In Part I, we talked about why gross profit — particularly at the project level — is the most important metric in creative businesses. If you missed Part I, check it out here. If you’re already a margin head, need no additional convincing, and just want to dive in go forward!

If gross margin is important, why does almost no one actually use it to run their business? The theory is the easy bit; implementing it is the hard work. Businesses fail to use project-level profit as a strategy not because it’s conceptually complex, but rather because our systems and structures weren’t built for modern creative businesses. 

The first failure is systemic - right now, it’s prettyyyy f*cking hard to use any of the existing systems (ERPs and spreadsheets, mostly) to pull together project-level budgets in a way that’s simple, visible, and timely. In practice, that means reporting that doesn’t require translating data across multiple systems, and lets the right people see the right information in real time.

The second reason is cultural and structural. In most organizations, financial information and decision making are still bottlenecked at the top of the org. Part of this is systemic — project P&L visibility difficulties persists — but part is cultural: a vestige of a time when CFOs could sit comfortably as the sole financial decision-maker.

The final reason is psychological. Organizations must also align their incentive structures to make people actually care about gross profit.. It’s also, frankly, hard to tell people their cows aren’t sacred. Until you create a culture of margin visibility, where results are disseminated, discussed, and people are held accountable for the outcome - people will push back against the idea that their favorite projects, clients, and initiatives are unprofitable. 

We’ll tackle the system issues first. The level to which creative businesses currently understand this project profitability varies based on their operational sophistication. Right now, the hard truth is that the ability to see granular financial detail is usually directly correlated to the size, sophistication (and therefore cost) of the finance team driving it.  

Measuring project profit is hard because even modern ERPs (accounting system for the non-heads) are not built to support project-based businesses. Any given project involves dozens — sometimes hundreds — of invoices to tag. Implementing project codes is a pain in the ass, full stop. Bad / imperfect implementation often gets in the way of that data being precise and therefore deemed useful.

Accounting systems are arcane and inaccessible to most users - as a CFO, I hated going into them. But more problematic than that is the trailing nature of accounting systems; they can only tell you what’s happened–not what’s happening or will happen.  If (and it’s a BIG IF) your business has managed to achieve that magical ten-day monthly close timeline, by the time you are looking at “closed” financials, you’re a full 40 days behind some of the decisions that needed to be made. CEOs / CFOs / Project Managers need to see where projects stand now, and how where they’re headed, not how they looked a full month ago.

Traditionally, the workaround to ERPs is that project financials are kept in spreadsheets. I love spreadsheets, but they break down at the organizational level - they lack organization, have very few controls, require multiple inputs, and have versioning issues. If you are a CFO / head of finance / head of ops, you know how challenging it can be to get a bird’s-eye view of how projects are tracking when you have to dig through a warren of spreadsheets to get an answer, let alone reconcile a project that’s gone off rails. 

Spreadsheets are often also the workaround to unify data that is coming from disparate systems. Headcount costs may come from one system; production budgets from another, freelance spend from a third. Uniting these pieces of data takes hours of time and matching across disparate data maps, time that could be more valuably spent elsewhere. 

Spreadsheets and ERPs show financial measurement with little insight into the other elements that make a project tick. Financial outcomes are simply a result of their many various inputs. A great profit margin without additional contextual data is a fluke of good luck; the context takes a good project outcome and makes it a repeatable experience. 

What were the key creative inputs? Who was the team? Where did this project live? How did we launch it? What did we, as a company, actually do for this project? This is the information that lives in the postmortem that always get cancelled or moved, but is the crucial information for making good creative work on a regular basis. Financials + project context reinforces the feedback loop, and closes the estimation fallacy between what people think a project will take and what it actually takes. Closing the context gap takes an endless stream of one-off projects and turns then into repeatable revenue. 

In a perfect world, and in a perfect system - you’d be able to track project margins at a glance, understand where you’re at in any given project, and what’s causing it to be on or off track (product plug: FOL-IO). Once you have that information, however, who has access to it is just as important as having it at all. 

Traditionally CFOs (and finance teams) have centralized all financial decision-making power into their group. Lack of visibility into reliable financial data outside of ERPs, plus an inherent distrust of people’s ability to comprehend and interpret that financial information (if we’re being real), meant that teams that actually lead the day to day implementation of projects often operated in a financial vacuum. 

One of the biggest challenges in modern creative businesses, as we’ve discussed, is the proliferation of projects. Each of these projects is run as a mini P&L, with, at varying levels, its own managers and decision makers. Each of the people up and down the chain of command - the project managers, the division or line of business owners above the project managers, all the way up to the C-suite - has a different level of responsibility and visibility when it comes to the ins and outs of each individual project. 

Almost every decision made on a project however, has a financial impact. The number of decisions that need to be made every day are frankly enormous - It’s illogical and exhausting to think about a singular financial team being able to approve all of them. Project leaders need to be empowered with the information they need to understand the decisions they are making and how they impact the project margin, so that they can help ease the load of decision making. This means CFOs and finance teams need to release their white-knuckled grip over all things financial (trust me, I’ve been there, therapy helps). Otherwise, finance teams risk burnout from the sheer volume of decisions and risk becoming a huge bottleneck in organizations that need to move quickly. 

A classic example of the CFO / downstream power tug of war is freelance spend. In almost any creative organization, freelance spend is a hot-button topic which no one seems to have fully wrangled. If left simply to project managers, who have limited visibility or ability to gauge how bringing a freelancer onto the project will affect overall margin, freelance spend balloons. At a previous employer, we spent nearly 10% of overall revenue on freelance in the first year I arrived. By year 2, I mandated that I had to sign off on all freelance spend personally - which brought spend way down, but resulted in resourcing taking up 30% of my time. Both methods were unsustainable - but we lacked the tools to show people, in a simple way, how freelance spend added up holistically and affected the margins of the individual projects that they were managing. A simple system showing the financial impact of those decisions would have saved enormous time and money (and added years back to my life).

Gone are the days when the best creative won regardless of budget - but gone too must be the days where creatives, project managers, and other down the line leaders have no idea of how much they are spending. If healthy profit living alongside healthy creative is your goal, then leadership must enact a culture of margin visibility and accountability.  

Accountability, of course, requires enacting incentive structures that place gross margin at the center. You can show people numbers, and you can explain what they mean; but you cannot make them care. The best way to make people care is to align incentives with profitability. Creative organizations already juggle competing priorities: creative outcomes, revenue, audience growth, client satisfaction, and managing up to creatively-inclined leadership - margin discipline must be added to this mix. This means P&L owners, project managers, creatives, account managers and everyone else who can affect project profitability have a vested interest in making projects run as efficiently as possible. 

Even if people are incentivized to care about margins, the process of rolling out these incentives and visibility can agitate, especially if their favorite projects and clients are the ones found wanting. To call back to an example from our last newsletter - I worked at a company with a $200M+ topline agency business. When we finally dug into the project profitability, we found that 40% of the clients were unprofitable. Understandably, that information landed like a bomb, and rectifying those realities took a huge lift across the organization - hard conversations around client management, around pricing, with internal teams and with clients themselves. Those clients that could not be fixed had to be let go. Margin visibility often provokes hard discussions — but they’re necessary for a more profitable future. 

If systems obscure margins, structures bottleneck decisions, and incentives discourage accountability - how do you actually fix it? Building an organization that centers their strategy around profitable growth isn’t easy. The biggest roadblock remains the systemic inability to see project margin - in a simple, visible, and timely fashion. That’s the gap we built FOL-IO to solve. What you do with that information is just as important. Using gross profit as a tool requires that the right people have access to that information, and that your culture is ready, from a structural perspective, to make them care.

Systems enable visibility. Culture determines whether you use it. If you’re interested in how FOL-IO can help your business please reach out. 

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.