A Capital Allocation Framework for Professional Services Firms

It took me years to realize that running a profitable professional services firm made me a capital allocator. Not just a founder, not just a CEO, but someone responsible for making deliberate decisions about where profits go and what kind of future those decisions create.

At first, profit just meant stability. A bit more to take home. A bit more room to breathe. But over time, especially as Barrel matured and Barrel Holdings grew, I came to see profit as something much more important. Profit became a decision point. And making good decisions consistently was the difference between building something valuable or just spinning wheels.

Over the years, I’ve come to rely on a two-step mental model that’s helped bring clarity to this process.

Step 1: How much do I need to take off the table?

Before thinking about reinvestment, I ask myself: How much money do I want to put in my personal bank account to feel good right now?

This number has changed depending on life stage, family needs, and how secure I’ve felt. In some years, I’ve prioritized building a cushion. In others, I’ve been comfortable letting more ride in the business.

There’s no universal formula here, just a very personal decision. I’ve found it helpful to be honest about the number that lets me sleep at night. Once I hit that threshold, it becomes easier to approach capital allocation with a clear head, not from a place of stress or scarcity.

Step 2: Where can this capital earn the best risk-adjusted return?

Once I’ve covered personal needs, the next question is whether the business is still the best vehicle for growth.

In the early days, I didn’t always think this through. I’d take distributions and invest in things I didn’t fully understand: angel deals, crypto, real estate, and tech stocks. While some worked out okay, many underperformed what I probably could’ve earned by simply reinvesting back into the business.

Eventually, I came to believe that, for a certain stretch of time, the business was the best shot at a compounding return. I had more control, more insight, and more ways to create leverage.

This became the foundation for how I approached reinvestment. I didn’t need to chase the next big thing—I needed to look more closely at the levers already available inside the business.

Five Levers for Capital Allocation

1. Organic Growth

Some of the best investments we’ve made have been in sharpening our positioning, upgrading our marketing, and building stronger sales capabilities.

At Barrel, a full rebrand and website refresh led to stronger inbound opportunities and better-fit clients. We also invested in outbound experiments and content development. But none of this would’ve worked if we’d treated it like a side project. Trying to get billable staff to drive internal growth always led to delays and diluted focus. The lesson: treat growth initiatives like real client work—scoped, staffed, structured, and funded with real dollars.

2. Acquisitions & New Business Ventures

Barrel Holdings has completed several agency launches and acquisitions—mostly horizontal, service-aligned agencies in areas like Shopify, Webflow, WordPress, and Amazon services.

The ones that succeeded brought not only revenue but strong teams, useful capabilities, and client diversification. They also created new opportunities for reinvestment. Of course, not all were home runs, and the ones that have struggled taught me that it’s very important to set clear boundaries for capital allocation. If an acquisition or a new venture is struggling, then it’s sometimes okay to pull the plug and divert resources elsewhere.

Acquisitions and launching a new venture can be powerful, but only when there’s a clear thesis and plan for how value will be realized.

3. Cash Buffer

There have been periods where holding onto cash was the smartest move. A healthy reserve has helped us navigate client churn, fund unexpected expenses, and most importantly, move quickly when a great opportunity appeared.

While cash sitting idle doesn’t feel productive, I’ve learned to see it as strategic patience. It’s about preserving optionality and protecting the downside.

4. External Support

Hiring external consultants and coaches has consistently paid off, whether that was a sales coach who helped us reframe our pipeline strategy, a CRM expert who cleaned up years of messy data, or a CEO coach who brought structure to leadership planning.

These engagements were often expensive, but they helped us make years of progress in months. Bringing in outside perspective has been one of the highest-leverage uses of capital.

You can also get external support via mastermind groups and associations like Collective 54, where exposure to other professional services firm leaders can spark new ideas or help you avoid mistakes.

5. R&D and Experimental Projects

Not every reinvestment needs to yield immediate ROI. We’ve tried a handful of internal projects, from product ideas to IP development.

Some didn’t go anywhere. Others, like our media property AgencyHabits, became real assets with their own revenue streams and strategic value. The key was giving them real resources and constraints. When we treated these efforts like “maybe someday” side hustles, they drained focus without producing results.

Avoid Hiring Ahead of Committed Revenue

One lever I’ve grown more cautious about over time is adding full-time headcount ahead of committed revenue. It’s easy to get optimistic about the pipeline, assume growth will materialize quickly, and start hiring in anticipation. I’ve made this mistake myself, and I’ve seen other professional services firm leaders do the same.

While it can occasionally work out, it’s a risky move that often creates unnecessary pressure. In most cases, I’ve found it far safer to bridge gaps with fractional hires or trusted subcontractors while waiting for revenue to materialize. This preserves flexibility and avoids the cash burn that comes with prematurely scaling the team.

A classic scenario is hiring a senior executive to lead a new function or service line before there’s enough real demand. When deals are delayed or don’t close, the cost of that hire becomes a drag—and often, there’s not enough for them to do in the meantime. The upside of acting early rarely outweighs the downside of overextending before the business is ready.

Putting It Together

What I’ve learned over time is that capital allocation is less about making bold bets and more about asking the right questions, repeatedly:

• What is the expected return?
• Where are diminishing returns starting to show?
• Could this capital be used more effectively somewhere else?

That last question has saved me from chasing distractions and helped me stay focused on the areas where the business had real leverage.

Profit can be distributed, reinvested, or parked. But it should never be thoughtlessly spent. Every dollar has the potential to shape the next version of the business.

These days, I try to remind myself that being a good capital allocator isn’t about being flashy or making perfect calls. It’s about staying clear on goals, being honest about needs, and making thoughtful decisions one quarter at a time.