000 in working capital.
The founder reported that the Client Profitability Report is now the single most important document in the business. It's reviewed monthly and directly informs decisions about which new clients to pursue and which existing clients need scope adjustments. "I thought I was running a profitable agency," the founder told us. "I was actually running a charity for 7 of my clients and I had no idea."
Want results like these?
Book a Discovery Call to see how we can optimize your finance stack.