Gross Margin by Account Manager: The Report Your Agency Isn't Running

By Craig S. Cody, CPA, Certified Tax Coach.

Here's the answer up front. Your agency's gross margin is an average, and it's an average of books of business that don't look anything alike. One account manager can be running a book at 62% while another runs one in the high twenties, doing the same kind of work for the same kind of client. The blended number on your P&L cannot show you that, and it never will.

The report that shows you is simple arithmetic: revenue by each account manager's book, the direct people cost of delivering that book, and the gross margin percentage that falls out. It takes an afternoon to build the first time and about an hour a quarter after that.

The reason most owners don't build it isn't difficulty. It's that they're afraid of what it will do to the team. That fear is reasonable, and it's also the thing that keeps the most expensive problem in the agency invisible. So let's deal with it directly: this is a pricing and scoping report, not a performance review. More on why in a minute.

I've owned a CPA firm for 23 years, and we work with more than 70 marketing and advertising agency owners every month. We run the agency-level financial screens on our clients' numbers every month, not once a year at tax time.

This report is the next layer down, and in all those years I've almost never seen an agency that had it. Owners can usually tell me their gross margin. Almost none of them can tell me how it's distributed. When you look at enough of these, that pattern stops being a coincidence and starts being the thing worth writing about.

Why Doesn't the Agency-Level Number Tell You This?

Because an average is designed to hide variation. That's its whole job.

If half your delivery capacity runs at 62% margin and half runs at 28%, your blended number lands around 45% and looks unremarkable. Nothing on your P&L is wrong. Nothing is flagged. You hit a number that most benchmarks would call acceptable, and inside that number one group of clients is quietly paying for another.

When margin disappoints, the reflex is to go after overhead. We've made the case before that overhead usually isn't the problem, and that piece lands on a single agency-wide delivery margin to aim at. That target is a fine place to start and it's the thing this report takes apart, because some of your revenue costs far more to deliver than anyone priced for, and one blended number absorbs it without comment.

Every agency has at least one account the good accounts are subsidizing. Most owners can name it in about four seconds. What they can't do is say how much it costs them, or how many others like it are in the building.

The reason this matters more at the person level than the client level is capacity. A single underpriced client is a pricing mistake. An account manager whose entire book is underpriced is a structural mistake, because you've built a delivery model around it and hired to staff it.

The Number AMI Measures, and the One Nobody Does

This is the part I find genuinely interesting, and it comes from Drew McLellan.

Drew runs the Agency Management Institute, and his AE boot camps teach account executives that growing their book of business is part of the job. He's blunt that most of them have never been told. On an episode we recorded together, he laid out the arithmetic:

"an AE is managing three accounts and it's $500,000 of AGI. That AE should be held accountable to growing that AGI, that book of business... by 10% a year. So if they start with a half a million, they should end the year with $550,000."

Two things in that quote are worth slowing down on.

First, he measures the book in AGI. More on that term in the next section, but the short version is that it's the money that's actually yours after pass-through costs come out. AMI's own model already refuses to measure a book of business in billings. That matters for what follows.

Second, and this is the gap: AMI holds the account manager accountable for growing the book. Nobody holds anyone accountable for the margin on it.

Those two goals can fight each other. An account manager can grow a book from $500,000 to $550,000 and do it by saying yes to everything, absorbing scope, adding hours nobody billed for, and pulling in senior people who were never priced into the engagement. The growth target gets hit. The margin on that book falls apart. And on your P&L it reads as a good year.

That's the blind spot. Not that owners lack a growth number, but that the growth number is the only number attached to a person, and it can be achieved in ways that cost you money.

What Number Are We Actually Dividing?

Before any of this works, the revenue figure has to be right, and for most agencies it isn't.

Quick vocabulary note, because the term collides with something else. AGI here means agency gross income: your billings minus the pass-through money that was never yours, which is media, freelancers, production, printing, client software. It is not the Adjusted Gross Income line on your 1040. If you've sat in a tax conversation with me, hold those two apart.

Here's why it decides this whole report. Say one account manager runs three clients billing $900,000, and $400,000 of that is client ad spend passing straight through to a platform. Their book's AGI is $500,000. If you compute margin against the $900,000, their delivery costs look like a small fraction of a big number and the book looks terrific. Compute it against the $500,000 and you see what the agency actually earned for the work it actually did.

Now put that account manager next to one whose book has no media in it at all. Against billings, the first one looks like your best performer. Against AGI, they might be your worst. You have not measured two people. You have measured how much media each of them happens to run.

So: revenue by book means AGI by book. If your accounting system reports revenue gross, you need a subtotal underneath it that strips the pass-throughs out, and every percentage in this report runs off that subtotal. That's the same wrong-denominator problem that distorts your agency-level margins, one level further down.

How Do You Map People Costs to a Book?

This is the hard part, and I'm not going to pretend it's clean.

You're allocating the cost of humans who don't work on one book. An account manager might be dedicated. The designer, the strategist, the paid media specialist and the person who does QA are not. Somebody has to decide how their salary splits across books, and that decision is a judgment call.

Three ways to make it, roughly in order of accuracy and of pain:

Time entries, if you have them and if they're honest. The best input and the least available. If people log time to clients reliably, allocate salary by logged hours and you're close to the truth.

An assignment map. No timesheets, but you know who works on what. Sit down with your delivery lead and assign each person's capacity across books in rough percentages. Somebody is 40% on this book, 30% on that one, 30% internal. It's an estimate. It's also usually within a few points of the timesheet answer, and it takes an hour.

Pod or team structure. If your agency is already organized into teams around books, the allocation is mostly done. Take the team's fully loaded cost and assign it to the book that team serves.

Whatever you pick, four rules keep the numbers comparable:

• Use fully loaded cost, not salary. Payroll taxes, benefits, and the contractors doing work you'd otherwise hire for. A book staffed by freelancers and one staffed by employees have to be measured the same way.
• Keep it above the line. This is a gross margin report. Direct delivery costs only. Rent, software and your own compensation are overhead and they stay out.
• Allocate 100% of delivery capacity somewhere, including to an "unassigned" or "internal" bucket. If everyone's time lands on a client book, your margins will all look better than they are.
• Use the same method for every book. A comparison between two books allocated two different ways is not a comparison.

Then the arithmetic is trivial. Book AGI, minus allocated direct delivery cost, divided by book AGI. That's your GP% per account manager.

How Honest Is This Number, Really?

Less honest than it looks, and you should know that before you act on it.

I sort financial numbers into three buckets: measured, inferred, and assumed. AGI is measured, because it comes off the books. Utilization is usually inferred, because it depends on people logging time accurately. And gross margin by book, built on an allocation you made with your delivery lead over an hour, is closer to assumed than most owners want to admit. If your books are cash basis and your retainers bill ahead of the work, it's further from measured still.

That's not a reason to skip the report. It's a reason to use it at the right resolution. Whether something counts as billable, and what total you divide by, changes the answer more than the metric you picked does, which is exactly why the method has to be consistent even when it's imprecise.

The practical test: a four-point gap between two books is noise. A thirty-point gap is a fact. Don't reprice a client over a rounding difference in how you allocated a designer. Do act when one book is running at half the margin of another, because no allocation method is wrong by that much.

One more honesty note. If revenue and the cost of delivering it land in different months, this report is measuring your billing calendar rather than your business. Accrual treatment matters here, because a retainer invoiced in January for work delivered in March will make one book look brilliant in Q1 and terrible in Q2.

What Is the Report For?

Pricing and scoping. That's it. Two decisions, and neither one is about the person whose name is on the book.

A low-margin book is usually an underpriced book. The work is going out the door correctly and somebody agreed to a fee that never covered it. That's a pricing decision, and it belongs to whoever set the fee, which is generally you.

Or it's an unclear scope. The engagement was priced for a defined set of deliverables and has since absorbed a standing weekly call, three rounds of revisions nobody agreed to, and a reporting deck that takes a day a month. That's a scoping problem, and it's fixed in the statement of work, not in a performance conversation. Recovering that margin and then keeping it are two separate jobs, and the second one is where most agencies lose it again.

Occasionally it's mix. Some services carry structurally lower margins than others. If one account manager's book happens to be heavy on the low-margin service, their GP% reflects your service portfolio, not their judgment. That's worth knowing before anybody draws a conclusion.

Notice that all three are decisions the owner makes. Which is why the fear is misplaced, and why it's worth saying out loud to your team before you ever run the numbers.

Drew's point about AEs is the one to hold onto here. They're stunned to learn that growing the book is their job, because nobody taught them. The same is true, twice over, of margin. An account manager who has never been shown the gross margin on their own book has not been given the information required to protect it. Handing someone a number for the first time and then judging them on last year's version of it is not accountability. It's a trap.

So: show them the report. Then set expectations. Then hold people to it. In that order.

Should It Drive Bonuses?

Eventually, carefully, and not in year one.

The case for it is real. If an account manager influences scope, staffing and the conversation where a client asks for one more thing, then margin is partly within their control and paying on it aligns everyone.

The case for waiting is that any number attached to compensation starts getting managed. Tie a bonus to GP% and you may find people declining useful work, pushing back on clients who need help, or getting creative about which book absorbs a cost. You want a year of clean data and a shared understanding of what the number means before money rides on it.

If you do build it in, pair it with the growth target rather than replacing it. Grow the book and hold the margin. One without the other produces exactly the behavior you didn't want.

How Often Should You Run It?

Once a quarter is good to start.

The first build is the expensive one, because it involves a conversation about allocation and you're inventing the method as you go. Quarterly also matches the decision cycle. You can't reprice a client every month, but you can look at a renewal date, a scope conversation and a resourcing change once a quarter and actually do something about them.

Run it the first time on a full trailing year, not a single quarter. One quarter of a single book is small enough that a project timing quirk can swing it twenty points.

Then go monthly once the structure lets you. In our own firm we're organized in pods, and we look at this monthly. That's the part worth copying: when the delivery team is already built around books, the allocation is standing rather than rebuilt from scratch every time, and the monthly version stops being expensive. The pod structure is what makes the cadence cheap, not the other way around.

If you're not there yet, quarterly is the honest answer. Don't commit to monthly and then quietly stop doing it in March.

Who Is This Not For?

Agencies without client-level revenue detail. If your accounting system reports one revenue line and nobody can tell you what each client billed, start there. This report is impossible without that, and that gap is a bigger problem than this report solves.

Very small teams. If there are four of you and everybody touches everything, the allocation is so arbitrary that the output is noise. Look at margin by client instead.

Anybody who wants it to settle an argument. If you already believe one account manager is underperforming and you want the report to prove it, you'll build the allocation to prove it, probably without meaning to. Get someone else to make the allocation calls.

Agencies where pass-throughs aren't separated. If media and production sit inside the revenue line with no subtotal beneath, every number in this report will be wrong in a flattering direction. Fix the base first.

Frequently Asked Questions

What is gross margin by account manager?

It's the gross margin on the book of business one account manager oversees: the agency gross income from their clients, minus the direct people cost of delivering that work, divided by the agency gross income. It shows which books of business are carrying the agency and which ones are being carried, at a level of detail your P&L cannot show you.

How do I calculate gross margin per account manager?

Three steps. Total the agency gross income for the clients in that book, meaning billings minus pass-through costs like media and freelancers. Allocate the fully loaded cost of the humans who deliver that work, using time entries if you have them or a capacity estimate if you don't. Subtract the second from the first and divide by the first.

Should I use revenue or gross income for this report?

Agency gross income, always. If you divide by billings, an account manager whose clients happen to run large media budgets will look far more profitable than one whose clients don't, and you'll have measured your clients' ad spend rather than your team's delivery. This single choice decides whether the report tells you anything.

Isn't this just a way to blame account managers?

No, and this is worth being explicit about with your team before you run it. A low-margin book almost always means the work was underpriced or the scope was never clear, and both of those are owner decisions. The report tells you which fees to revisit and which statements of work to tighten. If nobody has ever shown an account manager the margin on their book, they haven't been given what they'd need to protect it.

How often should I run gross margin by account manager?

Quarterly, on a trailing twelve months the first time. The agency-level screens are worth running monthly because they're quick, but this one involves allocation judgment and the underlying structure doesn't change fast enough to redo it every month.

Can I tie bonuses to it?

Eventually, and not in the first year. Any number attached to compensation starts getting managed, so you want clean data and a shared understanding first. When you do, pair margin with the growth target rather than swapping one for the other, or you'll get people protecting margin by declining work worth having.

What if I don't track time?

You can still build it. Sit down with whoever runs delivery and allocate each person's capacity across books in rough percentages. It's an estimate, it usually lands within a few points of what timesheets would tell you, and it takes about an hour. Just use the same method for every book, or the comparison means nothing.

Build It Once, Then Decide Something

The value here isn't the report. It's the two or three decisions that come out of it, and they're decisions you can't currently make because you can't see the inputs.

Build it once on a trailing year. Look at the spread. If every book lands within a few points, you've learned something genuinely useful and you can stop. If one book is running at half the margin of another, you've found the most expensive thing in your agency, and it was invisible last week.

Then go fix a price or tighten a scope. That's the whole point, and it's how you keep more of what you make out of work you're already doing.

If you'd like a second set of eyes on your own numbers first, Book a Free Tax Analysis. We'll look at your last two filed returns and at what your statements have and haven't been showing you.

Or just reach out and let's talk it through. That's the cheaper conversation.

Craig S. Cody is a CPA, Certified Tax Coach, and retired NYPD Lieutenant. His firm works with more than 70 marketing and advertising agency owners every month, helping them keep more of what they make through proactive tax planning.

This article is general education, not advice for your specific situation. Confirm your own facts with your advisor before acting.