Kevin SimpsonCPA Web Books · Founder at CPA Web Books

Ask Mike- What Percentage To Allocate Toward Profit Using Profit First?

11 Dec 2019 · 1 min

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In this Ask Mike video, Mike Michalowicz answers Dan Ferguson’s question about how much profit a brand‑new waffle business with $4,000 of debt should set aside. Mike advises calculating an optimal profit percentage by taking the business’s historical profit margin and adding 1–2 percentage points. Each quarter the business should allocate that profit percentage, using at least 95% of the allocated profit to aggressively pay down the $4,000 debt and the remaining ~5% for a small celebration. This cycle repeats until the debt is fully eliminated. Once the debt is cleared, the full profit allocation can be enjoyed by the owner (i.e., “eat a lot of waffles”). Mike closes by inviting viewers to submit future questions to askmike@mikemcalos.com.

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Welcome to Ask Mike. I'm Mike Michalowicz and I got a question from Dan Ferguson about how he's using profit. First, he's got a brand new business and he's in the waffle business and they have $4,000 of debt. He doesn't know what amount of money to allocate to a profit. Here's what you do. Allocate the optimal profit percentage that you determine based upon your historical profits plus 1 or 2%. Build the profits and every quarter keep ramping it up even if you have debt. Dan and here's what happens when you do your profit allocations at the end of each quarter, use the vast majority of it, 95% or more, to eradicate your debts, 5% to celebrate. Repeat that process until all your debts eradicated and then the next profit distribution. In that case, Dan, you're going to eat a lot of waffles because it's all going to you. And if you have a question, make sure you send a question to ask mike@mikemcalos.com and I'll answer your question on the next video.