When you’re allocating money before you even get to your expenses and how much you’ll spend on what, allocate your profit margin first. When you’ve done that, allocate your taxes.
The part most people find difficult is figuring out how much profit they actually want!
This is a question addressed by Mike in the Profit First book, who says the following:
“Of all these businesses in all different fields, I discovered that a healthy million-dollar business will be taking a profit of about 15%. Now, that’s above and beyond the owners being paid $200,000. Then, $150,000 is reserved for corporate tax responsibilities and personal tax responsibilities of the owner.”
If we follow this model you should be allocating around 15% of your revenue to profits, 35% to tax, and the remaining 50% is what is left for your operating budget, including payroll, overheads and any other expenses.
And you don’t need to have a million-dollar business for these numbers to apply. You can apply the same model to any business, of any size, and the principle remains the same.
Based on these numbers, Mike developed the Profit First Instant Assessment, which you can take now for free to help you calculate how much your profit margin should be, and how much you have for expenses.
Run through the assessment and use it to calculate your Target Allocation Percentages (TAP).