Allocation Percentages
Starting Small with Allocation Percentages
Description:
In this episode, we tackle the next step in implementing Profit First: setting up your allocation percentages. This is where the system becomes tailored to your business, helping you move toward financial stability and profitability one step at a time. The key is to start small, be realistic, and focus on building momentum over time.
We’ll discuss how to set achievable goals, why benchmarks are helpful but not absolute, and how to ensure you’re prepared for both rainy days and tax time. Remember, profitability is a marathon, not a sprint. Any progress is a win!
What You’ll Learn:
- Why starting small with your allocation percentages leads to long-term success.
- How to set realistic goals for Profit, Owner’s Compensation, Taxes, and Operating Expenses.
- The importance of working with your accountant to ensure your allocations align with your tax obligations.
- How even small profit percentages build significant financial safety nets over time.
- Strategies to adjust and improve your percentages incrementally each quarter.
Highlights:
- Start Small, Dream Big:
- Begin with just 1% allocated to your profit account. Over time, ramp up in 1–2% increments per quarter.
- The target allocation percentages are long-term goals—not a starting point. Adjust as needed to maintain momentum.
- The Power of Profit Savings:
- A 5% profit allocation creates a three-week cash reserve; 12% builds two months of operating cash, and 24% can provide five months of runway.
- Over time, even small allocations snowball into a significant safety net.
- Know Your Benchmarks:
- Leverage industry data, tax returns, and peer insights to set realistic allocation goals.
- Benchmarks are helpful, but every business is unique. Use them as a guide, not a rule.
- Owner’s Compensation:
- Pay yourself first! Determine what you’d pay someone else to do your job and allocate that amount to Owner’s Compensation.
- For multiple owners, ensure all roles are compensated fairly and documented correctly with your accountant.
- Why the Tax Account is a Game-Changer:
- Set aside taxes from total revenue—not profit—so you’re fully prepared for tax time.
- Leftover funds in your tax account become a bonus, turning tax season into a celebration rather than a stressor.
- Adapting as You Grow:
- As your business matures, transition from doing the work to managing the business.
- Implement systems and outsource tasks that don’t align with your strengths or can be done at a lower cost.
Action Step:
This week, take the first step by setting up your allocation percentages. Start with a small percentage—1% for profit, for example—and adjust quarterly as you build momentum. Focus on consistency over perfection.
Final Thought:
The hardest step is always the first one. Start small, stay consistent, and watch your financial health improve over time. Remember, this system works because it’s simple, achievable, and built on the principle of paying yourself first.
Hi, I’m the Profit Answer Man Rocky Lalvani! I help small business owners simplify their financial reports to make more informed business decisions with fewer hassles. We utilize the Profit First system created by Mike Michalowicz
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Music provided by Junan from Junan Podcast
Any financial advice is for educational purposes only and you should consult with an expert for your specific needs.
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