Profit First: Financial Assessment and Percentage Allocation

[Pesso]

Hey Square Readers,

As we’re getting deeper into reading Profit First by Mike Michalowicz, let’s get deeper into the material. So far we’ve talked about the basics, along with the core principles and first action steps to start ensuring that your business becomes truly profitable. 

Now we’re going to customize the plan to your business by running the Instant Assessment to see what financial shape your business is in now, and determine what percentages you’ll divide up your income to transfer into each account. 

Financial Instant Assessment

The next step of Profit First is to run the Instant Assessment to see what financial condition your business actually is in. 

To run the assessment, follow the steps in Chapter 4, “Assessing the Health of Your Business,” pages 59-74. Here you’ll use the following chart to write down how much your business currently makes and spends in each category in order to figure out what percentages of your income you currently spend, what allocation percentages to start with, what percentage goals to make, and what the difference is.

Instant Assessment:

You can follow the instructions in the chapter to set personalized goals based on your business’ financials, or you can simply use the Target Allocation Percentages (TAPs) laid out in the example chart based on income. The chapter also has an example of a fully completed Instant Assessment, which you can click here to view.

Setting Your Allocation Percentages

Since you know what percentages you’ve been spending, and you’ve set your goals of where you want to end up, it’s time to work to get there. Your Current Allocation Percentages (CAPs) are the percentages that you’ll set to transfer from your INCOME account to each other account.

The author writes, “For the remainder of this quarter, set your CAPs 1 percent “better” than what you have done historically—meaning increase your Profit, Owner’s Comp, and Tax all by 1 percent and cut your Operating Expenses by 3 percent. Every quarter we will push the CAPs to an even better percentage. Over time you will continue a relentless march toward a healthier and healthier company, and a fatter and fatter wallet.“

Next you’ll add those CAP and TAPs to the nickname of each account, so you can easily see what they are and where you’re going. If your current percentage for your OPEX account is 55% and your goal is 30%, you’d call your account “OPEX 55% (30%).”

Let’s Get Started!

If you haven’t already, jump over to our previous post and check out the first steps to start implementing Profit First. You can distribute the money currently in your account according to your new percentages, and start the twice a month cycle to keep it going. 

There’s plenty more to be done. This is just the framework of how to organize your money and set goals of what being profitable looks like. In our next post, we’ll talk about how to actually start cutting expenses in order to get there.

We’d love to hear your answer in the comments:

• What did you find in your Instant Assessment? 
• What are your Current Percentages and Target Percentages for each area/account?
• What do you need to do in your business in order to reach those goals? 

Feel free to share any other thoughts you have about this book. We can’t wait to hear your thoughts in the comments below!

Don't forget to RSVP to our Live Discussion on February 27th!

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Happy reading,

Pesso

[bonny]

Well ok then, from the top:

• What did you find in your Instant Assessment? 
  The first thing was I found a problem in my accounting that had gone unnoticed for years.  I am fixing that now so I can have an accurate picture of where I'm at.  I will say the instant accessment identified my weak spots and I won't even argue (to myself) that they are better than they look.  At least I am aware now what I need to change. 
  
  PS - Acronyms will be the death of me so I'm setting up a reference card so I can refresh my memory for what they mean in context to what I'm reading.  
  
  
• What are your Current Percentages and Target Percentages for each area/account?
  Can I just say I have work to do?  I'm out of balance compared to the ideal Target Percentages.  But I think that's the point of all of this.  
  
  
• What do you need to do in your business in order to reach those goals? 
  Good question.  I'm working on the answer to that now but I know need to pay more attention to Profit, Owner's Pay and the percentages that are going into each category.  That's just for starters.  

[Pesso]

Thank you so much, @bonny !

Oh wow! What was the accounting problem that you found?

I'm so glad that you were able to find it and that you can work on things now! 

Realizing that you're out of balance is absolutely the point! And then working to get it better.

It can be so hard to come to terms with hard financial truths about your business, so I'm so glad that you're jumping into it, not fighting it, but instead fighting to fix it. So inspiring! 

I can't wait to hear your updates on how things are going and what you end up doing to get things more in line with your targets. Keep us updated!

[Stacelyn24]

Thank you so much for creating the copy for us.  I'll print this out making it easier to use this graph (meaning I can mess up and start over and not have marks all throughout my book lol 🙂

[Pesso]

Always happy to share the resources, @Stacelyn24 ! That sounds like a great plan -- please share what you come up with!

[JUYBoutique20]

I actually emailed the author, and he had one of his specialists get in touch with me to answer the questions I had about the program.  My business is not in debt, thank God, so it pays for all my expenses.  They suggested I do the max amounts for my category and that's what I do.  Once I hit the next bracket, I'm hoping to still be debt free so I can do the suggested max % again.

[Pesso]

Ah that's so cool, @JUYBoutique20 , that you reached out and they responded with some suggestions! Incredible. Definitely keep us updated on your progress and how the max %s work out for you.