Your agency hits six figures monthly, but your bank account is still on life support?
Listen, we've all been there.
When you first start your agency, you're laser-focused on landing clients. Then revenue starts climbing, and you feel like you've finally made it.
But here's what nobody warns you about: as you jump from 10K to 100K months, expenses pile up like crazy. Suddenly that impressive revenue number doesn't look so hot anymore.
I've seen this exact pattern repeat with agencies of all sizes. They're crushing it on paper, but the owner is still sweating payroll every month.
After working as a fractional CFO with seven and eight-figure marketing agencies, I've learned this: Revenue makes headlines, but profitability pays bills.
The problem? Most agency owners are winging it when it comes to financial analysis. They know their top-line numbers but have zero visibility into what's actually making money.
Today, I'm giving you the exact framework we use to help agencies understand their true profitability.
It's a short but dense overview that starts simple and gets progressively more advanced.
Because here's what nobody talks about: It's not about how many clients you have or how much you bill. It's about how much you actually get to keep.
Let's fix your profitability blindspots once and for all.
Prefer to watch? Check out the video:
1. Analyze Your Revenue (Beyond the Obvious)
So, at the top of your profit and loss statement is your revenue.
Most agencies know their top-line number. That's the easy part.
It’s the number you multiply by 12 after a killer month to make yourself feel like a badass.
But here's where most agencies drop the ball: they don't dig deeper.
a. Break It Down by Service Line
Run a digital agency? Split your revenue between Google Ads, Facebook Ads, email marketing - whatever services you offer.
"But my clients bundle services!" I hear you say.
Break it down anyway. Assign proportional values based on what you'd charge if they bought each service separately.
The rule of thumb? If a client can buy it separately, or if a completely different team handles it, it deserves its own line.
Trust me - when you scale, you'll thank yourself for treating your agency like it already has departments.
b. Segment by Client
Are you running an agency or just working for one big client with a few side gigs?
Client segmentation reveals the uncomfortable truth: many agencies are just one lost account away from disaster.
If any single client represents more than 30% of your revenue, you're not running a diversified agency - you're one bad meeting away from a crisis.
c. Base Fee vs. Performance Fee
Love those performance-based fees? They feel great until they disappear.
Split your analysis between guaranteed base fees and performance bonuses.
This shows you exactly how much of your "success" comes from actually delivering results versus just showing up.
More importantly, it reveals how screwed you'd be if performance suddenly tanked across your client base.
d. Track Revenue Over Time
Monthly snapshots lie. Trends tell the truth.
Look at every metric over time - especially client revenue month by month.
This exposes what's really happening: Are you constantly replacing churned clients?
Is that growth coming from new business or expanding existing accounts? Your time series will show you the reality behind your revenue number.
e. Focus on Cost of Service
Revenue without context is meaningless. What's it costing you to generate those dollars?
The two major categories that are most commonly found here are going to be your personnel and software.
Your media buyers? Yes. Your sales team? No.
Here's why this matters: when you double revenue, you'll roughly double these costs.
Understanding this relationship is crucial before you start scaling.
Because bigger isn't always better if your margins are getting crushed in the process.
f. By Gross Margin
Double the revenue, half the profit? It happens more than you'd think.
Once you've got your cost of service nailed down, subtract it from your revenue.
That's your gross profit.
Now divide that number by your revenue and you've got your gross margin percentage.
This number tells you the brutal truth about your operational efficiency.
Here's why it matters: As you scale, things get messy. More clients, more team members, more moving parts.
Without rock-solid operations and processes, your margins will bleed out while your revenue climbs.
It's the dirty secret of scaling - many agencies grow themselves right into profitability problems.
If your systems are tight, your gross margin percentage should hold steady even as revenue jumps.
But if it's slipping? You're working harder to make less.
For example, if I have $100,000 of revenue and $50,000 for my cost of service, that gives me a 50% gross margin. If my revenue doubles to 200K and my cost of service doubles to 100K, I still have a 50% gross margin.
A good gross margin for an agency really depends on the type of service you're providing as well as the level of growth you're at, but generally speaking, you're looking at something between 70% to 90%.
And if you really want to get surgical with your analysis, calculate gross profit and margin by department and by client.
This is where you discover which clients are secretly costing you money despite their impressive revenue numbers.
2. Analyze Your Expenses (The Silent Profit Killers)
Revenue looks sexy on Instagram. Expenses don't make the highlight reel.
Next up, you need to look at all those other expenses that quietly drain your agency's bank account.
Maybe you're running a lean, virtual operation. Great - your expenses might seem minimal.
But don't be fooled. These costs add up faster than you think, especially as you scale.
We're talking about all that "infrastructure" stuff:
- General software: Slack, ClickUp, PipeDrive
- Non-client personnel: Your ops team, accounting folks, salespeople
- Marketing expenses for your own agency
- Office costs, equipment, website hosting
All that stuff that isn't directly tied to a specific client? It's in this bucket.
Subtract these expenses from your gross profit and you've got your net profit. Divide that by revenue? That's your net margin.
The simple take: Positive net profit means you're making money. Negative means you're losing it.
But the more useful metric is your net margin.
Of all the money flowing through your agency, how much actually sticks to your fingers?
This number will look wildly different depending on where you are in your journey:
- Solo operator doing all client work? You might see 90%+ net margins
- Scaling up and hiring rapidly? Expect this to crash hard
- Adding new service lines? They'll drag down profitability until they mature
- Dumping cash into sales and marketing? Your net margins will take the hit
An agency in aggressive growth mode might hover around 10% net margin, while a mature, stable operation could sit comfortably at 40%.
The "right" number depends entirely on your strategy. Just make sure you actually have a strategy and aren't just watching your profits vanish without a plan.
3. Analyze Profitability (Beyond The Surface Level)
Your P&L isn't just a financial statement - it's a story about where your money is actually going.
Now that you've got your revenue and expenses sorted, let's get into the full profit and loss picture.
There are two main ways to look at your P&L:
Horizontal Analysis: The Story Over Time
This is where you line up your P&L month by month, side by side, watching how each number evolves.
It's like time-lapse photography for your finances - you can actually see the trends forming in real time.
Suddenly you're not just looking at static numbers, but movements.
That spike in expenses? Maybe it coincided with your new hires.
That dip in gross margin? It happened right when you started that new service line.
Vertical Analysis: The Money Flow
With vertical analysis, you look at each expense line as a percentage of your total revenue.
This is powerful because it shows you exactly where each dollar you earn is going. 30% to personnel? 15% to software? 5% to that fancy office no one visits?
When you combine both approaches, you can spot trends like: "My personnel costs used to be 30% of revenue, but now they're creeping up to 40%."
That's a red flag that demands investigation before it kills your profitability.
Department Profitability: Not All Services Are Created Equal
When you offer multiple services, looking at profitability for each department separately is eye-opening.
Your first instinct might be: "Google's my cash cow - I should go all-in there!"
But hold up.
What if Google's high margins are actually dependent on the work being done on Facebook?
What if Facebook is actually your core service driving client value, and Google is just a highly profitable add-on?
Meanwhile, email marketing might be bringing in some gross profit, but is it worth the distraction?
Ask yourself:
- Is this service line diverting your attention from more profitable work?
- Are you cross-selling these services effectively, or do they operate in silos?
- Could you increase overall profitability by doubling down on fewer services?
The numbers don't give you the answers directly - but they reveal the questions you should be asking.
4. Analyze Admin Expenses (The Overhead Trap)
Not all overhead is created equal. Some of it is mission critical - some of it is just burning cash.
Admin expenses are tricky because they don't fit neatly into service departments. But how you handle them can make or break your profit analysis.
There are two approaches here, and neither is perfect:
Direct Attribution: The Clean Cut
Some admin expenses have obvious homes.
Your email team consists of contractors while Facebook and Google teams are employees?
Then payroll processing costs should hit Facebook and Google departments, not email.
This approach works when the connection is clear and direct.
The Gray Zone: Everything Else
But what about your marketing costs? Your fancy CRM? Your office ping pong table?
You've got two options:
- Create an Admin "Department" - Keep all these expenses separate from your service departments. Simple, but less precise.
- Attribute Everything - Try to allocate each admin expense to the departments that benefit from it. More accurate, but WAY more complicated.
While attempting to attribute every dollar of admin expense to specific departments is technically "better," it's also a massive headache.
For most agencies, just tracking admin expenses separately is good enough.
The real question isn't which accounting method you use - it's whether you're paying attention to these expenses at all.
Because here's the brutal truth: Many agencies grow revenue by 30% and somehow their admin expenses grow by 50%. That math doesn't work long-term.
If your admin expenses are growing faster than your revenue, you're building a house of cards that will eventually collapse.
5. Analyze Profitability by Employee (Where The Rubber Meets The Road)
Want to know where your money's really made or lost? Zoom in on your people.
All the department-level analysis in the world won't help if you can't see which team members are driving your profits and which ones are dragging you down.
If we have a large department with multiple people, how profitable is each individual inside that team?
The Simple Scenario: One Employee, One Service
This works beautifully when a single employee can handle the entire client service.
Let's break it down with real numbers:
- Junior PPC analyst costs you $4,000/month
- They manage accounts bringing in $12,000/month
- $12,000 ÷ $4,000 = 3x multiple
When you have a team of people doing similar work, you can compare their multiples.
Is one analyst consistently below that 3x target? Either they're inefficient or you're undercharging for their work.
Either way, those lower multiples are red flags pointing directly to your profitability problems.
The Real World: Pod-Based Analysis
Of course, clients rarely work with just one person. That's where pod analysis comes in.
Think of a pod as a mini-team:
- One Google Ads manager overseeing four staff members
- Each staff handles 5-10 accounts
- The manager doesn't directly generate revenue but supervises everyone who does
So how do you measure this?
You combine all revenue from the pod's clients and all costs for every pod member:
- Total pod revenue: $64,000
- Total pod cost: $23,000
- Multiple: 2.8x
This gives you a holistic view of how each mini-team performs. If one pod's multiple is lagging, you can dig deeper to find which specific employee or client is causing the drag.
The Complex Case: Cross-Functional Teams
For services like Facebook Ads where work doesn't divide neatly, a pod might include:
- Creative strategist
- Graphic designer
- Media buyer
- Copywriter
None of these roles generates revenue independently - the client pays for the complete package.
You can still analyze the pod's total performance, but pinpointing specific inefficiencies gets trickier.
This is where qualitative insight matters. Your team usually knows exactly which clients are resource drains - they're just waiting for you to ask.
The Gold Standard: Time Tracking
If your team tracks time you can attribute costs to clients with surgical precision.
Time tracking isn't just about keeping people accountable - it's about understanding your true profitability at the most granular level.
By knowing exactly how much time each team member spends on each client, you can:
- Calculate precise client profitability
- Identify which clients are worth keeping
- Know exactly when to raise prices
- See which team members are most efficient with their time
With these approaches to employee-level analysis, you'll have visibility that 90% of agency owners lack.
Because the truth is, most agencies are flying blind - and wondering why they keep hitting mountains.
The Bottom Line: Your Agency's Financial Health Check
With these approaches to analysis, you'll have visibility that 90% of agency owners simply don't have.
Because the truth is, most agencies are flying blind - and wondering why they keep hitting mountains.
If you stumbled upon this article trying to solve one of these problems:
- Why is my agency making less money as revenue grows?
- What's a good profit margin for a marketing agency?
- Agency profitability metrics to track
- Marketing agency financial benchmarks
- Improve marketing agency net margin
- Marketing agency financial KPIs
- Fix declining agency profit margins
...then you now have the framework to start addressing it head-on.
Being able to do this kind of analysis means you need clean, well-organized financial data. It's not sexy work, but it's the foundation of a profitable agency.
That being said, if you need help with your agency's bookkeeping or if you're getting large enough to need CFO-level support, feel free to reach out.
Remember: Revenue is vanity, profit is sanity, and cash flow is reality.
Your agency's true success isn't measured by how many clients you have or how impressive your revenue sounds at networking events.
It's measured by how much money actually stays in your pocket at the end of the day.
In the meantime, you might also enjoy this video on how to choose the right services to scale your agency.
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