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.
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!
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Happy reading,
Pesso
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.
