Editor’s Note: This is the 4th installment of our Business Functions Series. Find the other issues here: Activities To Functions - AIC #178, Client Delivery Function - AIC #179, Admin Functions - AIC #180

My two sons work as servers in a retirement home. Every Wednesday is payday. They excitedly open up their bank account apps and look at all the money that goes in. They are very, very excited and their eyes grow wide with the number of pizzas and sodas, the pounds of candy and the hours of movies that they can see.

But then reality steps in, and some of their money automatically gets transferred to a high-yield savings account that they can't easily get at. Every Wednesday, it's a disappointment. But their high-yield savings account is pretty fat and happy.

Before I got professional advice around agency finances, every invoice was like a Wednesday for me. I knew what we could do with that money, but I didn't really have a big plan. I read Profit First and that really helped.

But the big thing that changed for me is, in my zeal to turn finances into a function that I managed rather than something that I did, I had to reshape what money meant. Unlike all of the other parts of your agency, finance is a function that you manage, certainly, but you are an active participant in it.

For years, money meant “success”! It was validation that we did our jobs well, and the more money we generated, the more successful we were. I'm sure that you've heard the phrase that “revenue is vanity and profit is sanity”. For the first third of my agency management career, I was a vain motherfucker.

It wasn’t until I reshaped my idea that receiving money was the win, that I realized my job as CEO wasn’t “money maker” but rather CASH ALLOCATOR. When it came right down to it, my team earned the money, and it is my job as the CEO to allocate it intentionally.

Here is the world’s most obvious business calculation:

The the difficult thing is that there is not a predetermined relationship between those numbers. There isn’t always a positive number at the end of the equation. Sometimes the first number in the equation can be variable and full of surprises. and that middle number is tricky too because expenses tend to be largely focused on human beings. Sometimes they are more efficient or less efficient, or want to take vacation, and those things might actually cause you to spend more money.

So I like to think about this a little bit differently. You might call it backwards, but this is stolen directly from Profit First :

All the numbers are the same. It just turns out that, rather than leaving profit as the outcome of a function, you are pre-determining it and using that to define how much you will spend. It's intentional finance rather than finance as an artifact of what did happen.

These are some actual numbers from businesses before and after we've worked on this way of intentional finance:

BEFORE:
$1,237,000 REVENUE - $1,168,000 EXPENSES = $69,000 PROFIT (5.5% Profit)
AFTER:
$1,441,000 REVENUE - 20% PROFIT ($288,200) = $1,152800 EXPENSES

The Magic isn't in the fact that revenue grew and expenses dropped a little. The magic was that 20% of every dollar that came in was considered prepaid profit, so it wasn't available for expenses. This kind of preemptive discipline acts exactly like an automated high-yield savings account deposit for my sons - you can't spend money that you don't have access to. If you prepay your self-profit, that money isn't available to your business to push into the expense column.

This is you taking command of your financial ship in the often choppy seas of agency finance.

the most important thing about this prepaid profit concept is that it is discipline that happens without any consideration of the impact. As your agency goes through the year and revenue goes up or revenue goes down, you might find that that number that you chose to prepay as profit is wrong. That's okay. You just adjust and reshape the number, but you don't give up the discipline.

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It really comes down to having a clear idea of what you want to happen, rather than reacting to what might or did happen. In my 2026 Planning Workshop into a bucket system that is the “advanced” version of pre-paid profit. But the essence is this:

I really like a simple allocation style - broad categories that are easy to “think” about. We aren't talking about tax accounting here - we're talking about how to think about your money. So we don’t really care if a particular expense goes into the exactly perfect general ledger entry…we are thinking in buckets:

DELIVERY: This is all the money that you spend (salaries, contractors, etc.) to deliver the goods to and keep your clients. I’d like this to be 40-55% of revenue.

GROWTH: This is what you spend on salaries, commissions and marketing for your business. I’d like this to be 10-20% of revenue.

OVERHEAD: This is rent, software, taxes, etc. - you know, all the stuff that doesn’t change when you client roster changes. I’d like this to be 15-30% of revenue.

PROFIT: This is what’s left over. I’d like this to be 20-25%. But if you are at scale, your delivery & overhead costs run higher. If you are trying to grow faster, your growth costs are going to be higher. If you have in-office staff in a large city, your overhead is going to be higher. The industry average is actually closer to 15%

(Editor’s Note: There are all sorts of agency benchmarks that I’ve aggregated on my Agency Research page for you fun and enjoyment.)

I know - if you added up all of the top ends of the ranges, you’d end up with 130% of your revenue allocated. That’s not possible. That’s why there are ranges. The primary number you should be worried about is profit & delivery.

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Capacity planning is such a critical part of owning an agency. I will admit it has gotten so much more complex with the advent of AI because it's not clear anymore how long it takes anybody to do anything. AI makes things so incredibly fast, but not always good. Often it takes a really long time to convince AI to do the thing that you wanted to do in the way you wish to do it, so that you get the results that you promised. We are in an enormous flux in understanding the concept of capacity.

But here is my tried & true rule of thumb:

At that point, You either need to help them get more efficient through the use of AI or start thinking about distributing their work amongst other team members or hiring.

But if your team is significantly below 25 hours a week in client work, you are overstaffed and your allocations are going to get out of whack.

You know when you have a really great client and everything just works. You love working with them, and they love working with you, and you don't mind throwing another couple of hours or another body or two at their work.

That might be okay for a month or two, but the deep, dark, scary part of the allocation forest is in the world of over-servicing - you were doing things to be nice or because they are the right thing to do, but if you are not careful, that's going to end up costing you more money than you are taking in. That is a preventable disaster.

Everybody in the world hates timesheets. They feel infantile and controlling and like it's capricious overhead that doesn't create any benefit for anyone. I would generally agree. However, at least once every other month, you need people to track their time and their activities for a week. That where you can know how much time it costs your team to accomplish something. We don't need to have laser-guided precision here, but if a unit of work takes 30 minutes and your client has paid for 100 units of work, you can't have that unit of work actually take 45 minutes. Otherwise, you are giving 50% of the work away for free.

In addition, somebody on the account management team needs to be keeping track of what's actually in the scope that's in the contract. Ideally, you have built that contractual obligation in such a way that the money you receive for the work covers the cost of the work, the cost of your overhead, the cost of your growth & your profit.

You need to know what work you are doing, and if it's not in the contract, you have to have a method for saying, "Hey, we need to charge you more for this."

This is actually so much easier than you think. You have to pay yourself a reasonable market salary. The IRS says so. (BTW, I love this because it forces agency founders to assign themselves a minimum financial value so that they know their work is not free.)

Then, at the end of the month, quarter or year, you look at the profit from your business and decide how much you are going to put into your pocket and how much you are going to use to grow your business. I suggest doing this quarterly, and depending upon your financial circumstances, try not to take more than 50% of the profit in any time period. You've got to save some for a rainy day.

Actually, it's not, because as you were learning about Admin and Operations, you know that you are going to get a low-cost AI bookkeeper. you are going to get either automation or a human being to run your invoicing. You are going to find someone who can look at all of your expenses on a monthly basis and say, "Yes, they are assigned the right way," so you can trust the profit number that comes out of QuickBooks.

Your role is this:

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