Recently, I was asked a very insightful question regarding Profit First and income allocation. I decided to share my answer with you.
Q: “I had one question that I was hoping you could help clear up for me. As the business is basically a retail store, a large percentage (currently 46%) of the Top Line Revenue is used to purchase either stock for the store, or materials used to make her artworks. I read about the “Materials” or “Pass Through” accounts you mention in Chapter 9, but how do I allocate income into this account in a structured way? Should we tweak the “Instant Assessment Form” to calculate a CAP/TAP percentage of top line revenue to put into this “materials” account, and then adjust the other TAP/CAP values (for profit, owners comp etc) accordingly? It just hasn’t quite clicked for me.
If you could help explain or provide another example, it would be greatly appreciated.”
A: In regards to your question, determine your historical percentage for Materials. Create an account for Materials at your bank. When INCOME comes in and you do your allocations, transfer that materials percentage to the Materials account. Then the remaining money in INCOME gets allocated out to the the other four accounts (profit, owner comp, tax, and opex). Then start reducing the Materials percentage each quarter, try to reduce it (therefore allowing more money to go into your four accounts. Hope this helps.
