Drew McLellan from Agency Management Institute explains the relationship between AGI and headcount in your agency.
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Hey everybody, Drew McLellan here from Agency Management Institute. As you can see, this week’s video is coming to you from my home in Des Moines, Iowa. It’s the holiday season, and I am happy to be home. Even though it’s a little chillier than some of the places I’ve been lately. In this week’s video, I want to continue our conversation about adjusted gross income. If you remember what I had said about adjusted gross income is that it really is the foundational number that allows you to make all kinds of decisions about you business. So just as a refresher, we start with gross billings, we subtract our costs of goods. Our costs of goods is anything that we purchase on behalf of a client. So printing, media, it also includes all of your 1099 labor. Freelancers, business partners, anyone that you hire to do client work that is not a full time employee, or that does not receive a W2 from you at the end of the year. So what’s left after you take your gross billings minus your cost of goods, you are left with your adjusted gross income. And then adjusted gross income falls under three buckets, your loaded salaries of your W2 employees, your overhead, what you spend to run the business, and hopefully a profit bucket. So in this video, I want to talk about the loaded salaries bucket. I have never worked at an agency, where it was not a common request to hire more people. So when I was an employee, or now as an owner, it is a common thing. Whenever we get busy, whenever we get slammed, whenever there’s a big project in the door, what we hear from our team is, we can’t possibly take on any more work or oh my gosh don’t go out and get any new business, we can’t service it, we need more bodies. And as an agency owner, you sort of feel between a rock and a hard place. You certainly don’t want your people working ’til all hours of the night, but you also don’t want to be overstaffed so that when this season of busy slows down, you have people sitting around twiddling their thumbs. So how do you know if you can afford to add another body? Well, this is where AGI comes in handy. So here’s a benchmark that you can use to judge whether or not you are appropriately staffed. For every $150,000 of adjusted gross income, you should have one full-time equivalent, and that, by the way, includes you. So do the math, take your adjusted gross income for the year and divide it by the number of staffers you have. And if the number’s $150,000 or greater, it means that you have the capacity to add another person onto the team. If you’re between $130,000 and $150,000, it means that you are appropriately staffed. Maybe you’re a little overstaffed, but not enough so that you need to do something about it. But if you’re hovering around the $100,000 mark per FTE, that’s a problem, that should be a red flag to you. And if your numbers don’t line up, if you’re not at $135,000 of AGI per FTE or greater, what that means is, something else is broken. It’s not a staffing issue. It may mean that your estimates are too low, it may mean that you’re over servicing your clients and writing off a bunch of time, it may mean that your folks aren’t very efficient and they’re not billing their time properly. Whether or not they’re as billable as they need to be. But you need to dig into that problem, rather than throwing another staff person into the mix. This is just one of the many metrics that is tied to AGI, that will help you run your agency in a more profitable, more efficient, more effective, more scalable way. I’ll be back next week with another metric. Talk to you soon.