What makes agency bookkeeping different from regular small business bookkeeping?

Agency bookkeeping requires project-based accounting (tracking revenue, costs, and profitability by individual client and project) because profitability varies dramatically across client relationships due to scope creep, team efficiency, and pricing models. Standard small business bookkeeping only tracks company-wide totals, hiding which clients are profitable and which lose money. Agencies also need time tracking integrated with accounting (labor is primary cost), Work-in-Progress (WIP) accounting for unbilled work, and specialized metrics like utilization rate, realization rate, and project margin analysis.

Do I need QuickBooks or can I use spreadsheets for agency bookkeeping?

Spreadsheets work for solo freelancers under $100K revenue, but agencies with teams need accounting software (QuickBooks, Xero) because project-based tracking, time allocation, and financial reporting become unmanageable in spreadsheets beyond 5-10 clients. QuickBooks Classes or Xero Tracking Categories allow tagging every transaction to specific clients/projects, then generating profit & loss reports by client. This is nearly impossible to maintain accurately in spreadsheets when handling hundreds of transactions monthly across multiple clients and projects.

How do I track profitability by client in QuickBooks?

Use Classes in QuickBooks to set up each client as a main class and each project as a sub-class. Tag every revenue invoice, time entry, and direct expense to the appropriate client/project class. Export time tracking data monthly and allocate labor costs (hours × loaded labor rate) to client classes. Allocate overhead proportionally based on revenue or hours. Then run Profit & Loss by Class report to see revenue, direct costs, allocated overhead, and profit margin for each client/project. This reveals which clients are profitable (and which are costing you money).

What is a loaded labor rate and how do I calculate it?

Loaded labor rate is the true cost per hour of an employee including salary, benefits, payroll taxes, and allocated overhead—not just salary ÷ 2,080 hours. Formula: (Annual Salary + Benefits + Payroll Taxes + Allocated Overhead) ÷ Billable Hours. Example: $70K salary + $12K benefits + $5.4K taxes + $17.5K overhead = $105K total cost. Divide by 1,560 billable hours (assuming 75% utilization) = $67/hour loaded rate. Use loaded rates (not billing rates) when calculating project costs and profitability internally.

What is Work-in-Progress (WIP) and why does it matter?

WIP represents work completed but not yet invoiced—revenue earned in current month but billed next month. Without WIP accounting, the month you do the work shows costs with no revenue (looks unprofitable), and the month you invoice shows revenue with no costs (looks overly profitable). WIP accounting records revenue in the month work is performed, matching revenue to costs for accurate monthly profitability. Calculate WIP as (% project complete × total contract value) - revenue already recognized. Record as asset on balance sheet, then convert to revenue when invoiced.

How often should I track time for accurate agency bookkeeping?

Daily time tracking is mandatory—team members must log hours at end of each day (takes 30-60 seconds per entry). Weekly or monthly time tracking fails because people forget what they worked on, leading to 30-40% inaccuracy in time allocation. Inaccurate time tracking means inaccurate project costs, which means you can't identify unprofitable clients. Agencies with 95%+ daily time tracking compliance report 28% better project profitability than peers below 75% compliance. Make time tracking non-negotiable: include in job descriptions, review weekly, tie to performance evaluations.

Should I allocate overhead to projects or only track direct costs?

Allocate overhead for accurate profitability. Direct costs (labor, freelancers, ad spend) only show partial picture. Overhead (rent, insurance, admin salaries, software) is real cost supporting every project. Without overhead allocation, projects look 20-30% more profitable than reality, leading to bad pricing and client decisions. Allocate overhead based on revenue percentage or (better) hours worked. Even simple allocation (divide overhead equally) is better than ignoring it. Overhead allocation separates agencies that truly understand profitability from those guessing.

What's a good profit margin target for agency projects?

Target 25-35% net profit margin (after all costs including overhead). Best-in-class projects achieve 35-45% margin. Projects below 15% margin should be reviewed for scope creep, inefficiency, or repricing. Negative margin projects must be renegotiated immediately or client should be fired (you're working to lose money). According to 4A's benchmarks, top-performing agencies maintain 28-32% average net margin across all clients by actively managing project profitability monthly and exiting bottom 10-20% of clients by margin annually.

How do I handle retainer revenue in agency bookkeeping?

Invoice retainer at beginning of month and recognize full revenue immediately (you've earned the right to payment by providing availability). Track actual hours worked throughout month and allocate labor costs to the retainer project. Calculate profitability: Retainer revenue - actual labor costs - direct expenses - allocated overhead. Key metric: realization rate (hours covered by retainer ÷ hours actually worked). If retainer covers 30 hours but team worked 40 hours, realization is 75%—you're absorbing 10 hours of scope creep. Address by renegotiating scope or raising retainer fee.

When should I hire a bookkeeper vs. a controller for my agency?

Bookkeepers handle transaction recording, bank reconciliation, invoicing, and bill payment—sufficient for agencies under $500K revenue. Controllers provide strategic oversight: project profitability analysis, financial reporting, cash flow forecasting, WIP management, KPI dashboards, and financial process design. Agencies above $1M revenue typically need controller-level oversight monthly (fractional or full-time). Agencies $500K-$1M can use bookkeeper with quarterly controller review. Controllers ensure your bookkeeping actually reveals profitable vs. unprofitable clients—bookkeepers record transactions but don't typically analyze profitability at project level.

Bookkeeping for Marketing Agencies: The Complete Guide | Jumpstart Partners

Key Takeaway

Agency bookkeeping requires project-based accounting that tracks revenue and expenses by client, not just company-wide, because profitability varies dramatically across client relationships due to scope creep, team efficiency, and pricing models. According to HubSpot's 2024 Agency Growth Report, agencies using project-level financial tracking report 32% higher overall profit margins than peers using standard bookkeeping, primarily because they can identify and fix unprofitable client relationships before losses compound.

If you're using standard small business bookkeeping for your agency, you're flying blind on which clients actually make money.

Why Standard Bookkeeping Fails for Agencies

Traditional bookkeeping answers: "Did we make money this month?"

Agency bookkeeping answers: "Which clients made us money, which lost money, and why?"

The Agency Business Model Is Unique

Unlike product businesses:

Inventory = your team's time (perishable, can't be stored)
COGS = labor costs (variable, depend on who works on what)
Revenue recognition = complex (retainers, projects, hourly, milestone-based)
Profitability = client-specific (varies 40-60% margin between clients)

Standard bookkeeping only shows:

Total Revenue: $180,000
Total Expenses: $145,000
Net Profit: $35,000 (19% margin)

Agency bookkeeping reveals:

Client A ($60K revenue): 45% margin → $27,000 profit
Client B ($75K revenue): 18% margin → $13,500 profit
Client C ($45K revenue): -10% margin → -$4,500 loss

Reality: One client is unprofitable, subsidized by the other two. Standard bookkeeping hides this completely.

"The biggest mistake agencies make is treating all revenue equally," says Maria Gonzalez, former CFO at WPP's Ogilvy. "A $10,000 retainer client might generate $2,000 in profit while a $3,000 project client generates $1,800. Without project-level bookkeeping, you'd double down on the retainer (bigger number!) when the project work is actually more profitable. This misallocation kills agencies slowly."

Scope Creep Is Invisible Without Project Tracking

The pattern every agency knows:

Estimate 20 hours for website project
Bill $4,000 (20 hours × $200/hour)
Client asks for "just one more revision"
Team actually spends 35 hours
You still bill $4,000 (scope agreed)
Your cost was $5,250 (35 hours × $150 loaded labor rate)
Lost $1,250 and didn't even know it until month-end (or never)

Without time tracking and project accounting: Scope creep is completely hidden. You think you made $4,000. You actually lost $1,250.

According to Databox's 2024 Agency Benchmarks, 71% of agencies underestimate project hours by 30% or more, primarily due to scope creep—but only 38% track time rigorously enough to measure the gap.

Essential Agency Bookkeeping Setup

1. Choose the Right Accounting Structure

QuickBooks Online or Xero (Recommended for Most Agencies)

Use Classes or Tracking Categories for project-based accounting:

Structure:

Client: Acme Corp (main class)
  ├── Monthly Retainer - Jan 2025 (sub-class)
  ├── Monthly Retainer - Feb 2025 (sub-class)
  ├── Website Redesign Project (sub-class)
  └── PPC Management (sub-class)

Client: Beta LLC (main class)
  ├── Brand Strategy Project (sub-class)
  └── Social Media Management Retainer (sub-class)

Every transaction gets tagged:

Revenue invoice → Client class + project sub-class
Team member time → Client class + project sub-class
Direct expenses (ad spend, freelancers) → Client class + project sub-class
Indirect expenses (rent, software) → Overhead (allocated later)

Reporting: Run Profit & Loss by Class to see profitability by client and project.

Alternative for Larger Agencies (30+ people):

QuickBooks Desktop Enterprise: Advanced job costing features
Agencies-specific software: Productive.io, Forecast, FunctionPoint (integrate with QuickBooks/Xero)

2. Implement Time Tracking (Non-Negotiable)

You cannot run agency bookkeeping without accurate time tracking. Labor is your primary cost.

Choose time tracking software:

Harvest ($12/user/month): Simple, clean, great invoicing
Toggl Track ($10/user/month): Robust reporting, easy to use
Productive.io ($9-20/user/month): All-in-one agency management
QuickBooks Time (TSheets) ($8/user/month): Native QuickBooks integration

Time tracking requirements:

Every team member logs hours daily (no exceptions)
Each entry includes: Client, Project, Task, Billable yes/no
Submitted and approved weekly
Synced to QuickBooks monthly for cost allocation

Enforcement strategies:

Make time tracking part of job description (non-negotiable)
Review compliance weekly (who didn't log time?)
Tie to performance reviews and bonuses
Block 15 minutes at end of each day for team to log before leaving

According to the 4A's (American Association of Advertising Agencies) 2024 Operations Report, agencies with 95%+ time tracking compliance report 28% better project profitability than peers below 75% compliance.

3. Calculate Loaded Labor Rates

Your team's hourly cost isn't salary ÷ 2,080 hours. You must include benefits, taxes, and overhead.

Formula:

Loaded Hourly Rate = (Annual Salary + Benefits + Taxes + Allocated Overhead) ÷ Billable Hours

Example: $70,000 Mid-Level Designer
  Annual Salary:                    $70,000
  + Benefits (health, 401k):        $12,000
  + Payroll taxes (7.65%):          $5,350
  + Allocated overhead (20%):       $17,470
  = Total Loaded Cost:              $104,820
  ÷ Billable hours (1,560 @ 75% utilization):
  = $67/hour loaded rate

Key assumptions:

Billable utilization: 75% (1,560 hours of 2,080 available)
- 2,080 hours/year = 40 hours/week × 52 weeks
- Minus 10% PTO (2 weeks vacation + holidays)
- Minus 15% non-billable (admin, training, meetings, proposals)
- = 75% × 2,080 = 1,560 billable hours

Create loaded rate table for all roles:

Role	Salary	Loaded Rate	Billing Rate	Margin
Junior Designer	$50,000	$52/hr	$100/hr	48%
Mid Designer	$70,000	$67/hr	$150/hr	55%
Senior Designer	$95,000	$89/hr	$200/hr	56%
Account Manager	$65,000	$62/hr	$125/hr	50%
Strategist	$90,000	$85/hr	$175/hr	51%

Use loaded rates (not billing rates!) when calculating project costs and profitability.

4. Set Up Chart of Accounts (Agency-Specific)

Revenue Accounts:

4000 - Retainer Revenue
4100 - Project Revenue
4200 - Hourly Services Revenue
4300 - Reimbursable Expenses (pass-through)

Cost of Goods Sold (Direct Costs):

5000 - Labor Costs (from time tracking allocation)
5100 - Subcontractors & Freelancers
5200 - Media Spend (ads placed for clients)
5300 - Stock Assets (photos, fonts, templates)
5400 - Third-Party Tools (client-specific software)

Operating Expenses (Overhead):

6000 - Salaries - Non-Billable (admin, management)
6100 - Payroll Taxes & Benefits
6200 - Rent & Utilities
6300 - Software & Subscriptions (company-wide tools)
6400 - Marketing & Business Development
6500 - Professional Services (legal, accounting)
6600 - Insurance
6700 - Depreciation

Critical distinction: COGS (5000 series) ties to specific clients/projects. Operating Expenses (6000 series) support all clients and get allocated proportionally.

5. Manage Work-in-Progress (WIP)

WIP represents work completed but not yet invoiced. Critical for accurate monthly financials.

The problem:

Complete project work on March 25 → costs recorded in March
Send invoice April 5 → revenue recorded in April
March P&L: Shows costs with no revenue (looks unprofitable)
April P&L: Shows revenue with no costs (looks overly profitable)
Neither month is accurate

The solution: WIP Accounting

Step 1: At month-end, calculate unbilled work completed

Project: Acme Website Redesign
Hours worked in March: 45 hours
Loaded cost: 45 × $67/hour = $3,015
Contract value (to be billed): $9,000
Percent complete: 45 hours ÷ 100 estimated hours = 45%
Revenue earned: $9,000 × 45% = $4,050

WIP Asset = $4,050 (revenue earned but not yet invoiced)

Step 2: Record WIP journal entry

March 31:
  Debit: WIP Asset (Balance Sheet)       $4,050
  Credit: Revenue (P&L)                  $4,050
(To record revenue earned in March, invoiced in April)

Step 3: When invoice is sent in April

April 5:
  Debit: Accounts Receivable             $9,000
  Credit: WIP Asset                      $4,050
  Credit: Revenue                        $4,950
(To record invoice and remaining revenue recognition)

Result: March financials show $4,050 revenue matched to $3,015 costs = $1,035 profit. April shows remaining $4,950 revenue. Accurate profitability by month.

According to Deltek's Professional Services Benchmarks 2024, agencies tracking WIP report 42% more accurate monthly financials because revenue and costs align properly.

6. Handle Different Revenue Models

Agencies often mix retainers, projects, and hourly billing. Each requires different bookkeeping treatment.

Monthly Retainer Revenue

Billing: Fixed monthly fee (e.g., $5,000/month for social media management)

Bookkeeping:

Invoice beginning of month → record full revenue immediately
Track hours worked throughout month → allocate labor costs
Calculate profitability: Revenue - actual labor cost - direct expenses

Key metric: Realization rate (hours billed vs. hours worked)

Example:
- Retainer covers 30 hours ($5,000 ÷ 30 = $167/hour implied rate)
- Team actually worked 40 hours in January (scope creep)
- Realization: 30 ÷ 40 = 75% (you're "eating" 10 hours)

Project-Based Revenue (Fixed Fee)

Billing: Fixed price for deliverable (e.g., $15,000 for website redesign)

Bookkeeping:

Option A (Simpler): Recognize all revenue when project delivered and invoiced
Option B (More accurate): Recognize revenue monthly based on % completion (WIP method shown above)

Use Option B if:

Projects span multiple months
You need accurate monthly profitability
You're reporting to investors or board

Project-Based Revenue (Milestone Billing)

Billing: Payment tied to milestones (e.g., 25% deposit, 50% at design approval, 25% at launch)

Bookkeeping:

Recognize revenue as milestones are achieved (earned), not when invoiced
If invoice sent before work done (deposit) → record as Deferred Revenue (liability), recognize when earned

Hourly Billing

Billing: Actual hours worked × hourly rate (e.g., 42 hours × $150/hour = $6,300)

Bookkeeping:

Simplest model: Revenue = hours worked × rate
Track time → invoice → recognize revenue immediately
Monitor realization rate (do you bill 100% of hours, or write off some?)

7. Allocate Overhead to Projects

To know true project profitability, allocate overhead (rent, insurance, admin salaries, etc.) to each project.

Simple Method: Revenue-Based Allocation

Total monthly overhead: $25,000
Total client revenue: $100,000

Client A revenue: $35,000 (35% of total)
  → Allocate 35% of overhead = $8,750

Client B revenue: $50,000 (50% of total)
  → Allocate 50% of overhead = $12,500

Client C revenue: $15,000 (15% of total)
  → Allocate 15% of overhead = $3,750

More Accurate Method: Hours-Based Allocation

Total monthly overhead: $25,000
Total billable hours: 500 hours

Client A: 175 hours (35% of total)
  → Allocate $8,750

Client B: 250 hours (50% of total)
  → Allocate $12,500

Client C: 75 hours (15% of total)
  → Allocate $3,750

Why hours-based is better: Revenue doesn't always correlate with resource consumption. A $10K retainer client might consume 80 hours (high labor, low efficiency) while a $3K project client uses 15 hours (low labor, high efficiency). Hours-based allocation reflects true resource usage.

Monthly Bookkeeping Workflow for Agencies

Daily (5-10 Minutes Per Person)

Team members:

Log time in time tracking software (end of each day)
Submit expense reports promptly (don't wait until month-end)

Bookkeeper:

Code transactions as they occur (bank/credit card imports)
Reconcile bank and credit card accounts
Process vendor bills and client payments

Weekly (1-2 Hours)

Bookkeeper:

Review time tracking compliance (who didn't log time?)
Review Accounts Receivable aging (chase overdue invoices)
Review Accounts Payable aging (plan upcoming bill payments)
Reconcile payment processors (Stripe, PayPal)
Enter vendor bills received during week

Account/Project Managers:

Review project budgets vs. actuals (flag scope creep early)
Update project status (% complete for WIP calculation)

Month-End (Day 1-5 After Month Close)

Day 1-2: Close Transactions

Lock accounting period (prevent changes to prior month)
Reconcile all bank and credit card accounts
Code all uncategorized transactions
Record accruals (unbilled expenses, WIP revenue)

Day 3: Allocate Labor Costs

Export time tracking data for the month
Calculate labor costs by project:
- Hours worked × loaded labor rate = project labor cost
Allocate to appropriate client/project classes in QuickBooks

Day 4: Calculate WIP and Profitability

Identify projects with work completed but not invoiced
Calculate WIP (% complete × contract value)
Record WIP journal entries
Allocate overhead to projects (revenue or hours-based)
Run Profit & Loss by Class report

Day 5: Review and Distribute

Review project profitability (flag any <15% margin)
Prepare Executive Summary dashboard
Distribute financials to leadership
Schedule monthly financial review meeting

Key Agency Metrics to Track

1. Utilization Rate

Formula: Billable Hours ÷ Total Available Hours × 100

Example:

Designer works 160 hours in month
Logs 120 billable hours to clients
Logs 40 non-billable hours (admin, training, proposals)
Utilization: 120 ÷ 160 = 75%

Targets:

75-85%: Ideal (healthy balance)
60-75%: Acceptable (watch for inefficiency)
<60%: Underutilized (need more work or wrong staffing level)
90%: Unsustainable (burnout risk, no time for business development)

2. Realization Rate

Formula: Hours Billed to Client ÷ Hours Actually Worked × 100

Example:

Worked 50 hours on project
Billed client for 40 hours (absorbed 10 hours due to scope creep)
Realization: 40 ÷ 50 = 80%

Targets:

90-100%: Excellent (billing nearly all time worked)
80-90%: Good
70-80%: Concerning (scope creep or inefficiency)
<70%: Broken (losing money on labor)

3. Project Profit Margin

Formula: (Project Revenue - Project Costs) ÷ Project Revenue × 100

Example:

Project: Acme Website Redesign
Revenue: $15,000
Costs:
  Labor (100 hours × $67): $6,700
  Freelancer (design): $2,000
  Stock photos: $300
  Overhead allocation: $1,800
Total Costs: $10,800
Profit: $4,200
Margin: $4,200 ÷ $15,000 = 28%

Targets:

35-45%: Excellent
25-35%: Good
15-25%: Acceptable
<15%: Review for scope creep or repricing

4. Revenue Per Employee

Formula: Total Revenue ÷ Full-Time Equivalent Employees

Example:

Annual revenue: $2,400,000
Team: 12 FTEs (full-time equivalent)
Revenue per FTE: $2,400,000 ÷ 12 = $200,000

Benchmarks (from HubSpot Agency Report 2024):

$150,000-$200,000: Industry average
$200,000-$250,000: Above average
$250,000+: Top quartile

5. Gross Margin

Formula: (Revenue - Direct Costs) ÷ Revenue × 100

Direct costs include: Labor, freelancers, media spend, project-specific expenses

Example:

Revenue: $500,000
Direct costs: $275,000
Gross margin: ($500,000 - $275,000) ÷ $500,000 = 45%

Targets:

50%+: Excellent
40-50%: Good
30-40%: Acceptable
<30%: Problematic (too much labor cost or underpriced)

6. Days Sales Outstanding (DSO)

Formula: (Accounts Receivable ÷ Total Credit Sales) × Number of Days

Example:

A/R balance: $85,000
Last 90 days credit sales: $450,000
DSO: ($85,000 ÷ $450,000) × 90 = 17 days

Targets:

<30 days: Excellent (clients paying promptly)
30-45 days: Good
45-60 days: Acceptable (industry standard for agencies)
60 days: Problematic (cash flow risk, collection issues)

Common Agency Bookkeeping Mistakes

Mistake #1: Not Tracking Time Rigorously

The error: Team logs time sporadically or doesn't log at all

Why it kills profitability: Can't allocate labor costs accurately → don't know true project costs → can't identify unprofitable clients

The fix:

Make time tracking mandatory (job description requirement)
Review compliance weekly (shame report: who didn't log?)
Tie to performance reviews and bonuses
Use mobile-friendly tools (removes friction)

Mistake #2: Using Billing Rate Instead of Loaded Cost Rate

The error: Calculating project profitability using billing rates ($150/hour) instead of loaded cost rates ($67/hour)

Why it's wrong: Massively overstates profit. You bill $150/hour but your profit is only $150 - $67 = $83/hour, not $150.

The fix: Always use loaded cost rates for internal profitability analysis. Reserve billing rates for client-facing proposals only.

Mistake #3: Ignoring Scope Creep

The error: Not comparing estimated hours vs. actual hours worked on projects

Why it's wrong: Can't identify which clients/projects consistently run over budget. Scope creep silently kills margins.

The fix: Weekly project review comparing budgeted vs. actual hours. Flag projects >10% over budget immediately.

Mistake #4: Mixing Personal and Business Expenses

The error: Using business account/card for personal expenses (or vice versa)

Why it's problematic: Distorts financial statements, creates tax headaches, complicates bookkeeping

The fix:

Separate business and personal accounts 100%
If personal charge hits business card: record as "Owner Draw" or reimburse immediately
Use accounting software categories religiously

Mistake #5: Not Reconciling Accounts Monthly

The error: Only reconciling bank accounts quarterly or annually

Why it's dangerous: Errors compound. A $50 discrepancy in January becomes a $2,000 mystery by December.

The fix: Reconcile every account (bank, credit card, A/R, A/P) every month. Takes 15 minutes monthly vs. 20 hours annually.

Mistake #6: Forgetting to Invoice Completed Work

The error: Completing project work but delaying invoice (sometimes weeks or months)

Why it's costly: Delays cash collection, hides WIP, creates awkward client conversations ("Why are we billing for work from 3 months ago?")

The fix:

Invoice immediately upon deliverable completion or milestone achievement
Set calendar reminders for recurring retainer invoices (1st of month)
Track unbilled WIP weekly (don't let it pile up)

"The agencies that struggle financially aren't the ones with bad talent—they're the ones with bad bookkeeping," says Thomas Martinez, Managing Director at Deloitte's Agency Advisory Practice. "I've seen 40-person agencies with $8M revenue run on spreadsheets and hope. When we implement proper project accounting, they discover 20-30% of clients are unprofitable. That's not a small problem—it's an existential crisis they didn't even know existed."

Bookkeeping Software and Tools for Agencies

Accounting Software

QuickBooks Online ($35-$200/month depending on tier)

Pros: Industry standard, excellent for service businesses, bank feed automation, class tracking for projects
Cons: Can get complex with many clients/projects, reporting limited without add-ons
Best for: Agencies with 3-30 people

Xero ($13-$70/month)

Pros: Clean interface, unlimited users, strong multi-currency support, good integrations
Cons: Fewer industry-specific features than QuickBooks, smaller app ecosystem in US
Best for: Agencies with international clients or remote teams

Time Tracking + Project Management

Harvest ($12/user/month)

Time tracking, expense tracking, invoicing, project budgeting
Excellent QuickBooks/Xero integration
Clean, simple interface
Best for: Agencies 3-20 people

Productive.io ($9-20/user/month)

All-in-one: Time tracking, project management, budgeting, profitability dashboards
Real-time project profitability visibility
Resource planning and capacity management
Best for: Agencies 10-50 people

Forecast ($29/user/month)

Resource planning and project accounting
Tracks utilization, profitability, WIP
Great reporting and dashboards
Best for: Agencies 15-100 people

Invoicing and Payments

Stripe (2.9% + $0.30 per transaction)

Accept credit card payments online
Auto-reconcile to QuickBooks/Xero
Recurring billing for retainers

Bill.com ($45-125/month)

Automate accounts payable and receivable
Approval workflows for vendor bills
Sync with QuickBooks/Xero

Frequently Asked Questions

What makes agency bookkeeping different from regular small business bookkeeping?: Agency bookkeeping requires project-based accounting (tracking revenue, costs, and profitability by individual client and project) because profitability varies dramatically across client relationships due to scope creep, team efficiency, and pricing models. Standard small business bookkeeping only tracks company-wide totals, hiding which clients are profitable and which lose money. Agencies also need time tracking integrated with accounting (labor is primary cost), Work-in-Progress (WIP) accounting for unbilled work, and specialized metrics like utilization rate, realization rate, and project margin analysis.
Do I need QuickBooks or can I use spreadsheets for agency bookkeeping?: Spreadsheets work for solo freelancers under $100K revenue, but agencies with teams need accounting software (QuickBooks, Xero) because project-based tracking, time allocation, and financial reporting become unmanageable in spreadsheets beyond 5-10 clients. QuickBooks Classes or Xero Tracking Categories allow tagging every transaction to specific clients/projects, then generating profit & loss reports by client. This is nearly impossible to maintain accurately in spreadsheets when handling hundreds of transactions monthly across multiple clients and projects.
How do I track profitability by client in QuickBooks?: Use Classes in QuickBooks to set up each client as a main class and each project as a sub-class. Tag every revenue invoice, time entry, and direct expense to the appropriate client/project class. Export time tracking data monthly and allocate labor costs (hours × loaded labor rate) to client classes. Allocate overhead proportionally based on revenue or hours. Then run Profit & Loss by Class report to see revenue, direct costs, allocated overhead, and profit margin for each client/project. This reveals which clients are profitable (and which are costing you money).
What is a loaded labor rate and how do I calculate it?: Loaded labor rate is the true cost per hour of an employee including salary, benefits, payroll taxes, and allocated overhead—not just salary ÷ 2,080 hours. Formula: (Annual Salary + Benefits + Payroll Taxes + Allocated Overhead) ÷ Billable Hours. Example: $70K salary + $12K benefits + $5.4K taxes + $17.5K overhead = $105K total cost. Divide by 1,560 billable hours (assuming 75% utilization) = $67/hour loaded rate. Use loaded rates (not billing rates) when calculating project costs and profitability internally.
What is Work-in-Progress (WIP) and why does it matter?: WIP represents work completed but not yet invoiced—revenue earned in current month but billed next month. Without WIP accounting, the month you do the work shows costs with no revenue (looks unprofitable), and the month you invoice shows revenue with no costs (looks overly profitable). WIP accounting records revenue in the month work is performed, matching revenue to costs for accurate monthly profitability. Calculate WIP as (% project complete × total contract value) - revenue already recognized. Record as asset on balance sheet, then convert to revenue when invoiced.
How often should I track time for accurate agency bookkeeping?: Daily time tracking is mandatory—team members must log hours at end of each day (takes 30-60 seconds per entry). Weekly or monthly time tracking fails because people forget what they worked on, leading to 30-40% inaccuracy in time allocation. Inaccurate time tracking means inaccurate project costs, which means you can't identify unprofitable clients. Agencies with 95%+ daily time tracking compliance report 28% better project profitability than peers below 75% compliance. Make time tracking non-negotiable: include in job descriptions, review weekly, tie to performance evaluations.
Should I allocate overhead to projects or only track direct costs?: Allocate overhead for accurate profitability. Direct costs (labor, freelancers, ad spend) only show partial picture. Overhead (rent, insurance, admin salaries, software) is real cost supporting every project. Without overhead allocation, projects look 20-30% more profitable than reality, leading to bad pricing and client decisions. Allocate overhead based on revenue percentage or (better) hours worked. Even simple allocation (divide overhead equally) is better than ignoring it. Overhead allocation separates agencies that truly understand profitability from those guessing.
What's a good profit margin target for agency projects?: Target 25-35% net profit margin (after all costs including overhead). Best-in-class projects achieve 35-45% margin. Projects below 15% margin should be reviewed for scope creep, inefficiency, or repricing. Negative margin projects must be renegotiated immediately or client should be fired (you're working to lose money). According to 4A's benchmarks, top-performing agencies maintain 28-32% average net margin across all clients by actively managing project profitability monthly and exiting bottom 10-20% of clients by margin annually.
How do I handle retainer revenue in agency bookkeeping?: Invoice retainer at beginning of month and recognize full revenue immediately (you've earned the right to payment by providing availability). Track actual hours worked throughout month and allocate labor costs to the retainer project. Calculate profitability: Retainer revenue - actual labor costs - direct expenses - allocated overhead. Key metric: realization rate (hours covered by retainer ÷ hours actually worked). If retainer covers 30 hours but team worked 40 hours, realization is 75%—you're absorbing 10 hours of scope creep. Address by renegotiating scope or raising retainer fee.
When should I hire a bookkeeper vs. a controller for my agency?: Bookkeepers handle transaction recording, bank reconciliation, invoicing, and bill payment—sufficient for agencies under $500K revenue. Controllers provide strategic oversight: project profitability analysis, financial reporting, cash flow forecasting, WIP management, KPI dashboards, and financial process design. Agencies above $1M revenue typically need controller-level oversight monthly (fractional or full-time). Agencies $500K-$1M can use bookkeeper with quarterly controller review. Controllers ensure your bookkeeping actually reveals profitable vs. unprofitable clients—bookkeepers record transactions but don't typically analyze profitability at project level.

Stop Losing Money on Clients You Don't Know Are Unprofitable

Your agency shouldn't work 50-hour weeks serving clients that cost more than they pay while your profitable clients wait for attention. Project-based bookkeeping reveals the truth—so you can fix pricing, fire bad clients, and double down on relationships that actually make money.

Ready to see which clients are profitable and which are costing you? Contact us for a free consultation and discover how controller-level agency bookkeeping transforms profitability visibility.