Profit First Percentages: How to Customize the System for Your Business Type

When I first implemented Profit First in my consulting business, I made a critical mistake. I tried to force-fit the standard percentages from the book onto my business model. The result? Three months of unnecessary cash flow stress and a near-mutiny from my operations manager.

Here’s what I learned the hard way: Profit First isn’t one-size-fits-all. Those “standard” percentages Mike Michalowicz recommends are starting points, not commandments carved in stone.

In this guide, I’ll walk you through how to customize Profit First percentages for your specific business type, revenue level, and growth stage. Because when done right, Profit First transforms not just your bank accounts, but your entire relationship with your business finances.

The Profit First Foundation: Understanding the Basic Formula

Before customizing, let’s review the core concept. Profit First flips the traditional accounting formula from:

Old Formula: Revenue – Expenses = Profit (often resulting in little to no profit)

Profit First Formula: Revenue – Profit = Expenses (guaranteeing profit by allocating it first)

The system works by distributing your income into separate accounts based on predetermined percentages:

• Profit: Your business’s reward and safety net
• Owner’s Pay: Your personal compensation
• Tax: Funds set aside for tax obligations
• Operating Expenses: Money to run your business

Standard Profit First Percentages by Revenue

Mike Michalowicz provides these baseline Target Allocation Percentages (TAPs) based on revenue:

But here’s where many business owners go wrong—they try to immediately jump to these percentages without considering their unique business model.

Why One Size Doesn’t Fit All: Industry Variations

Different industries have fundamentally different cost structures and profit potentials. Let’s look at how percentages vary across business types:

Service-Based Businesses

Service businesses typically have higher profit potential due to lower overhead and inventory costs.

Consulting/Coaching:

• Profit: 10-20%
• Owner’s Pay: 40-60%
• Tax: 15-20%
• Operating Expenses: 20-30%

Law Firms:

• Profit: 35-45%
• Owner’s Pay: 25-35%
• Tax: 15-20%
• Operating Expenses: 15-25%

Product-Based Businesses

Physical product businesses require higher operating expense allocations due to inventory, manufacturing, and shipping costs.

E-commerce:

• Profit: 5-10%
• Owner’s Pay: 20-30%
• Tax: 15%
• Operating Expenses: 50-60%

Manufacturing:

• Profit: 5-15%
• Owner’s Pay: 10-20%
• Tax: 15%
• Operating Expenses: 60-70%

Hybrid Businesses

Agencies:

• Profit: 15-20%
• Owner’s Pay: 20-30%
• Tax: 15%
• Operating Expenses: 40-50%

Restaurants:

• Profit: 5-10%
• Owner’s Pay: 10-15%
• Tax: 10-15%
• Operating Expenses: 65-75%

The 5-Step Process to Customize Your Percentages

Now that you understand the variations, here’s how to customize Profit First percentages for your specific situation:

Step 1: Determine Your Current Allocation Percentages (CAPs)

Before setting targets, you need to know where you stand. Calculate your Current Allocation Percentages from the last 12 months of financial data:

1. Calculate total revenue
2. Determine how much went to:
   • Owner’s compensation
   • Taxes paid
   • Profit retained
   • Operating expenses
3. Convert each to a percentage of total revenue

For example, if your business generated $400,000 in revenue, and you paid yourself $120,000, that’s a current Owner’s Pay percentage of 30%.

Step 2: Compare Your CAPs to Industry Benchmarks

How do your current percentages compare to both the standard Profit First recommendations and industry-specific benchmarks?

Create a simple table:

This comparison reveals where your biggest gaps exist.

Step 3: Set Realistic Target Allocation Percentages (TAPs)

Don’t try to jump from your current percentages to ideal percentages overnight. Instead, set incremental targets that move you in the right direction.

A good rule of thumb: Close no more than 25% of the gap between your current percentages and your target percentages each quarter.

For example, if you’re currently allocating 2% to profit and want to reach 10%:

• Quarter 1 target: 4%
• Quarter 2 target: 6%
• Quarter 3 target: 8%
• Quarter 4 target: 10%

Step 4: Account for Business-Specific Factors

Several factors might require you to further adjust your TAPs:

Business Life Stage:

• Startup: Higher operating expenses, lower profit and owner’s pay
• Growth: Balanced allocations with increasing profit percentage
• Mature: Higher profit and owner’s pay, stable operating expenses

Seasonality:

• Seasonal businesses may need variable allocation percentages throughout the year
• Consider higher profit allocations during peak seasons to cover leaner months

Debt Repayment:

• If paying down significant debt, create a temporary “Debt” account with 5-10% allocation
• Reduce operating expenses or owner’s pay temporarily to accommodate this

Growth Goals:

• Aggressive growth plans may require higher operating expense allocations
• Consider a separate “Growth” account for specific expansion initiatives

Step 5: Implement and Adjust Gradually

The most successful Profit First implementations follow these patterns:

1. Start with Real Revenue: Remember to calculate percentages after subtracting materials and subcontractors (for service businesses) or cost of goods sold (for product businesses)
2. Begin with Just Four Accounts: Income, Profit, Owner’s Pay, and Operating Expenses. Add Tax and other specialized accounts after you’ve established the basic habit.
3. Allocate Twice Monthly: Make transfers on the 10th and 25th of each month, not after every deposit
4. Review Quarterly: Assess your progress and adjust percentages as needed

Industry-Specific Customization Examples

Let’s look at how specific businesses might customize their Profit First implementation:

Case Study 1: Marketing Agency ($750K Revenue)

Standard Profit First (for $500K-$1M):

• Profit: 15%
• Owner’s Pay: 20%
• Tax: 15%
• Operating Expenses: 50%

Agency-Specific Adjustments:

• High labor costs require higher operating expenses
• Creative agencies typically have lower profit margins than standard service businesses

Customized Percentages:

• Profit: 12%
• Owner’s Pay: 18%
• Tax: 15%
• Operating Expenses: 55%

Case Study 2: E-commerce Store ($300K Revenue)

Standard Profit First (for $250K-$500K):

• Profit: 10%
• Owner’s Pay: 35%
• Tax: 15%
• Operating Expenses: 40%

E-commerce Adjustments:

• Inventory requires higher operating expense allocation
• Digital marketing costs are significant
• Owner typically handles multiple roles

Customized Percentages:

• Profit: 8%
• Owner’s Pay: 25%
• Tax: 15%
• Operating Expenses: 52%

Case Study 3: Solo Consultant ($200K Revenue)

Standard Profit First (for $0-$250K):

• Profit: 5%
• Owner’s Pay: 50%
• Tax: 15%
• Operating Expenses: 30%

Solo Consultant Adjustments:

• Low overhead allows for higher profit and owner’s pay
• Higher tax bracket due to profitability

Customized Percentages:

• Profit: 10%
• Owner’s Pay: 55%
• Tax: 20%
• Operating Expenses: 15%

Common Customization Mistakes to Avoid

1. Trying to match the book percentages immediatelySolution: Implement gradually over 12-18 months
2. Not accounting for industry-specific needs Solution: Research industry benchmarks or consult with industry-specific Profit First professionals
3. Setting unrealistic operating expense targets Solution: Audit expenses before setting TAPs to identify what can realistically be reduced
4. Neglecting tax obligations Solution: Consult with a tax professional to ensure your tax allocation is sufficient
5. Forgetting about seasonality Solution: Create a “Vault” account to smooth out seasonal fluctuations

Advanced Profit First Customizations

Once you’ve mastered the basic system, consider these advanced customizations:

Additional Specialized Accounts

Beyond the core four accounts, consider adding:

• Growth Fund: For strategic investments (2-5%)
• Vault: For seasonal businesses to normalize cash flow
• Bonus: For team performance rewards
• Equipment: For planned capital expenditures

Profit First for Specific Business Models

Agencies with Contractors: Create a separate “Subcontractors” account to clearly separate pass-through expenses from true operating expenses.

Product Businesses: Implement a “Materials & Inventory” account to separate COGS from operating expenses.

Businesses with Multiple Revenue Streams: Consider separate allocation percentages for each major revenue stream if their profitability differs significantly.

Conclusion: Your Profit First Journey

Remember that Profit First is a system designed to be customized. The goal isn’t to perfectly match someone else’s percentages—it’s to build a sustainable, profitable business that serves your specific goals.

Start with small, manageable changes to your allocations. As Mike Michalowicz says, “Take baby steps.” Each quarter, review your progress and adjust your percentages to gradually move closer to your ideal allocations.

The most successful Profit First businesses aren’t the ones that follow the book exactly—they’re the ones that adapt the system to their unique needs while staying true to the core principle: profit comes first.

What business type are you customizing Profit First for? Share your experience in the comments below.