Understanding agency math is critical if you want to run a profitable shop. The importance of AGi and how those dollars are spent cannot be over-emphasized. We often rob from the wrong category (profit) to shore up the others.
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Hey, everybody, Drew McLellan here from Agency Management Institute this week coming to you from Savannah, Georgia. One of the most important metrics in the agency world, in the agency math world that is different than most other businesses is that we live by adjusted gross income. And the reason why we do that is because we understand the ratios of running our business based on the money that we actually get to spend on our business. So remember, we have gross billings, you subtract out all your cost of goods, your hard costs, media, printing, contractors, software that you subscribe to specifically to serve a client. All of that gets subtracted out and what’s left is adjusted gross income. And when we look at our adjusted gross income, we know that we’re going to divide that into three buckets. 55% of our adjusted gross income should be spent on loaded salaries, salaries and benefits. 25% of that AGI should be spent on overhead, and 20% should be left over for profit. So for many of you, depending on where you are living these days, what market you’re in, whether or not you are in an office or you’ve gone virtual, maybe your overhead expenses aren’t quite as high as they used to be. So the good news is at the same time that that may be true, everybody is paying a little more for their team today, right? Whether you’re hiring somebody or you’re trying to retain somebody, salaries are going up. So, one of the things you can think about is AGI can also be thought of as two buckets. 80% needs to cover salary and benefits and your overhead because your whole goal is to leave 20% for profit. And so if you can steal from the overhead bucket to go into the salary bucket, that’s fine, but we often steal out of the profit bucket, right? So remember, the average agency maybe makes 5% or 6% profit. That is not a healthy profit for us. We can easily get into double digits and you absolutely can get to 20% profit every single year if you run your agency by the numbers. But right now, maybe the numbers are shifting a little bit. So maybe that 55/25/20, and we don’t know if this is permanent or temporary. We don’t know if people are all going to be back in the office. We don’t know, I believe salaries are going to adjust and they’re not going to be quite so crazy. But that 55/25/20 can also be thought of as an 80/20. But don’t forget the 20. Don’t steal from the 20. Steal from the overhead bucket, not the profit bucket, all right? So, if you’re trying to adjust your numbers and you’re managing by AGI numbers, it’s okay to steal from overhead and throw a little extra money into the salary bucket, all right? But not profit. I’ll see you next week.