Agency Finance 101: Insights from the CFOs

2025, Mar 03 — 16 minute read

Like many digital agency owners, I didn’t start my agency with a well-thought out financial model or plan. The evolution of my business was much more organic, starting with me just freelancing, then raising my prices, hiring people, and eventually getting clear on our target customer and offering.

In the first few months, my financial plan was simple: keep enough money in the bank to pay my people and pay myself. And that was good enough…until it wasn’t.

About a year in, we were growing quickly, so I was hiring quickly and expenses were piling up. There were plenty of clients, but they were paying me after work was completed (sometimes 60 or 90 days after), so I quickly ended up in a situation where more money was going out than I had coming in.

I remember waking up in the middle of the night and checking my bank balance incessantly to see if a payment was going to come in before I had to make payroll the next week. That month was when I realized I needed to get serious about my agency’s finances if I was going to keep this thing going for the long-term.

Most agency owners I speak to are just as blissfully unaware of how important a strong financial function is in an agency, and likely just one mistake away from feeling a cash crunch like I had.

I like to think I’ve learned a lot about agency finance in the past few years owning and buying digital agencies, but I’ve also been able to speak to experts with even more knowledge on this topic.

For this article, I’ll draw on conversations from my podcast, Retained Trust, specifically four financial specialists who work in agency finance and bookkeeping:

By the end of this article, I hope you’ll have a better understanding of what it takes to manage your agency’s finances, but I’ve also included a list of books that might be handy if you want to dive in deeper.

You don’t have to have an MBA or degree in finance to follow along, but you do have to put some basic measures in place, so let’s dive in.

Understanding Your Agency’s Financial Health - Metrics That Matter

“Go back to where you started, or as far back as you can, examine all of it…but know whence you came.” - James Baldwin

Starting your financial journey

Before you can use your financial knowledge to forecast, budget, or grow your business, you need to start with a baseline understanding of your agency’s financial health.

The two big metrics to start with are:

1. Gross Profit (ie: Service Profitability)

This tells you how profitable your service delivery is. In other words, when a client pays you $1000 for a project, how much money is left after you pay for the people and tools they need to actually execute the project?

Gross profit ignores the cost to acquire customers, taxes, and other business overhead, so the formula is simply:

Gross Profit = Revenue - Cost of Goods Sold (COGS)

This number is helpful in determining which clients, projects, or services are most profitable, and it feeds into the formula for Gross Margin:

Gross Margin = Gross Profit / Revenue

In order to survive, your gross profit must be positive, but if you want to thrive, you need gross margins between 40%-60%.

If you go too low, you won’t have enough cash to spend on Operating Expenses (ie: Sales, HR, Management, Software, Business Expenses, etc.), and if your Gross Margin is too high, it indicates that you might be overcharging clients or underpaying talent. Short periods of overly high gross margins are okay, but if it persists, competitors might come in and undercut your prices or start paying your people better.

2. Net Profit (ie: Bottom-Line Profitability)

The second number that every agency owner should understand is net profit: your actual take-home profit after all expenses for service delivery, marketing/sales, general business expenses (excluding taxes), other salaries, and software.

In a small agency (<$5mm in revenue), this number often excludes the owner’s salary, as the owner is likely relying on the business’ profits for income, but this can be calculated either way.

Net profit is used to calculate Net Margins, another useful number to benchmark your agency’s financial health:

Net Margin = Net Profit / Revenue

Again, you can surive in the short-term with any positive Net Margin, but good agencies target 15%-30% Net Margins.

If your Net Margin is too low, you won’t be able to set aside cash for a rainy day. If your Net Margin is too high, it might mean you’re overcharging customers, underpaying people, or underinvesting in growth.

Learn more about agency finance pitfalls and key terms in my podcast interview with Joey de Wit:

More Agency Financial Terms You Should Know

With the big two out of the way, let’s do a quick pass at some of the other metrics that you can use to guage and improve your agency’s financial performance:

Revenue per employee - This helps you understand your team’s efficiency, especially as you grow and add new layers of management, more freelance talent, and more expensive leadership roles. Typically, US-based agencies should target $150,000 - $250,000 in revenue per full-time employee.
Client concentration - Tracking revenue per client and keeping an eye on any outliers is another important factor. The less your revenue depends on a single client, the better, but make sure you don’t have a single client that accounts for more than 20% of your revenue if you can help it.
Cashflow forecasting - Understanding how cash is received and payed out of your agency is crucial to maintaining solvency. Aim to maintain 2-6 months of cash reserves, especially if your employees are full-time.
Accounts Receivable Aging - If you don’t charge up-front for services (always a good idea if it’s possible in your industry), you should keep a close eye on past due accounts receivable. AR Aging reports are a good way to do this.
Customer Lifetime Value/Churn Rate - Retention is the key to maintaining agency health as it prevents you from having to constantly replace revenue. Tracking lifetime value (how much a client spends with you over their entire lifespan) and churn rate (how many clients you lose per month or year) are good ways to guage this.
Cost of Acquisition (CAC) - While not as prevalent in agency marketing as it is in SaaS, you should know how much you spend on marketing every quarter and how many new clients that delivers. Understanding if your CAC scales linearly or not will help you quickly assess the viability of new growth channels.
Client, Project, and Service-level Profitability - Ensuring that all your clients, projects, and service offerings are profitable is a good way to help you right-price or cull the bad ones. Revenue without profit is just wasted effort.
Price Increase Frequency - Finally, most agencies don’t raise prices often enough. 5%-10% per year is typically sustainable, and if you don’t regularly have clients pushing back on prices, it means you’re likely undercharging.

Some of the above metrics are more important than others depending on how you structure your agency’s prices, services, and team. That said, spending a day or two every quarter putting these together and reviewing them will put you in the top tier of agencies out there, so I’d highly recommend you try it.

Monthly Reports and Managing Cashflow

One of the most common mistakes agency owners make is running their business completely reactive to cash in the bank. This causes agency owners to operate on two extremes:

Lots of money in the bank? Okay, let’s spend it!
Almost out of money? Better start working on getting some new clients!

Learn more about agency finance best practices in my podcast interview with Paul Seaton:

I know I made this mistake a lot in the early days, but with the proper financial reporting in place, you can avoid this cycle and build a more sustainable company. Here are a few things you can do to better manage your cashflow and make proactive rather than reactive decisions:

Slim Down Your Monthly Reporting - You will overwhelm yourself if you look at every number above every single month. Work with your CFO and bookkeeper to focus on 5-10 financial metrics you can use each month and make your reporting more actionable.
Build a Rolling Cashflow Forecast - This will help you see how ongoing and new sales will affect cash in the bank, allowing you to invest in strategic expenses when you can actually afford them.
Improve Cash Collection and Terms - One of the easiest ways to improve your agency’s cashflow is to collect more earlier and faster from clients. Keep a close eye on your AR and implement penalties for late payments or discounts for early payments.
Block Time for Monthly Financial Review - Get your books closed and reports generated within a week from month end and set a day each month to review the prior month’s finances. If you aren’t a numbers person, review them with someone who is so you can get the most out of this time.
Build a Cash Reserve - Finally, set a goal for cash reserves and put a plan in place to reach those goals. You don’t need to have an excessive amount of cash sitting around, but 2-6 months of expenses (depending on your risk tolerance and fixed costs) is wise.

If you’ve followed this guide so far and you have a good handle on your monthly, quarterly, and annual financial metrics, you’re already doing better than 90% of agencies. Congratulations!

But, having the reporting in place doesn’t mean your finances are in a good state, so let’s look at what you can do if you think you could be doing better.

Improving Your Agency’s Finances…Without Just Selling More

Most agency owners would like to make more money. For most, this means growing revenue, but there’s no one-size-fits-all approach to doing this.

For example, you might think the easiest way to grow revenue is to simply sell more of the same stuff to new clients but, that usually takes time and money. You have to invest in finding, nurturing, and closing deals, which is impossible if your net margins are already razor-thin. So what can you do?

There are three options for agency owners, and this is the order you should explore them in:

Option 1: Raise Prices or Change Your Pricing Model

The most common reason agency owners get stuck at revenue plateaus is that they are afraid of raising prices. I hear a version of one of these all the time:

“I don’t want to lose the clients I have worked so hard to get.”
“I’m already not closing enough new business. Won’t raising prices make it harder?”
“Our clients love us because our prices are so good.”

If you’re using any one of those excuses, you’re never going to grow out of your current state.

Agencies naturally have negative economies of scale. In other words, as they get bigger, their costs go up because more people are required to do the same amount of work.

The only way to combat this is to raise your prices and/or change your pricing model.

This might mean that in order to grow, you have to service different (read less price-sensitive) clients or move up-market. It’s why all the biggest creative agencies work with Fortune 500 clients - there’s simply no way to grow an agency without raising prices.

That said, it doesn’t have to be an “all or nothing” approach. Here are some ways you can alter your pricing to increase your revenues:

Move from hourly to fixed-price billing - Hourly billing is typically the worst model for agencies. The incentives are misaligned (clients want you to spend fewer hours, so they push you to cut corners rather than focus on output quality) and clients can basically see your whole financial model by reverse engineering your time sheets. I know it’s the norm in some industries, but billing a fixed rate for a specced project gives you much better opportunities to increase your margins.
Move from fixed-price to retainer billing - The next level up in agency pricing is retainer-based billing. This allows you to charge clients a fixed monthly fee for a “bucket” of work that you will do on an ongoing basis. It’s more predictable and again, it allows you more ways to improve your margins without just cutting hourly rates to your team.
Move towards value-based pricing - Value-based pricing means charging the client based on the outcome of your work rather than the input of your time. This gives you the opportunity to make much larger margins and pay for top tier talent, but it also requires more work in the discovery phase.
Raise prices on new clients only - If you can’t change your pricing model, the next best thing to do is to raise prices, and the best place to start is with new clients. They don’t know what your prices used to be, so just putting a higher rate in front of them is a great way to test the waters on price raises. You can always back off if you hear “no” too often.
Raise prices on your least profitable clients only - Raising prices based on profitability is another good way to lower your risk. If you have clients that aren’t profitable, then raising prices on them is a no-brainer, and the only way to make your business sustainable.
Raise prices with a discount option - Finally, if you’re scared to raise prices generally, you can couple a price raise with a discount offer if the client does something in your favor. For example, we raised prices last year, but offered discounts for clients willing to move to annual commitments and include a link to our site on theirs.

Most agencies can greatly improve their financial situation by simply raising or changing their pricing model, so if you haven’t explored this in over a year, it’s definitely the place you should start.

Option 2: Decrease or Move Expenses Around

If you are in a highly saturated or price-sensitive market, the only other option available might be cutting your expenses. In an agency, payroll is typically the biggest category of expenses, but how do you figure out where to cut first?

It’s actually pretty simple once you have your numbers:

If your gross margin is <50%, cut your service delivery costs.
If your gross margin is >50%, but your net margin is <15%, cut your operational expenses.

Unfortunately, a lot of agency owners struggle to follow this guideline, and instead they jeopardize the health of their business by just allowing themselves lower net or gross margins.

This is not sustainable, and it will put your entire company in jeopardy in the long-term.

Put another way: if you have to fire one person today in order to save 10 jobs next year, would you do it?

I would.

Letting go of people is a harsh reality of running an agency, but that said, there are ways to cut costs without simply letting people go. Here are some options you can consider:

Move specific people to part-time - Rather than firing someone, see if you can cut their hours or ask them to take a pay cut.
Outsource certain work to offshore freelancers - If certain clients or projects don’t need your A-Team, strategically cut costs by moving some work to lower-cost offshore teams or freelancers.
Cut travel and equipment expenses - While essential in some industries, remote events, meetings, and sales calls are all becoming more common. Making employees use their own equipment can also help you save some money, but it comes with security risks and considerations.
Cut employee benefits - Again, this is not my first choice, but if it comes down to firing people vs. lowering their health insurance benefit, most business owners would take the latter.
Decrease office expenses - Move more jobs to remote or hybrid and decrease your office space. For many agency owners, office locations are important, but for others, it’s simply vanity.
Lower software vendor costs - A lot of SaaS tools will give you discounts for annual commitments or just for threatening to cancel. If your agency is big enough for these savings to be significant, then you should definitely try or evaluate other vendors.

Finally, there are other long-term things you can do to cut your costs like making processes more efficient through technology or leveraging specific tax deductions, but these are more likely long-term than short-term fixes. Technology also has an implementation and maintenance cost that is rarely factored in at small agencies, so it’s not necessarily going to save you a ton of money overnight.

Cutting costs is not necessarily fun, especially when it means cutting jobs or benefits, but it’s sometimes necessary in building a sustainable business.

Option 3: Invest in New Revenue

Finally, if you have healthy cashflow, you’ve updated your prices recently, and your margins are within the expected ranges, you can start to invest in new business. This could take the form of:

New clients for existing services - While this typically takes the longest to develop, it’s the most straightforward path to more revenue. Look at your marketing channels that work today and either do more of the same marketing that already works or strategically try new channels to develop business.
New service lines - Another way to grow is to start offering new lines of service. For example, if you offer content writing services, you might also offer link-building or SEO auditing services. Both are natural cross-sells to the same customer.
Upselling existing clients - Finally, you can upsell existing clients to purchase larger packages or add-on other services you offer. This should become a default part of your operations, but you can only push it so often before your clients will get annoyed.

Learn more about improving your gross and net margins in my interview with Chris Gwinn on Youtube:

So far, you’ve read about the metrics you need to track and some tactical actions to put your agency in a better place. In the last section, let’s point out some common pitfalls agency owners make so you can avoid falling into any of these traps as well.

Common Agency Finance Mistakes

After seeing behind the scenes at dozens of agencies and speaking to consultants who have seen hundreds more, some common trends start to emerge. Let’s look at the most common agency finance mistakes and how you can avoid them:

1. Lack of Financial Insight

It’s rare to find a small (<$5mm revenue) agency whose books are clean, expenses properly categorized, accounts receivables up-to-date, and the owner is proactively using their financial metrics to make a plan for the future. Intermingling of personal and business expenses, poor controls over processes, and non-standard bookkeeping all make insight harder.

So, the first thing to do is get your house in order. Every agency needs:

A bookkeeper
A tax accountant
A chief financial officer

Typically, you only need these roles fractionally, so look for an agency or freelancers who can do these things part-time.

2. Being Unwilling to Invest in Growth

There are certain stages of running an agency where profits are high, but growth will stall. For example, a single owner with ~$1million in revenue typically doesn’t need to have managers or salespeople. One person can usually do it all with some freelancers to handle the tactical work. But, the owner will inevitably hit a wall around this stage because they will become the bottleneck to future growth.

The danger here is that cashflow is addicting.

Think about it this way: if you’re taking home $500,000/year in profit and you build your lifestyle in a way that requires this much, it’s incredibly hard to give up $150,000/year to hire a salesperson or an Operations Director who will inevitably not be as good as you on day one.

Getting through growth plateaus requires reinvestment of profits and it requires risk. It may ultimately be worth it, but it may also be painful in the interim.

3. Focusing on Revenue at the Expense of Profit

Finally, the flip side of this mistake is focusing on revenue growth at the expense of profit.

I met an agency owner recently who told me that after five years, they were finally able to pay themselves. This is a huge red flag. Agencies are not like venture-backed startups that require long buildups to a huge exit. They should be spitting off cash from day one, and if not, you’re doing something wrong.

Growth might require you to cut your net margins from 20% to 10% in the name of making good hires, but it shouldn’t require you to lose money for years.

Agency Finance Books

While I hope this guide is a good starting point, it’s by no means the last thing you should read on agency finance. There have been plenty of things written on this topic, but here are a few of my favorites:

Conclusion

Whether you plan to sell your agency or not, understanding the financial fundamentals to running a healthy business is important. Finance makes your business more resilient, gives you insight into what’s working and what’s not, and frees you from worrying about your cash balance on a daily basis.

But, like most good practices, it takes work. Small, consistent movements in the right direction are the key, so rather than seeking to implement everything at once, make it a quarterly or annual goal to put one more piece of the puzzle in place.