AMI’s Drew McLellan talks about a financial metric that is an instant health check for your marketing agency.
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Hey everybody, Drew McLellan here from Agency Management Institute. This week, I’m in Seattle, and as you can see behind me, the city is just starting to wake up. A few weeks ago, I did a video where I talked about the importance of understanding the difference between gross revenue and adjusted gross income. Gross revenue, if you remember, is everything we bill a client before anything is taken out. And for many agencies, that’s the number that they look at. But it’s a vanity number for us in terms of running our business well, wisely, we have to actually pay attention to adjusted gross income. And that number is our gross billings minus our cost of goods, which includes all of our contract labor, 1099 folks. And what’s left is our adjusted gross income, and that’s the money that we get to use to actually run our business. And that AGI needs to get broken into three big buckets. The first bucket is our people bucket—all of our W2 income, including all of the benefits, so health insurance and other things. The second bucket is the overhead bucket—rent, lawyer fees, travel expenses, things like that. And then there’s a third bucket—a very important bucket to us as agency owners—and that’s the profit or even up bucket. And the ratio that I want you to remember around these three buckets is 55:25:20. Fifty-five percent of your adjusted gross income on a monthly basis should be spent on your people—salaries, and benefits. Twenty-five percent of your adjusted gross income on a monthly basis should be spent on overhead. And you that should leave you twenty percent of your monthly adjusted gross income in the profit bucket. Now for some of you, the 55% may be a challenge. I will tell you, I see hundreds of agencies financials, and many of them hit these ratios. But it requires a lot of discipline. It requires really running your business like a business. But if you have a lot of super senior people or you have a lot of digital people who tend to be more expensive, then you need to look at this a little differently. So then your buckets are 60:20:20. But the minute you exceed 60%, that tells you something is wrong. Either you are over staffed, you are not charging enough for your services, you may be super busy but you’re not getting paid what you need to get paid to run your business, or something else is out of whack. You need to look at those numbers, and if you run your business by—and I’m not suggesting this is the only metric; we’ll get into more of those down the road in some other videos—but this is the most important metric for running your agency profitably—55:25:20. And if you track that on a monthly basis, the good news is it’s gonna either give you a very early warning that something’s out of whack or it’s gonna let you sleep at night because everything is in line and you’re doing a great job running your business. If you want to track this and you don’t have a way to do it, we have a spreadsheet that I’m happy to share with you. So if you go to agencymanagementinstitute.com/AGIforms you will find two Excel documents. One is a PC and one is a Mac document because they format a little differently. Feel free to take those and use those to start managing these most important metrics in your business. Remember, 55:25:20. That’ll help you sleep at night or at least tell you what you need to do so that you can get a good night’s rest. All right, I’ll be back later. Thanks.