Profit First for Service Businesses: A Simple Allocation System

Most business owners view profit as a leftover, but the Profit First method redefines this. It prioritizes profit by allocating it first, allowing businesses to operate on the remainder.

The Profit First Approach

The standard accounting equation, Revenue - Expenses = Profit, often leads to profit being treated as an afterthought. The Profit First approach flips this to: Revenue - Profit = Allowable Expenses.

This means you allocate profit as soon as money comes in, and then you adjust your spending to live within what's left.

Typical Allocation for Service Businesses

For service businesses typically in the $500K-$3M revenue range, here's a common initial allocation breakdown:

• Operating Expenses: 50-55%
• Owner's Compensation: 25-30%
• Taxes: 10-15%
• Profit: 5-10%

To implement this, you should set up separate bank accounts for each of these categories. Every two weeks, you'll transfer incoming revenue into these accounts according to their respective percentages. This system quickly reveals whether your business can sustain its current expense structure.

The Power of the System

The discomfort is the point.

If you find you can't cover payroll from your operating account under the current allocation, it's an immediate signal. This indicates the business either needs to charge more or spend less. The benefit is that you'll uncover this issue within two weeks rather than six months. Owners who adopt this system for a year rarely revert to their old methods.