What are Profit First Percentages?

A lot is made about Profit First Percentages and coming up with the exact number. The specific number is not as important as starting!

Read on to learn more.

What is Profit First?

The Profit First Method is a financial management system that helps businesses improve their cash flow and increase profitability. It is designed for any business owner who wants to take control of their finances and ensure they are always making a profit.

Whether you are a small business owner or a Fortune 500 company, the Profit First Method can be used by businesses of all sizes and in any industry. It is especially beneficial for entrepreneurs and small business owners who often struggle with managing their finances and have limited resources. By implementing the Profit First Method, businesses can prioritize profit and make better financial decisions in their day-to-day operations.

This method is also useful for businesses that are experiencing financial challenges or want to better understand their cash flow. It provides a clear and practical framework for managing finances and increasing profitability.

Additionally, the Profit First Method can be utilized by businesses at any stage of growth- from startups to mature companies. It can help newly established businesses establish a strong financial foundation and assist established businesses in identifying areas for improvement and expansion.

Overall, anyone who wants to improve their financial management and prioritize profitability should consider utilizing the Profit First Method.

Will it Make My Business More Successful?

Profit First Accounting is a formula approach to financial management that aims to help businesses succeed by focusing on maximizing profit. This system was developed by Mike Michalowicz, a renowned entrepreneur and author, in his book Profit First.

Unlike traditional accounting methods that prioritize revenue and expenses, the Profit First Accounting principle prioritizes profit as the main objective. This means that businesses using this approach allocate a percentage of their income specifically for profit before allocating funds for other expenses. By making profit a non-negotiable priority, businesses are forced to operate more efficiently and make wiser financial decisions.

This system also incorporates the concept of "paying yourself first," which means business owners take a regular profit distribution from their business accounts. This not only rewards business owners for their hard work, but also provides them with the motivation to continually improve their business and increase profitability. In addition, the Profit First Accounting system helps businesses overcome the common challenge of using all available funds for expenses, leaving little to no profit.

By setting aside a predetermined percentage for profit, businesses can ensure they are consistently generating income and building a financially stable foundation. Overall, Profit First Accounting offers a holistic approach to financial management that can significantly improve a business's chances of success. By prioritizing profit and implementing sound financial strategies, businesses can thrive and achieve their goals.

Target Allocation Percentages

When people talk about their Profit First percentages, they are usually referring to their target allocation percentages (TAPs).  These are the percentages that you use on a regular basis to transfer money in your bank accounts.  TAPs are different than current allocation percentages.

Current allocation percentages are determined by doing a Profit Assessment to figure out where your business is currently.

What Are the Recommended Target Percentages?

Think of TAPs as your "budgeted" percentages.  They are what you have decided as you plan for business finances for the current year or quarter to attain your desired profit margin.  TAP's are usually part of a Profit Improvement Plan, which changes the TAP's each quarter until you have the profitable business you desire.

How Can Business Owners Determine Their Own Target Allocation Percentages?

Your TAPS will change as your business changes and as your profit improves.   When implementing TAP's and a Profit Improvement Plan you should plan on making incremental changes.  For instance if your long term goal is to increase profit by 10%, don't do that all at once. 

Start by changing your TAP's 1% so that you can actually make changes to your operating costs that stick.  Better yet, work with a Profit First Professional to help you set your financial goals, keep you on track, and obtain financial freedom!

What Is the Difference Between a Percentage of Revenue and a Percentage of Real Revenue?

When calculating your percentages we recommend using Real Revenue instead of the top line number.  Real Revenue is your total revenue less your pass through costs.  These pass through costs are things like cost of material you purchase and don't mark up or things you subcontract out.  By eliminating these dollars you have Real Revenue, which is the amount your business really has to work with.

The Standard Profit First Bank Accounts

There are five main accounts in the Profit First system. The Income account is where all revenue is deposited. This account is strictly used for incoming funds and should not be touched for any other purposes.

The Profit account is meant to accumulate profits and should be periodically moved to a different bank where it cannot be easily accessed.

The Owner's Compensation account is used to pay the business owner a reasonable salary. This account ensures that the owner is adequately compensated for their efforts.

The Tax account is crucial for setting aside funds to cover tax obligations. By allocating money to this account regularly, business owners can avoid any surprises come tax season.

Lastly, the Operating Expenses (OPEX) account is where all the business expenses to run the business are paid from. This account should receive a predetermined percentage of revenue to ensure that the business remains profitable and sustainable. By allocating funds to these five accounts, businesses are able to better manage their finances and ensure that they are making consistent profits. The Profit First system provides a simple and effective way for business owners to prioritize financial stability and growth. 

Yeah, But Does Profit First Work?

Absolutely! 100% of the times it is implemented. I write more in this article. Check it out.

If you don't believe that it can work in your business, try this exercise. Open a separate bank account. Deposit 1% of EACH deposit you make each day into your normal account. Look in 90 days. You'll be surprised how much money is in there, and you won't have even noticed it. This is not Profit First System, but it will give you a taste of what is possible!