Profitability isn’t just about how much money your marketing agency brings in—it’s about how you manage that revenue. Without a clear plan, it’s easy for operating expenses, compensation, and unexpected costs to eat away at your profits. Fortunately, there’s a simple formula that can help you take control of your finances and ensure long-term profitability: the 30/30/20/20 method.
This formula is designed to work hand in hand with the popular Profit First method, and together, they give you a clear roadmap to follow. Both methods focus on setting up dedicated bank accounts for key financial areas, ensuring that each dollar you earn has a purpose.
Let’s break it down.
Step 1: Set Up Your Bank Accounts
The foundation of this profitability system is separating your revenue into multiple bank accounts. This allows you to manage your money more effectively, preventing overspending in any one area. Here are the four key accounts to set up using the 30/30/20/20 method:
- COGS (Cost of Goods Sold) – 30% of revenue
- Net Profit – 30% of revenue
- Operating Expenses – 20% of revenue
- Owner’s Compensation – 20% of revenue
These accounts ensure that you always know where your money is going and that no area is neglected.
Step 2: Allocate 30% to COGS
COGS includes all the direct costs associated with delivering your services. For a marketing agency, this might include contractor payments, software subscriptions for client work, and other client-related expenses. By allocating 30% of your revenue to COGS, you’ll cover all the necessary expenses for delivering high-quality results without eating into your profits.
The key here is to track these costs closely. If your COGS consistently exceeds 30%, it may be time to reassess your pricing or renegotiate vendor contracts. Keeping these costs in check is essential for maintaining a healthy profit margin.
Step 3: Allocate 30% to Net Profit
Here’s where the Profit First method comes into play. By allocating 30% of your revenue directly to profit, you ensure that your business is always growing financially. Too many agencies focus on covering expenses first, hoping to have some profit left over at the end of the month. The 30/30/20/20 method flips that mindset by prioritizing profit, ensuring that it’s built into your financial system.
This money is not to be touched for day-to-day expenses. Instead, it should sit in its own account, growing over time. Whether you want to reinvest in the business or simply have a financial safety net, this account ensures that your agency is always profitable.
Step 4: Allocate 20% to Operating Expenses
Your operating expenses should include everything needed to keep the agency running—rent, utilities, office supplies, and software not directly tied to client work. By limiting your operating expenses to 20% of your revenue, you create a lean, efficient agency.
This forces you to be more strategic with your spending. If operating expenses exceed 20%, you need to find areas to cut back. This may involve negotiating lower rates with vendors, switching to more cost-effective tools, or eliminating unnecessary expenses. Keeping this in check ensures that the agency remains financially healthy.
Step 5: Allocate 20% to Owner’s Compensation
Finally, set aside 20% of your revenue for Owner’s Compensation. This ensures that you, as the business owner, are paid fairly for your hard work. Too many agency owners wait until the end of the month to see if they can afford to pay themselves. This system guarantees that your compensation is prioritized alongside the agency’s other financial needs.
By separating out your compensation from operating expenses, you prevent the temptation to dip into your personal income to cover business costs. Your agency should be structured to pay you a fair wage while remaining profitable.
Conclusion
The 30/30/20/20 method is a straightforward, effective way to ensure long-term profitability for your marketing agency. By separating your revenue into dedicated bank accounts and prioritizing profit, you create a system that guarantees financial growth while keeping your business lean and efficient. Combined with the Profit First method, this formula helps you build a sustainable agency that pays you well and grows your bottom line.