Lets face it, running an agency in 2025 is challenging and can be infinitely exhausting without the right team and partner support. Among other things, agency accounting has unique issues that may not be so prevalent in other industry types. The main IP any agency has is manpower – so agency accounting focussed only on a regular profit and loss will not give you the tools or understanding to make numbers in your business impactful.
Effective agency accounting is not merely about recording transactions; it’s about providing a clear, real-time picture of your agency’s financial health. This allows for informed decision-making, strengthens client relationships through transparency, ensures healthy cash flow and eventually gives you a set of numbers that can be used for tax purposes.
Why is agency accounting even a thing?
Let me share a story (this is a story only partially influenced from real life events). Sally started her dream company “Agency Soul” in 2023. The agency quickly gained traction, attracting a diverse portfolio of clients working well by Sally’s creative campaigns and innovative strategies. As the company grew, she found herself overwhelmed by the financial aspects of her business. She was brilliant at crafting compelling marketing strategies, but when it came to managing the agency’s finances, she felt like she was fumbling in the dark. Like a lot of entrepreneurs, she pushed her finances to be lower in her list of priorities.
Then came an exciting opportunity to pitch for a major client – a multinational that could potentially double her agency’s revenue. However, as she sat down to prepare the proposal, she realised she had no clear picture of her current financials. Could she afford to take on such a large project? Did she have the resources to deliver without compromising quality? Frustrated and anxious, Sally reached out to her mentor, Alex, a seasoned agency owner. Alex listened patiently and helped her piece something together – but with the lack of time and information they both knew it was not an ideal pitch. “It’s not just about tracking income and expenses,” Alex concluded. “It’s about understanding your profitability, actual costs, and important numbers. Having an overall understanding of this can massively help when it comes to major decisions”.
Taking Alex’s advice to heart, Sally recruited an agency accounting specialist. Over the next few quarters, she started to get a clearer view of her finances. She discovered that one of her seemingly profitable clients was actually costing her money due to scope creep and under pricing. She also realised she had the capacity to take on bigger clients, with defined deliverables.
This story might resonate with some of you. The challenges that Sally had are common – we see it often. If this sounds like your own story, we believe you’ll find our insights here useful.
Agency Accounting essentials – A good software is where is starts, but not where it ends..
Most agencies (small and large) will have a fall back accounting software, very likely Xero or QuickBooks (QBO) and this is fine. That’s a great starting point.
If you use them as they are meant to be used, they are great in terms of providing a set of management accounts that you can read and understand monthly.
But financial and operational control comes with processes and a certain behaviour that allows for factual decision making.
Along with the software, having a bookkeeper who maintains the numbers is crucial. They need to understand the general nature of the business, and that is the initial point where a general accountant cannot help. This is where a specialist accountant, with established systems and practices that can focus on core issues can help. With that in mind, there are definitely some common issues most agencies will be familiar with.
Agency accounting controls for practices that bleed an agency time, resource and money
Scope Creep
No one in an agency world need to be told this, they know that scope creeps are real. Sometimes inevitable. Scope creep occurs when a project’s requirements expand beyond its originally agreed-upon scope, often without adjustments to budget, time or resources – inevitably leading to more work, strained client relationships and reduced profitability for agencies.
How do we avoid scope creep? To start with agencies should define and document the project scope clearly in a written agreement before starting. Implementing a change control process helps manage any changes to the project scope by requiring reviews, and approvals. Communication including that some asks are additional and will incur extra costs need to be had to address potential conflicts early. Educating clients about the impact of scope changes on timelines and budgets helps manage expectations. Regular project reviews can also help identify risks early, allowing for timely interventions.
As much as most people hate dealing with time sheets, the more they practise keeping time, the more accurately you can check what time has been spent on what task and what projects.
Not managing recurring billing
While it’s exciting to get new streams of revenue especially of the recurring variety, it’s crucial that your book-keeper has processes that ensure they go out on time. With agency accounting, we maintain a simple record of all recurring sales where monthly invoices have to be sent. This is a good starting point to build from. Xero allows for repeat invoicing that doesn’t need manual intervention once set up. If you’re sending a large number of invoices each month, this is a good feature to use.
Not having a proper AR process
When you bill B2B, pending dues are to be expected. With a defined credit term (15 days, 30 days etc), it’s super important that you have a good follow-up process. Basic chases can come from the book-keeper themselves. Define a clear escalation for this; so everyone involved knows when to move the communication to the Account Manager and eventually the CFO/CEO/COO. In this regard always involve your agency accounting team for setting out of norm payment terms. Sometimes these are inevitable like when you’re dealing with government contracts.
Unplanned cash emergencies
With the level of uncertainty in the economy, unplanned emergencies can really deplete reserves. Our agency accounting experts suggest a 3-month buffer to cover essential expenses (payroll, taxes – VAT, PAYE, rent and other essentials like contractors). If you are able a 6-month cash runway is always useful. There are a number of deposit accounts also available with corporate banking accounts. These deposit rates are not always the market best, but better than the cash gathering dust.
That said, cash flow forecasting with pivots for changing scenarios are an essential part of agency accounting and reporting.
What does reporting look like under agency accounting?
Most agency owners are familiar with what they need to look for when using their financial reports. We’ve summarised a method to follow when looking to implement and maintain a financial reporting process for your agency.
The Profit First Method
The Profit First method, popularised by Mike Michalowicz in his book of the same name, offers a distinct perspective on agency finances. Instead of the traditional formula (Sales – Expenses = Profit), this method flips the equation:
Sales – Profit = Expenses
By prioritising profit and allocating funds to different accounts before paying expenses, you can gain control over costs that you are afford to pay. This was also mentioned by Marcel Pettipas in his blog specialising in agency businesses.
Businesses can create more than one business bank account for this purpose. Move a set amount or percentage of your monthly revenue to a separate bank account that you don’t usual use for opex. The Profit First approach can be particularly beneficial for agencies looking to scale their operations while maintaining a healthy balance.
The top KPIs to think about
Agency metrics and KPIs are well debated and researched. Before spending hours on creating templates that don’t always give you the best results, work out the KPIs that will make the most difference to your firm’s objectives.
In general your KPIs can be divided to,
- Those that address revenue changes – churn, recurring revenue Vs project revenue
- The ones that look at margins – Mainly gross and net profits. Measuring EBITDA , though not always known as an agency metric is useful. This gives an understanding of profits made purely from operations. Many larger companies till use EBITDA to figure out an “agency value”.
- Growth in cash and AR – Being the largest of liquid assets for an agency tracking growth or decline in both cash and AR can be useful in gauging agency objectives for growth
- Variance Analysis – Not a KPI but a process of comparing what you have achieved each month against planned numbers.
Then comes KPIs that aren’t traditional but increasingly used to track operating efficiencies such as,
- Utilisation rate : Utilisation rate for agencies measures the percentage of time employees spend on billable, client-facing tasks versus their total available working hours. A high utilisation rate indicates focused and efficient use of time, while a low rate suggests inefficiencies or underutilisation of resources. Consider the formula: Utilisation Rate = (Billable Hours / Total Available Hours) x 100For example, if an employee works 30 billable hours out of 40 available hours in a week, their utilisation rate is 75%. Tracking this metric can be done manually via spreadsheets or automated through resource management tools, which provide real-time insights into billable versus non-billable hours. Unless you track time, the use of this formula will not help in understanding the reality of utilisation in your agency.
- Net Promoter Score (NPS): This metric indicates how likely clients are to recommend the agency’s services to others. While being a simple metric, it can help understand where the agency is scoring high with clients and where things can be improved. Consistently asking for clients’ feedback can be a great indicator of potential churn. If clients talk about things to improve, that can then be used internally as a focus point for the team.
- Employee Satisfaction: While not financial, understanding how your employees feel about working with you should be at the top of an agency’s priorities. This can be as simple as understanding why resources stay or leave during a period of time, what can be done to increase their satisfaction such as flexible working or benefits that help their career and growth. It’s important to remember that people need to feel valued on an individual basis and not just as contributors to your Company’s success.
Creating a financial strategy with agency accounting best practices
Creating a financial strategy for an agency involves setting clear financial goals and aligning them with the organisation’s objectives. While a lot of planning is not always helpful especially in wildly changing economic situations, agencies should have an overarching financial budget for a year. This can be for the financial year or even the individual tax year (April to April in the UK) so an owner-founder’s situation can be taken into consideration. Without that blue print, you are stabbing in the dark and most successes will be accidental.
Your annual budget
Create an annual budget before the start of your new accounting period (or tax period). This budget is set in stone. So no changes are to be made because you haven’t met targets 3 months down the line. We’ve seen agency owners make this mistake time and time again.
Your budgets are a blueprint for the year ahead. When you don’t meet targets, there are lessons to be learnt from that. We recommend that revenue targets be ambitious but still be realistic. It should provide a challenge to the team – however a budget that’s completely out of touch will just cause frustration and anxiety.
Make sure to review and update your agency rate cards and retainers to reflect increases in wages, operational expenses and inflation. The start of a new year is often used for implementing new pricing models like value-based pricing, to optimise revenue generation. Value-based pricing, involves pricing services based on perceived value rather than time billed and many SMEs are finding they much prefer this model to traditional time based or project based billing methods.
Be realistic with overheads
While creating your annual budget, it’s also the time to think about what are your biggest expenses for the coming year likely to be. People no doubt feature at the top for any agency. We always say – think and rethink before hiring and have never supported a hire and fire culture. Amongst the most talked about overhead category is digital transformation. This is not just subscribing to a bunch of tools (AI tools included) – but integrating tools into your workflow to make a real difference to the way work is handled and delivered. Agency owners have been thinking really hard about how to digitally transform their practices for better productivity. So this is a key area for any spend.
Is diversification part of your strategy for the year?
Relying heavily on a few key clients can be risky. But it’s not always easy to attract and retain the highest paying clients. Currently, economies around the world are struggling and that has impacted business across all industries. Perhaps the following ideas will help,
- Can you introduce new services that complement your existing offerings?
- Expanding your target market to reach new customer segments or geographies
- Creating strategic partnerships to reach new clients.
- Investing in marketing and sales strategies to generate more leads
Project management metrics should form part of your overall financial strategy
Integrating project management metrics into your financial strategy is essential for agencies with diminishing profit levels. Not all clients are created equal. Some clients may be more profitable than others due to factors such as project complexity, payment terms, and the level of resources required. Build measuring client profitability into your financial strategy. We spoke before about utilisation and measuring profits across projects. Identifying a consistent, simple method to do this month on month and reporting on it will make a difference to overall operations. At the very least, it will help identify areas that are in sync with your company’s vision and culture.
We have touched on so many subjects here. To summarise, unlike traditional businesses that deal with goods, agencies have unique challenges. If you’re struggling or need advice on how to structure your agency accounting, please drop us a line and we will get back to you. Until next time!
