Drew McLellan, CEO of Agency Management Institute, offers a weekly agency management tip to agency owners
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Hey everybody. Drew McLellan here. Actually, I’m home today I’m in Des Moines, Iowa. I’m going to be here for a couple days before I head back out to hang out with some agency owners later in the week. But in the meantime, what I wanted to talk to you about was one of the most misunderstood metrics in agency life. So many agencies pay attention to gross revenue. And you know what? That’s an ego number for us. So if you want to hit a $100,000; you want to hit $1,00,000 or $10,000,000—have at it. But understand when it comes to running your business, that number is absolutely irrelevant. So when I read Ad Age or Ad Week and I see what the big box agencies, when they rank them by size, when I see what their gross billings are, I know that the money they actually have to run their business is a fraction of that. So the number you need to be paying attention to is adjusted gross income, and here’s how you get to that number. You take your gross revenue—everything you bill a client—and you subtract your cost of goods. And your cost of goods are anything, any expense you have—any hard expense that is associated with actually serving a client or doing a specific project for a client. So that might be media; it might be printing; it could be a subscription to a software that you use to track social likability. It is also all of your 1099s or contract labor. And the reason for that is—the reason why they don’t drop down into the salary pool—is—even if you’re a virtual agency and you operate primarily with 1099s—you would not give them money. You don’t pay them when you don’t have work for them. They are a cost of good. So anyway you have your gross revenue minus your cost of goods, and what’s left is your adjusted gross income. And your adjusted gross income is the money that is actually your money. The rest of it, you’re just act acting as a bank. So you bill a client for media, you pay the client. The commission on that media drops down to the adjusted gross income, along with your fees and any markups that you have. That’s the money that you have to actually run your business. AGI—adjusted gross income—has to cover three big buckets of expenses. The first and biggest bucket is your salaries and benefits of your staff, your w-2 people, including you. It is to cover your overhead, rent, supplies, lawyer fees, accounting fees, things like that. And hopefully there’s money left over, and that’s your profit. That’s the number that matters to you. That’s the number that I want you thinking about and tracking. And that’s what all of the financial metrics tied to the dashboard that you should have—and we’ll talk about that in a video down the road—that’s the number that matters. So absolutely, if you want to pay attention to gross revenue because it means something to you personally because it’s a vanity thing or an ego thing, have at it. But the number in terms of running your business well that matters to you is adjusted gross income. We’ll talk more about it I’m sure in some later videos. In the meantime, have a great day and I’ll talk to you soon.