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.

Comments

4 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.
    Statement
    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

    Pierre

Leave a Reply to Pierre Cancel reply

Your email address will not be published. Required fields are marked *

More of mike…

Have Mike Speak at your event

Read All of Mike’s amazing Books

Listen to Mike’s Podcast Right now

Join Profit First Professionals

…& Mike’s Books

Profit First

Surge

The Pumpkin Plan

The Toilet Paper Entrepreneur