Profit First Question and Answer

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.


17 thoughts on “Profit First Question and Answer”

  1. Hi Mike, I’m listening to the audio book of Profit First. Without even getting to the actual assessment (just about there), I took in two fees over the weekend from clients which lodged this morning. I immediately transferred out one of them to my Credit Union account. Two more clients are due to sign up today (I’m running an 8 week program starting next month), and I intend to do the same.
    I’m posting this because in the book you invite us to email you to commit to the process. I’m COMMITTING TO THE PROCESS! From now on, and with the proper guidance of the Profit First formula which I haven’t even got to yet, I commit to taking a percentage of every penny earned UP FRONT and putting it away first.
    I had been doing a version of this, kind of… I’d set up three accounts and had money filtered through monthly standing orders into a ‘tax’ account, a ‘save to spend’ account and an ’emergency fund’ account but it really wasn’t working, as I was truthfully dipping into them whenever the cash flow in the business ran low/out.
    I now intend to ring a bank I had a savings account with a long time ago – I found the account number recently in a pile of paperwork – to see if that account is still active or if it can be activated. It is difficult to withdraw money from that account as I recall. In fact, if I don’t re-order a card reader/code generator gizmo, I literally won’t be able to withdraw at all. I am going to apply the Profit First formula this month, and put my profit into that account, where I cannot access it until I order a gizmo. I further undertake NOT to order a gizmo until I have gotten my new habit firmly in place and more importantly, my overall financial management of my business under proper control and monitoring. At the very least, I undertake not to order a gizmo until January 2018.
    Profit First starts TODAY.

  2. Mike,
    I am a transportation freight broker.
    My division did several millions in sales last year. I do not have my own trucks on the road. We find and hire carriers to do the loads of my clients. We are essentially traffic managers for hire in a way.
    For each of my clients loads that needs to move from point A to B, I find the appropriate carrier to do the job in such a way that I can be competitive rate wise, and still make a profit.
    So the question is, if hypothetically my numbers were:
    Sales $ 5,000,000
    COGS $ 4,000,000 ( Total charges of all the carriers only, that I used to move all of my clients freight )
    The employees I pay a salary to all find clients and match their loads or handle billing of just do operations with carriers and coordinate the process.
    We in turn bill our clients for the freight service provided directly ( hold the receivable ) , and pay the carriers directly ( Payables )
    So the question is…what’s the real revenue of my firm?
    Is Real Revenue $ 5,000,000 or $ 1,000,000
    Best regards

    1. It is my understanding your “real revenue” would be 1,000,000. Did you end up implementing this process? I am a manufacturer and I’ve beens struggling to figure out the same thing. It makes sense to me that my real revenue is 40% less than my top revenue—but then I feel like that makes my TAP a lot easier to reach (because now I’m only allocating 60% of my top revenue). I’m thinking I will use my top revenue #, include materials costs (for you, this would be the drivers) in my operating expenses, and see if that can help me get costs down. I’d be curious to hear what you did!

  3. I’m really impressed with this whole concept but I’m struggling with excluding my retail store’s rent in the materials and subs. This is not something I can reduce and its my biggest operating cost. Can I include it in my materials instead?

    1. Hey, would I did was create a separate account for rent & utilites.
      I looked back at last year got a percentage I paid for rent & utilites and used that figure to start off with. If your business is growing and your rent is fixed then extra sales will make it easier to pay each month.

  4. Hi Mike,
    When you are starting a new retail business and apply the profit first, will your TAPs be adjusted? Because you are spending more on marketing, etc and not really paying yourself first. I’ve set aside money on 50% owner’s pay but would rather use that for marketing etc to build a client base. As time goes, I’d like to get it to where you suggested in your book. By the way, I have an idea if you want to work with me on it. I listened to your Episode 193 podcast and had an AHA moment to apply your profit first to a niche market. Thanks!

  5. Hi Mike! I’m reading and working on implenting Profit First and I’m confused in filling out the Instant Assessment…. namely block A4 and A7. Can you please explain where these #’s come from?
    I have a service company and I’m the only “employee”, however, I’ve rarely ever written myself a check for anything. I KNOW that’s about to change and I can’t wait.

  6. Hi,
    Not sure if this is still even active but I implemented profit first at the beginning year and it has been very beneficial to my company.
    I was a little dubious at first so even though I set up all the accounts I never took any quarterly payments from my profit account as I just wanted to make sure all was well before I did.
    It is now coming up to third quarter and I am happy to say I want to take out that 50%. Does anyone ever feel guilty for taking that much for themselves? The amount I will take will be like 4 months salary for my accountant!
    Just wondered if anyone else had similar issue if they are part of a smaller business.

  7. Hello Mike,
    I am a little confused on distributing the profit. I am doing the first quarterly payout and then got to thinking about the 2nd one and needed clarification. For hypothetical numbers, let’s say profit in Q1 is $1,000.00. So I would take $500.00 as profit distribution and leave $500.00 for profit. Now, let’s say I get another $1,000.00 in Q2 as profit. Now my profit account shows $1,500.00 in there. Am I only to take half of what was added in this quarter ($500.00) or half of the total balance ($750.00)?
    Thank you in advance!

    1. Marianne,
      I have the same question…. because as the math works, if you always take 50% of the whole account, the account will never grow past $1000 (as per your example). Q1, $1000 you take $500 (leave $500), Q2, $1500, you take $750; Q3, $1750, you take $875; Q4, $1875, you take $937, etc. the account never gets above the average of quarterly deposits. No way to “build emergency fund” with it.
      Mike needs to clarify this….

  8. Hi Mike,
    We have a blended family with my husband and 2 girls from my previous marriage. Ages 8 and 14. Looking at doing the ProfitFirst for kids. Yay! However it feels uncomfortable to request my 8 year old daughter to put money aside for her “rent” as part of helping with our home. There is already relationship tension with the “stepfather” dynamic. However it makes complete sense for my 14 year old. Can you please advise on how to handle age appropriate guidelines? Thanks so much!

  9. I am confused about where you account for the payroll taxes for the OWNER. So if I pay myself $100,000 a year through payroll, that $100k would be in OWNER COMP. But the business is responsible for certain payroll taxes. I understand the taxes withdrawn for my withholding are to be reimbursed with the TAX account, but what about the business portion of the payroll taxes for the salary paid to me as owner? Is that an operating expense, or is it reimbursed through the TAX account or should it be baked into the OWNER COMP? So if my revenue was $200k, and I was setting aside $100k for owner comp, am I really paying myself less than $100k because of the payroll tax?

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