Profit First Allocation Calculator
Use this calculator to determine how much of a new deposit or period's income should be allocated to your core Profit First bank accounts: Profit, Owner's Compensation, Tax, and Operating Expenses (OpEx). Enter the total income received and your target allocation percentages (TAPs).
Enter Income and Allocation Percentages
Target Allocation Percentages (TAPs)
Enter your percentages. They should ideally sum to 100%. Use decimals (e.g., 15 for 15%).
Understanding Profit First
What is Profit First?
Profit First is a cash management system for businesses created by Mike Michalowicz. It flips the traditional accounting formula:
Sales - Expenses = Profit
into:
Sales - Profit = Expenses
By taking your profit first as a percentage of your revenue, you ensure profitability is prioritized, rather than being a hopeful leftover.
How Profit First Works (Simplified)
The core idea involves setting up multiple bank accounts (usually 5) and allocating percentages of your income into each account as soon as revenue comes in:
- Income Account: Where all revenue is initially deposited.
- Profit Account: Set aside for actual profit distributions (usually quarterly or semi-annually).
- Owner's Compensation Account: Your salary or draw as the owner.
- Tax Account: Funds reserved for income taxes (federal, state, local).
- Operating Expenses (OpEx) Account: Funds available to pay your immediate business bills.
The percentages you allocate to each account (Target Allocation Percentages or TAPs) are determined based on your business's current financial health and revenue levels, typically adjusting over time as your business improves.
Using This Calculator
This calculator helps you perform the allocation step. Enter the total amount received (e.g., a payment from a client) into the "Total Income / Deposit Amount" field. Then, enter your current TAPs for Profit, Owner's Comp, Tax, and OpEx. The calculator will show you exactly how much to transfer into each corresponding account.
Profit First Allocation Examples
See how different income amounts and percentages affect allocations:
Example 1: Standard Allocation
Scenario: Allocate a standard client payment using typical starting TAPs.
Inputs: Income = $5,000; Profit % = 10; Owner's Comp % = 15; Tax % = 15; OpEx % = 60.
Calculation:
- Profit: $5,000 * (10 / 100) = $500
- Owner's Comp: $5,000 * (15 / 100) = $750
- Tax: $5,000 * (15 / 100) = $750
- OpEx: $5,000 * (60 / 100) = $3,000
Result: Allocate $500 to Profit, $750 to Owner's Comp, $750 to Tax, and $3,000 to OpEx.
Example 2: Smaller Deposit
Scenario: Allocate a smaller deposit with the same standard TAPs.
Inputs: Income = $1,200; Profit % = 10; Owner's Comp % = 15; Tax % = 15; OpEx % = 60.
Calculation:
- Profit: $1,200 * 0.10 = $120
- Owner's Comp: $1,200 * 0.15 = $180
- Tax: $1,200 * 0.15 = $180
- OpEx: $1,200 * 0.60 = $720
Result: Allocate $120 to Profit, $180 to Owner's Comp, $180 to Tax, and $720 to OpEx.
Example 3: Higher Profit Target
Scenario: Your business is improving, and you've raised your Profit TAP.
Inputs: Income = $7,500; Profit % = 15; Owner's Comp % = 15; Tax % = 15; OpEx % = 55.
Calculation:
- Profit: $7,500 * 0.15 = $1,125
- Owner's Comp: $7,500 * 0.15 = $1,125
- Tax: $7,500 * 0.15 = $1,125
- OpEx: $7,500 * 0.55 = $4,125
Result: Allocate $1,125 to Profit, $1,125 to Owner's Comp, $1,125 to Tax, and $4,125 to OpEx.
Example 4: Lower Owner's Comp (Early Stage)
Scenario: In an early stage, you might take a smaller owner's draw.
Inputs: Income = $3,000; Profit % = 5; Owner's Comp % = 10; Tax % = 15; OpEx % = 70.
Calculation:
- Profit: $3,000 * 0.05 = $150
- Owner's Comp: $3,000 * 0.10 = $300
- Tax: $3,000 * 0.15 = $450
- OpEx: $3,000 * 0.70 = $2,100
Result: Allocate $150 to Profit, $300 to Owner's Comp, $450 to Tax, and $2,100 to OpEx.
Example 5: Zero Profit Allocation (Initial Phase)
Scenario: Some businesses start with 0% to Profit while stabilizing.
Inputs: Income = $4,000; Profit % = 0; Owner's Comp % = 20; Tax % = 15; OpEx % = 65.
Calculation:
- Profit: $4,000 * 0 = $0
- Owner's Comp: $4,000 * 0.20 = $800
- Tax: $4,000 * 0.15 = $600
- OpEx: $4,000 * 0.65 = $2,600
Result: Allocate $0 to Profit, $800 to Owner's Comp, $600 to Tax, and $2,600 to OpEx.
Example 6: Large Income Deposit
Scenario: Allocating a significant single income payment.
Inputs: Income = $20,000; Profit % = 12; Owner's Comp % = 18; Tax % = 15; OpEx % = 55.
Calculation:
- Profit: $20,000 * 0.12 = $2,400
- Owner's Comp: $20,000 * 0.18 = $3,600
- Tax: $20,000 * 0.15 = $3,000
- OpEx: $20,000 * 0.55 = $11,000
Result: Allocate $2,400 to Profit, $3,600 to Owner's Comp, $3,000 to Tax, and $11,000 to OpEx.
Example 7: Adjusting Tax Percentage
Scenario: Your tax liability has changed, requiring a percentage adjustment.
Inputs: Income = $6,000; Profit % = 10; Owner's Comp % = 15; Tax % = 20; OpEx % = 55.
Calculation:
- Profit: $6,000 * 0.10 = $600
- Owner's Comp: $6,000 * 0.15 = $900
- Tax: $6,000 * 0.20 = $1,200
- OpEx: $6,000 * 0.55 = $3,300
Result: Allocate $600 to Profit, $900 to Owner's Comp, $1,200 to Tax, and $3,300 to OpEx.
Example 8: All Percentages Equal (Not Typical, for Demo)
Scenario: A hypothetical case where all allocation percentages are the same.
Inputs: Income = $4,000; Profit % = 25; Owner's Comp % = 25; Tax % = 25; OpEx % = 25.
Calculation:
- Profit: $4,000 * 0.25 = $1,000
- Owner's Comp: $4,000 * 0.25 = $1,000
- Tax: $4,000 * 0.25 = $1,000
- OpEx: $4,000 * 0.25 = $1,000
Result: Allocate $1,000 to each account.
Example 9: Deposit with Cents
Scenario: Allocating an income amount that includes cents.
Inputs: Income = $3,456.78; Profit % = 10; Owner's Comp % = 15; Tax % = 15; OpEx % = 60.
Calculation:
- Profit: $3,456.78 * 0.10 = $345.68
- Owner's Comp: $3,456.78 * 0.15 = $518.52
- Tax: $3,456.78 * 0.15 = $518.52
- OpEx: $3,456.78 * 0.60 = $2,074.07
Result: Allocate $345.68 to Profit, $518.52 to Owner's Comp, $518.52 to Tax, and $2,074.07 to OpEx (amounts rounded to two decimal places).
Example 10: Percentages Don't Sum Exactly to 100
Scenario: What happens if your entered percentages add up to something other than 100%?
Inputs: Income = $1,000; Profit % = 10; Owner's Comp % = 15; Tax % = 15; OpEx % = 50. (Sums to 90%)
Explanation: The calculator will perform the calculation based on the percentages entered. The total allocated amount will be less than the input income ($1000 * 90% = $900). Profit First practice requires percentages to sum to 100%. The tool will warn you if the sum is significantly off 100%.
Result: Calculator would show a warning and allocate: $100 to Profit, $150 to Owner's Comp, $150 to Tax, $500 to OpEx. Total allocated: $900.
Frequently Asked Questions about Profit First Allocation
1. What are Target Allocation Percentages (TAPs)?
TAPs are the specific percentages of income you decide to allocate to each of your Profit First accounts (Profit, Owner's Comp, Tax, OpEx) based on your business's current revenue level and financial health. These percentages typically evolve over time.
2. How often should I perform the allocation?
Mike Michalowicz recommends performing allocations on a "D-Day" (Distribution Day) typically twice a month. As soon as money hits your Income Account, you allocate it according to your TAPs.
3. Why do the percentages need to sum to 100%?
In the simplified Profit First model, 100% of your incoming revenue is distributed across the four core operating accounts (Profit, Owner's Comp, Tax, OpEx). If your percentages don't sum to 100%, you either have money left unallocated or you're attempting to allocate more money than you received.
4. Where do I find my TAPs?
Mike Michalowicz's book "Profit First" provides average TAPs based on revenue levels. Ideally, you determine your initial TAPs by performing an Instant Assessment of your current financial situation. You can adjust them gradually over time.
5. What is the Owner's Comp account for?
This account is specifically for paying yourself a regular salary or draw from the business. By allocating here, you ensure you have the funds set aside to compensate yourself consistently.
6. What is the Tax account for?
This account is where you set aside money specifically to cover income tax obligations (federal, state, local) for your business and potentially for yourself if you are taxed as a pass-through entity. This prevents surprises when tax payments are due.
7. What is the OpEx account for?
The Operating Expenses account is where you keep the funds necessary to run the day-to-day operations of your business – paying bills, suppliers, rent, utilities, etc. The goal is to eventually operate *within* the funds available in this account.
8. Can I use this calculator for multiple income sources?
Yes. For each new deposit or for the total income received over a specific period (like half a month before D-Day), you would enter the *sum* of that income into the "Total Income / Deposit Amount" field and then perform the calculation and transfers.
9. What if my calculated OpEx amount isn't enough to cover my bills?
This is a common challenge when starting Profit First. It indicates your current expenses are too high relative to your income and TAPs. Profit First helps reveal this problem so you can focus on either increasing revenue or reducing expenses until your business can operate healthily within its allocations.
10. Does Profit First replace traditional accounting?
No. Profit First is a *cash management system*. You still need traditional accounting to track income, expenses, profitability over periods, assets, liabilities, etc. Profit First ensures cash flow supports profitability; accounting reports on the financial performance.
