When I first started running an agency, I didn’t give a second thought to financial ratios. I thought if there was money in the bank and clients were happy, I was winning. Spoiler alert: I wasn’t. I learned the hard way that understanding your numbers—especially your financial ratios—isn’t just for accountants or spreadsheets nerds. It’s for anyone serious about running a real business, scaling it, and eventually selling it for a valuation that makes people’s jaws drop.
Let’s dive into the ratios every agency owner must know. These numbers don’t lie, and they tell you whether your agency is on the path to profitability—or a slow death.
1. Gross Margin: The Golden Ratio
Gross margin is the percentage of revenue left after you’ve paid your cost of goods sold (COGS). For agencies, that’s everything related to delivering the service: your team’s salaries, contractors, software, etc. If your gross margin isn’t sitting pretty at 70%, you’re either overpaying, undercharging, or both.
Here’s how this plays out: If you’re bringing in $100,000 a month, your COGS should be no more than $30,000. That leaves you with $70,000 in gross profit. Why does this matter? Because gross margin funds your entire operation—marketing, rent, salaries, even your personal paycheck.
When buyers evaluate your agency, gross margin is one of the first things they’ll check. If your COGS are out of control, they’ll assume you either don’t know how to run your business or that you’ve created a low-margin job for yourself, not a scalable company.
2. Net Profit: Your Agency’s True Scorecard
Your net profit is what’s left after you’ve paid for everything—including yourself. I’ll repeat that for the people in the back: your paycheck is NOT net profit. If you’re paying yourself $200,000 a year, that’s an operating expense, not a profit bonus.
Healthy agencies hit 30% net profit consistently. Let’s say you’re making $100,000 a month in revenue. After paying for COGS ($30,000), overhead, marketing, and your salary, you should still be left with $30,000 in net profit.
Why does this matter? Because when you eventually sell your agency, net profit drives the multiple you’ll get. A buyer doesn’t care how “busy” you are or how much effort you put in. They care about one thing: how much money the business makes. If you’re not hitting 30% net, you’re leaving cash on the table when it’s time to exit.
3. Current Ratio: Can You Pay Your Bills Without Breaking a Sweat?
This one’s straightforward: take your current assets (cash, receivables, etc.) and divide them by your current liabilities (bills, debt, etc.). The ideal ratio is 2:1, meaning you have $2 in assets for every $1 you owe.
Why is this important? Because it shows whether you’re running a financially stable agency or teetering on the edge of chaos. If your current ratio is less than 1, you’re borrowing from Peter to pay Paul, and eventually, that house of cards will collapse.
Buyers love agencies with clean, stable financials. A strong current ratio signals that you’re not just making money—you’re managing it responsibly.
4. Client Profitability: Not All Revenue Is Created Equal
Here’s the truth: Some clients are a drain on your resources, your team, and your sanity. Just because a client pays well doesn’t mean they’re profitable. If it costs you $9,000 in labor and headaches to service a $10,000-a-month client, you’re walking away with a razor-thin margin—and probably a migraine.
Smart agency owners track the profitability of each client. If a client’s margin is below 70%, you’ve got three options:
- Raise their rates to reflect the true cost of servicing them.
- Streamline the work to bring their COGS down.
- Let them go and replace them with a more profitable client.
Why Ratios Are the Key to a Killer Valuation
If your end game is to sell your agency (and it should be), these ratios aren’t just nice-to-haves—they’re non-negotiable. Buyers want businesses that are profitable, scalable, and easy to run. If your numbers are solid, you can demand a higher multiple and walk away with life-changing money.
But if your gross margin is low, your net profit is a joke, or your current ratio is upside-down, you’ll struggle to attract serious buyers—or worse, you’ll be forced to sell for pennies on the dollar.
Final Thoughts: Know Your Numbers, Know Your Worth
I get it—financial ratios aren’t sexy. But you know what is? Running an agency that makes money, scales effortlessly, and sells for millions. That starts with knowing your numbers and taking ownership of them.
So, here’s my challenge to you: Pull up your P&L this week. Calculate your gross margin, net profit, and current ratio. If they’re not where they need to be, don’t panic—start making changes. Tighten up your COGS, renegotiate contracts, or let go of unprofitable clients.
At the end of the day, your numbers tell the story of your business. Make sure it’s a story worth buying.