The Art and Science of Estimating.

In every agency there are basic accounting functions and tabulations, from purchase orders to invoices to the basic P&L statements.

Beyond the accounting “science” is the “art” of estimating – and as any successful agency owner will tell you, they consider the entire client/agency financial arrangement as an attempt at a balanced relationship where one is really in a constant state of monitoring and tracking.

Early on in my career I was taught the basics of billing. You see he had a pretty clear idea of what his costs were and how much of a percentage in profit he was willing to make (or not make) on a project, he would often charge less for a client that gave him more business, or less for a client that had an interesting project that could potentially enhance the agency portfolio, but the negotiated rates that he would charge a client was always based in fairness to the agency and the client.

I give him a lot of credit for teaching me that you have to be attunted to the client’s business and understand the each client has their own ideas and values that they put to their work and projects. You have to listen between the lines and learn to make wise choices of when you can charge for something, and when you can't. True "value-added" billing is meant to maintain the overall billing relationship, not to undermind it.

When times are good, you can charge more, when times are bad you charge less or work out alternate compensation. Many a night is spent worried about if we made the necessary judgement call to make sure both sides are in a comfortable, beneficial relationship.

The science in estimating is rather clear, cover your costs, salaries and overhead, the true art is in negotiating how much of a profit you will be able to charge, keeping in mind the worth of the account (and the creative) to the agency’s bottom line.

I wish everyone a happy estimating experience. Just remember, although you can always calculate the true costs of the project vs. your rates, it doesn't mean all of your clients will want to pay them.

Northstar Confrences is holding it's "Advertising Agency Profitability Forum" on March 3-4, 2005.