All of this used to be easy! (editor’s note: easier). 

Magazines printed issues monetized by ad pages. Studios made movies paid for by ticketgoers. TV channels had subscriber revenues plus advertisers, and ad agencies made art + copy paid for by retainer agreements over long periods of time. Graydon Carter was Important. People rode in town cars and drank martinis at lunch.

This is a drastic simplification and romanticization of a different time, of course, but one thing is true: in the past, creative businesses tended to be simpler. Companies tended to focus on singular creative outputs, with healthy / rich monetization models. Much of the nostalgia about this time period stems from the fact that the internet hadn’t yet destroyed the traditional creative monetization model and also that the internet hadn’t yet made the creative operating model incredibly complex. 

Now, any media company akin to a prior-day magazine has multiple teams cranking out content in video, image, text, and social-specific formats (and they’re all doing events now!). The agency model has shifted drastically, with the majority operating on a project-by-project basis, even with their largest clients, while also producing across a range of outputs. Every TV show has  a corresponding podcast. Everything needs a social media angle. Everything needs to be IRL, too. 

This has led to a massive growth in the number of projects any creative company is operating at any given moment. Those projects can be monetized several ways (more on the three monetization models of creative businesses coming soon!), but typically the output or product is run as an individual workstream, a mini-fiefdom, with their own leaders, operators, and often multiple creative teams working together. 

So which of these projects is making us money? Which of these is benefitting us in the long run? These are all questions that can be answered with a clear(er) view on project-level gross profit, or in non-accountant speak, the amount of profit each of these projects generates. 

If you peeled apart the P&L of any creative company, you would start to understand that instead of looking at the holistic P&L of one smoothly operating assembly line, you’re really looking at hundreds of smaller, project-level P&Ls glued together. Each of those individual projects will contribute a certain profit (or loss) level to the whole company. Therefore a whole company profit is in fact just a summation of all of the individual profits of each project. You cannot separate the concepts of whole company profit from project-level profit; you must understand and control profit at the project-level in order to drive profitability at the whole company level. 

To understand project-level profit, we must be clear on what profit actually means.  

For all of my non-finance heads in the room, let’s first break down what gross profit is and why (in my humble opinion) it matters the most. Traditionally, you hear people talk about revenue and profit as the main financial indicators of a company’s health. I’m here to bang the table on the importance of gross profit. Gross profit sits in the middle of the P&L, defined as revenue less costs of goods sold (before overheads, T&E, executive salaries, etc). (not to introduce more terms, but gross margin is used interchangeably with gross profit).

In project-based businesses, the revenue and costs directly associated with each project = project profit = gross profit (reported in a project P&L). At a very simple level, gross profit answers two very basic but powerful questions: 

With these two insights in hand, we can start to transform gross profit from an accounting measurement into a strategic tool. We can start to decide both what to do or to continue doing (growth strategy), and start to diagnose how to do it or deliver it better (operational efficiency). We can also make adjustments - whether to pricing, or operational delivery, or effort - that would improve the outcome next time. 

“But Morgan”, you may be saying, “my revenue is growing, surely that means we’re more profitable. All of this gross profit measurement seems like a waste of time”. But remember that gross profit comes before bottom line profit - you must be able to discern whether new revenue (new projects) are driving any gross profit at all before you can assume that they will contribute to overall profit. Everyone has lived this paradox – revenue is growing, yet everyone is stretched thin, and cash flow still feels extremely tight. That’s what happens when revenue grows through projects that don’t actually generate any gross profit. 

At a previous employer (a large digital media company I won’t name here) our entire focus was on revenue growth. We operated under the assumption that all revenue growth=profit, but we had very poor grasp on gross profit at any level. We couldn’t tell you which of our business lines actually made money; nevermind the individual outputs / projects within each of those business lines. 

Revenue growth inevitably meant taking on more people, and we couldn't actually see that those incremental costs far outweighed the growth in top line. Our lack of project-level visibility made it impossible to decipher whether a “pivot to video” made any financial sense or not (editor’s note: it did not). This same company had an agency arm; once we ran the numbers, we realized that although we had grown revenue 40% over the past 2 years, we were losing money on half of our clients. Untold amounts of cash had been sunk into these money-losing enterprises; money that could have been invested into other parts of the enterprise (perhaps a viable subscription model). 

Put simply, revenue growth without profit visibility is how businesses waste a bunch of capital and die. The real strategic questions are always revenue-growth questions: Should we take on this new client? Is youtube expansion worth it? Should we take on more of X type of work?  They cannot be answered with revenue impact alone.

Even the ability to take on creative risks, or reputation-building work - not the work that generates the highest margin, but the kind of projects that make consumers, advertisers, and clients take notice - hinges on understanding how those projects impact profitability. Every creative business should have the right to invest in risks, but without understanding profit margins, it’s easy to fall into the pattern of a) overinvesting in “creative risks” because of a lack of understanding of their impact or b) avoiding business-expanding risks entirely.

Much ink has been spilled about the challenges of the modern creative business; the revenue model has changed, much of it permanently. Attention has fractured and outputs have multiplied. As revenue has spread across more formats, revenue for each has fallen, leading to margin compression across the board. If all cost in the people-based business of creativity is a measure of time, and therefore effort, then effort is what must be changed to meet the new moment. 

What is talked about less than the changing revenue realties is this new reality around effort. Companies have not evolved their businesses fast enough; they have not moved to drive the appropriate amount of effort into the new monetization. Media businesses failed in their “pivot to video” because they over invested in production while monetization lagged. Agencies shuttered because they did not adjust the effort they put into clients under new engagement models. Production companies failed to trim expensive overheads that no longer matched their slimmer project margins from streamer sales. In each case, the issue wasn’t just revenue - it was misaligned effort.

And without the ability to measure effort - and quickly translate that effort into project margins - companies can’t correct course. With margin visibility, companies can make changes quickly to match their effort to their realities. Gross profit becomes more than a number; it becomes the feedback loop. It tells you whether a project works, or whether the delivery, pricing, or other factors need to change.

So now that you’re fully drinking the kool-aid of gross profit - how do we start to see this number more easily? Understanding profit is simple; measuring it is not. In our next letter, we’ll talk about why project margins can be difficult to see, track, and decipher. 

Check out our intro to FOL-IO and people as a system.

Author’s Note: I’ve spent most of my career inside creative businesses — as a CFO, operator, and partner — trying to reconcile the tension between growth, talent, and profitability. This essay is part of a broader exploration of how creative companies can turn project-level economics into an actual operating system, rather than a post-mortem exercise. More to come.