Insights
How to account for pass-through costs at your agency
Keep pass-through costs such as media spend in their own income and cost accounts, tagged by client, and judge your agency on gross income. Mixed in with your fees, they shrink your margin on paper, hide which clients pay, and tie up cash you front for clients.
Mohammad Azam, Aprecity Consultants · 5 min read
Why your margin looks thinner than it is
You buy media, printing or software for a client and bill it back at cost. Your books record it as revenue, then as a cost.
Your profit does not change. But your revenue swells, your margin shrinks, and every ratio built on revenue stops meaning anything.
What it does to your numbers
Run the numbers on an invented month. The agency earns $60,000 of fees and bills $140,000 of media at cost. Team and overheads cost $54,000.
| View | Revenue | Profit | Margin |
|---|---|---|---|
| Media inside revenue | $200,000 | $6,000 | 3.0% |
| Gross income only | $60,000 | $6,000 | 10.0% |
These figures describe an invented month chosen to show the arithmetic. They are not a client result.
A client with heavy media spend looks like your largest account. Its fees may be smaller than a client who buys no media at all.
The cash you front for clients
Cash you front = pass-through billed x (days client takes to pay - days you take to pay the vendor) / 30
Say the platform takes payment in 30 days and the client pays in 45. The invented agency then carries $70,000 of its client's media bill.
That cash earns you nothing. It is a loan to the client that never appears in your profit and loss.
Set up your books for it
- ( 01 )
Open two accounts
Create a pass-through income account and a pass-through cost account. Keep both out of your fee income and delivery costs.
- ( 02 )
Tag every line by client
Each media bill and each rebill carries the client's name. The two accounts should net to zero for each client.
- ( 03 )
Bill fees separately
Put pass-through costs on their own invoice line. Record any handling fee as fee income, not inside the media line.
- ( 04 )
Report on gross income
Work out margins, payroll ratios and client rankings on fees only. Show pass-through totals beneath them.
- ( 05 )
Collect before you pay
Ask clients to pay media in advance, or match their terms to the vendor's. Then work out the cash you still front.
What changes
Your margin shows what your work earns. Your client list ranks accounts by the fees they pay you, which is what pricing and staffing depend on.
Each month, check that the two pass-through accounts net to zero by client. Any difference is media you paid for and never billed.