Why Your Agency’s Gross Margin Is Probably Wrong (And What It’s Costing You)

Eighty-six per cent gross margin.

That was the number on the screen in a first advisory session. The founder said it the way you say a number you've earned, with a small pause afterwards in case anyone fancied applauding.

One question. Where do your delivery salaries sit?

Overheads, he said. Freelancers too.

So it wasn't an 86% gross margin. It was a SaaS number stapled to a services business, and he'd been pricing off it for two years.

Most of our first month is archaeology

When an agency brings us in, they want help with the big calls. The new service line. Pricing. The senior hire. Whether to go after a different market. Where better process and a bit of innovation might buy them some leverage.

They want to grow. Fair enough, that's the job.

And with roughly 95% of the new clients we take on, we can't start there. Not properly. Because every one of those decisions sits on top of the agency's commercial performance, and the numbers we get handed don't survive contact.

So we spend the opening stretch of an engagement doing forensics on a P&L instead of the work you're actually paying for.

This is, I'll admit, a rant we have most weeks. It's also one of the most expensive problems we see, and almost nobody counts the cost of it.

Count how many of these make you wince

Do you chase your accountant for reconciliations, compliance, or the reports they promised at onboarding?

Can they explain why a P&L category looks bloated? (Usually it's overhead coded to the wrong place.)

Do you know your VAT and corporation tax position today, or are you estimating?

Would you see a cash squeeze coming, or would it simply arrive?

Is your balance sheet right, with accruals and work in progress calculated properly?

Do they chase you, or do you chase them?

Do your management accounts come with a view, or just numbers?

Do you get monthly management accounts at all?

More than two, and your numbers are steering you wrong. Not slightly. Directionally.

Wrong numbers don't sit still

A bad gross margin doesn't sit quietly in a spreadsheet looking bad. It gets used.

You price a new retainer off it, and you price it too low, because you think you've got eighty-six points of room and you've really got forty-two.

You look at a 70,000 pound senior hire and decide you can carry it, because the margin says you can.

You decide not to bother streamlining a chunk of delivery, because delivery looks almost free from where you're standing.

Three strategic decisions. All wrong. All made with total confidence, which is the part that should bother you.

And your advisors are making them alongside you, whether they've spotted it or not.

What a good one actually looks like

The good accountants are ahead of you.

They talk to you weekly, on whatever channel you already live in, not through a portal you log into twice a year.

Your management accounts arrive in a format you can use, carrying the data you asked for plus the data they know matters in an agency. Utilisation. Gross margin with direct costs allocated where they belong. WIP and accruals at year end. A balance sheet you'd be happy to defend. Cash flow forecasts and budgets built around your real project-to-retainer mix, because that mix decides how much weight a budget can take. Revenue per head. Fee earners against non-fee earners.

Every month. With a view on what it means.

None of this is a function of what you pay, by the way. We've seen it done well at 600 pounds a month and badly at 4,500. Full fractional FD support, or management accounts out of Fathom with a five minute video walking you through them. Both can work.

You can expect more than you're getting. Most founders don't, because they quietly assume this is just what accountants are like.

The bit that compounds

When your accountant is proactive and understands agencies, every other advisor you have gets sharper. Us included.

We stop untangling and start advising. You make the pricing call in month one instead of month five. Growth turns up quicker, you build something with actual value in it rather than a busy job, and you get nearer to the life you started the agency to lead.

That's the return on an accountant who knows what a gross margin is. It's also why, at gyda.co, the first thing we tend to look at is your numbers rather than your marketing.

So, when did yours last tell you something about your agency you didn't already know?