Running a successful marketing or advertising agency requires more than just creative excellence—it demands a solid grasp of financial metrics that ensure the agency’s long-term profitability and sustainability. At Agency Management Institute (AMI), we’ve spent decades helping agency owners master the business side of their operations. Our goal is to keep the critical KPIs very simple so that a 5-10 minute glance at your monthly numbers should give you either reassurance that your agency is financially healthy or give you insights as to where you are off-track and how to dig in deeper to diagnose the problem.

Below are four critical financial metrics we believe that every agency should monitor.

1. Adjusted Gross Income (AGI)

Why AGI Matters:

Adjusted Gross Income (AGI) is one of the most crucial metrics for understanding an agency’s true financial health. Unlike gross revenue, which includes all client billings, AGI represents the revenue left after subtracting client-related expenses like media buys, printing, or freelance contractors. This is the money available to cover operations, salaries, overhead, and profit.

Gross revenue is a “vanity metric” because it doesn’t reflect what an agency actually keeps to run its business. AGI provides a more accurate picture of operational efficiency and profitability.

Ideal Ratios for AGI Allocation:

AMI advises that agencies follow the “55:25:20” rule for spending AGI:

• 55% on salaries and benefits: This includes all W2 employee costs and loaded benefits like health insurance.
• 25% on overhead: Rent, utilities, legal fees, software subscriptions, and other operational costs fall into this category.
• 20% for profit: This is the amount that should be left over for reinvestment, bonuses, or owner dividends.

If payroll exceeds 60% of AGI or overhead goes beyond 25%, it signals inefficiencies that need immediate attention. Unfortunately, the average agency in the US runs at less than 10% profit until they begin to measure performance against this simple metric each month.

2. AGI per Full-Time Employee (AGI:FTE Ratio)

Why This Metric Matters:

The AGI:FTE ratio measures how much revenue each full-time employee generates for the agency. It’s a key indicator of productivity and profitability at the individual level. A low ratio suggests inefficiencies in staffing or underpricing services.

Ideal Benchmark:

Agencies should shoot for at least $175,000 in AGI per full-time employee. Agencies with an AGI:FTE ratio below $130,000 are often in the “danger zone,” where profitability is at risk. Conversely, agencies with higher ratios tend to have leaner operations and better margins.

This is the most violated agency metric we see. Most agencies are over-staffed, which negatively impacts all of the other key ratios.

How to Improve AGI:FTE:

• Evaluate team utilization rates to ensure employees are working on billable projects.
• Increase pricing for services if necessary to align with market rates.
• Avoid overstaffing by hiring only when AGI growth supports it.

3. Client Concentration

Why Client Mix Matters:

Client concentration measures how much of your total AGI comes from your largest clients. While landing a high-paying client can be beneficial in the short term, over-reliance on one or two clients can jeopardize your agency’s stability if those clients leave.

Ideal Range:

Ideally, agencies should keep any single client’s contribution to AGI below 25%. A concentration above 30% is considered risky because losing that client could significantly impact cash flow and operations. It also leads to the client running your agency because you become beholden to that income.

How to Diversify Revenue Streams:

• Actively pursue new business opportunities that align with your ideal client profile.
• Focus on upselling and cross-selling services to existing clients without becoming overly dependent on any single account.
• Regularly review your client portfolio to ensure a balanced mix of revenue sources.

4. Profitability Metrics: EBITDA and Delivery Margin

Why Profitability Metrics Matter:

Profitability is the ultimate measure of an agency’s financial health. Two key metrics stand out:

• EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): Agencies should aim for an EBITDA margin of at least 20%. This ensures there’s enough profit left after covering all operating costs.
• Delivery Margin: This measures the percentage of revenue left after direct costs like salaries and project expenses. Agencies should target a delivery margin above 50%, with anything closer to 60% being ideal.

Common Profitability Pitfalls:

• Overpaying employees due to competitive hiring markets.
• Underpricing services relative to their true value.
• Inefficient project management leading to scope creep or write-offs.

How to Improve Profitability:

• Regularly review pricing models and adjust rates as needed.
• Implement tighter controls on project budgets to minimize write-offs.
• Monitor overhead expenses closely to avoid unnecessary spending.

Tracking these four financial metrics—Adjusted Gross Income (AGI), AGI per Full-Time Employee (FTE), client concentration, and profitability ratios—provides a comprehensive view of your agency’s financial health. By adhering to benchmarks like the “55:25:20” rule for AGI allocation and maintaining a balanced client portfolio, agency owners can ensure sustainable growth while mitigating risks.

Running an agency isn’t just about delivering creative work; it’s about running a disciplined business operation. Monitoring these metrics monthly or quarterly can help you identify red flags early and make informed decisions that drive long-term success.