Creating a budget for your agency might seem like just another task on your to-do list, but it’s actually one of the most important steps to running a successful business.
A good digital agency budget helps you understand where your money is going, what you’re bringing in, and whether you’re truly making a profit.
At Agency CPAs, we approach budgeting with a straightforward method that puts your profit first, without overcomplicating things.
You may have heard of the “Profit First” method, which is a great first step in owning your agency’s finances.
The problem with it is that implementing it usually falls flat on its face once you open up a bunch of different bank accounts and are constantly moving money around.
So we put a fresh take on it, keeping the same powerful theme: paying yourself first.
Let’s dive into how you can create a smart, simple budget for your agency that focuses on growth, profitability, and keeping your finances under control—without all the extra steps.
What’s Different About a Digital Agency Budget?
When you run a digital agency, your income and expenses can fluctuate a lot depending on client projects, ad spending, and staffing needs. Instead of just hoping there’s enough left at the end of the month, you want to build a budget that ensures you’re paying yourself, covering your expenses, and setting aside money for growth.
Here’s an easy way to think about it: Start with profit, not sales. Instead of asking, “How much can I make?” ask, “How much do I want to keep?” and work backward from there.
How to Build Your Agency’s Budget
Here’s how to get started with a budget that works for your agency:
1. Start With Your Personal and Business Goals
First, think about what you need for yourself and your agency. Are you paying yourself enough? Do you have personal financial goals like saving for retirement or a big purchase? And on the business side, are you planning to grow your team or invest in new tools?
If you’re unsure of how much you should be paying yourself, don’t just pull a number out of thin air. We wrote a blog post that can help: How Much Should You Pay Yourself as an Agency Owner? Check it out here.
Here’s a quick summary of what we recommend based on your team size:
• 1-5 people = $130,000
• 6-10 people = $200,000
• 11-15 people = $250,000
• 16-20 people = $300,000
• 20+ people = $400,000
Example: Let’s say you want to pay yourself $100,000 a year and also save $20,000 for retirement. Your agency will need to generate enough profit to cover both.
2. Figure Out How Much Profit You Need
Once you know your personal and business goals, figure out the profit your agency needs to hit those goals. This isn’t just about covering expenses—you want enough profit to invest in your business and pay yourself well.
Example: You want $120,000 in profit after expenses, so now you need to figure out how much your agency needs to make to hit that target.
3. Estimate Your Costs Using Your P&L
To estimate your costs, don’t just pull numbers out of thin air. Look at your Profit & Loss statement (P&L) from this year or last year as a guide. This will give you a realistic starting point for expenses like salaries, software, marketing, and any other costs that keep your agency running.
Example: If your operating expenses were $200,000 last year, you can use that number to project this year’s expenses—and add any new costs you expect, like hiring more staff or upgrading software.
4. Build Your Budget From the Bottom Up
Once you’ve set your profit goal and estimated costs, work backward. Figure out how much revenue your agency needs to generate to cover those costs and still hit your profit target.
Example: If your operating expenses are $200,000 and you want $120,000 in profit, your agency needs to generate $320,000 in revenue to meet those goals.
5. Check Your Numbers Against Real Sales
Now, look at whether your sales goals are realistic. Do you have enough projects in the pipeline to hit that revenue target? If not, you may need to adjust either your profit expectations or find ways to bring in more clients.
Example: If you typically generate $300,000 in revenue, you’re slightly under your target. This is when you might adjust expenses or look at boosting revenue.
Why We Don’t Recommend the “Profit First” Method (But Like Its Concept)
You may have heard of the “Profit First” method, which involves splitting your money into lots of different accounts for various purposes—like taxes, expenses, owner’s pay, and profit. While the idea behind it is solid (pay yourself first), it can end up being a bit of a headache for most agency owners.
With too many accounts, you’re constantly moving money around, which makes it hard to keep track of where things are. Instead, we recommend using one or two main accounts and focusing on profit first in your budget, not your bank accounts.
The key takeaway? Pay yourself first, but don’t overcomplicate it.
So, What’s Next?
Now that you have a loose budget in place, what’s next?
Creating a budget is just the beginning. The real challenge is sticking to it. That’s why it’s so important to regularly compare your actual numbers to your budget.
We recommend doing this monthly so you can stay on top of any changes or unexpected costs and adjust your plan as needed.
Remember, a budget is meant to be a living, breathing document. It will change throughout the year, and staying on top of those changes is what keeps you in control.
Fine-Tuning Your Budget Throughout The Year
If you’re falling short of your goals or finding areas that need improvement, here are a few ways you can fine-tune your agency budget:
- Dial #1: Reduce Overhead Costs: Take a close look at your overhead—software, subscriptions, office space, etc. Small savings here can add up and take the pressure off needing to boost revenue to cover unnecessary costs.
- Dial #2: Boost Your Project Profitability: Are you pricing your projects correctly? Make sure you’re charging enough to cover costs and still leave room for profit. Even a small rate increase can have a big impact on your bottom line.
- Dial #3: Adjust Your Goals: If you’re still not hitting your targets, it might be time to adjust your goals. But be careful—lowering your profit expectations could mean delaying personal or business investments, so weigh the trade-offs carefully. This is where we recommend working with your agency accountant before making any decisions.
Need Help Building Your Agency’s Budget?
Whether you try our pay-yourself-first approach or stick to something more traditional, budgeting is no easy task.
If you underestimate your cash needs, you might find yourself scrambling to cover expenses throughout the year. If you overshoot, you could fall short of your long-term growth goals.
That’s why we always recommend getting guidance from an expert.
At Agency CPAs, we help agency owners like you create budgets that support business growth.
If you’d like some help with budgeting or any other financial process, we’re always here to help.
Feel free to book an introductory call with us anytime using the calendar below.
Until next time!
