Profit First percentages split your business income into profit, owner pay, taxes, and funds for bills. They give each dollar a job before you spend it. The right split depends on your sales, costs, and tax needs.
A packed week can still leave you short on cash. Think of a salon booked solid before prom season. Color stock, team pay, and rent all come due. Your bank looks busy, but your own pay stays small.
What Are Profit First Percentages?
Mike Michalowicz’s Profit First method puts profit ahead of routine spending. You set funds aside, then run the business with what remains. Its goal is to change how you use cash. It does not change how tax or accounting rules work.
The system commonly uses five core bank accounts. Income comes into one account before you split it. The other four hold funds for distinct needs. That separation helps you see what you can spend.
- Income: Holds business receipts before you split the funds.
- Profit: Builds a return for owning the business.
- Owner pay: Funds the work you do in the business.
- Tax: Holds cash toward the taxes covered by your plan.
- Operating expenses: Pays business costs, such as rent and staff wages.
Your current split and your goal can look quite different. Current allocation percentages show where funds go right now. Target allocation percentages show the split you aim to reach.
Why Set Money Aside Before Paying Bills?
A single bank balance can give you false comfort. You see cash and think there is room to spend. Yet some of those funds must cover tax or wages. Separate accounts make those claims on your cash much clearer.
Keep in mind that moving cash does not create earnings. A business still needs prices that cover its full costs. Weak margins need work on pricing, sales, or spending. Extra accounts alone cannot fix a service that loses money.
How to Calculate Profit First Percentages
Start with the right base before you choose a split. The method uses “real revenue” to compare business models. Where applicable, this removes qualifying materials and subcontractor costs from revenue. It does not mean subtracting every cost before you start.
Employee wages are not the same as subcontractor costs. A salon should not remove all stylist payroll from this base. Ask your accountant how to treat mixed service and retail sales. Count each cost once so your plan does not fund it twice.
The core math is simple once that base is clear. Multiply the funds available for allocation by each chosen percentage. Use collected business receipts under a consistent process. Do not split unpaid invoices or count a loan as sales.
| Allocation amount = funds available × chosen percentage |
For instance, 5% of $10,000 equals $500. Repeat that step for each of your four spending categories. Their shares must add up to 100%. The examples below assume the base has already been checked.
Profit First Percentages: 5 Easy Examples
These examples show the math, where each split adds up to 100%. Check your own costs before you use one.
1. A Solo Business Using a Common Target Split
A freelance designer has $10,000 to split this month. Annual real revenue sits below $250,000. A commonly published target for this tier is shown below.
- Profit, 5%: Set aside $500 for the profit account.
- Owner pay, 50%: Reserve $5,000 for the owner’s work.
- Tax, 15%: Move $1,500 into the tax reserve.
- Operating expenses, 30%: Keep $3,000 available for business costs.
The key question is whether $3,000 covers the business bills. If costs run higher, the owner needs a transition plan. The 15% tax share also needs a separate check.
2. A Salon Starting With a Small Profit Share
A small salon has $20,000 available for its monthly split. Its bills leave little room for a large profit reserve. The owner tests a custom 1% starting share instead.
- Profit, 1%: Save $200 to start building the habit.
- Owner pay, 20%: Reserve $4,000 for the owner.
- Tax, 10%: Set aside $2,000, subject to tax advice.
- Operating expenses, 69%: Keep $13,800 for business costs.
That $200 may look small beside the rent bill. Still, it makes profit a planned use of funds. Before adopting this split, the owner checks wages and due dates. A plan that cannot meet payroll needs revision before use.
3. A Team Business Testing a Higher Profit Goal
A service business has $40,000 available for the month. It has cut unused software and raised low-margin service prices. The owner now tests a custom split with more profit. These figures illustrate a decision, rather than a standard target.
- Profit, 10%: Reserve $4,000 for the profit account.
- Owner pay, 25%: Set aside $10,000 for owner compensation.
- Tax, 15%: Hold $6,000 toward the reviewed tax plan.
- Operating expenses, 50%: Leave $20,000 for the business bills.
What if those bills still total $23,000 each month? There is a $3,000 gap the percentages cannot erase. The owner must change the split or fix the costs. Moving money back from profit each month hides that problem.
4. A Product Seller Using Real Revenue
A shop collects $25,000 from sales during the month. Assume $10,000 qualifies as materials costs under its setup. That leaves a $15,000 base for the remaining split. The shop keeps the materials funds separate from this calculation.
- Profit, 5%: Put $750 into the profit reserve.
- Owner pay, 40%: Set aside $6,000 for the owner.
- Tax, 15%: Hold $2,250 toward planned tax needs.
- Operating expenses, 40%: Keep $6,000 for the remaining costs.
This custom example shows why the starting number matters. Five percent of total sales would have been $1,250. Five percent of this base is $750. Using the wrong base would leave other needs short of cash.
5. A Seasonal Business Facing a Slow Month
A business usually has $20,000 available for its monthly split. This month, that amount drops to $12,000. The owner keeps a custom 5/30/15/50 split for comparison. The shares stay steady, but the dollar amounts fall.
- Profit, 5%: Save $600 instead of the usual $1,000.
- Owner pay, 30%: Reserve $3,600 instead of $6,000.
- Tax, 15%: Set aside $1,800 instead of $3,000.
- Operating expenses, 50%: Retain $6,000 instead of $10,000.
Rent does not fall just because sales slow down. That makes a cash forecast and reserve fund essential. Use strong months to plan for known weak spells. Do not assume a steady percentage creates steady take-home pay.
Build a Split Your Salon Can Sustain
Start with recent books and a list of bills due. Check wages, debt payments, tax needs, and your own pay. Then test the proposed split against a slower sales month. Small, planned changes are easier to judge than a sudden overhaul.
True Profit Salons offers Profit First implementation tailored to salons. Its service includes account setup, custom percentages, and cash flow coaching. It also provides ongoing guidance and monthly reviews. That support can help turn a sample split into a workable routine.
Book a call with True Profit Salons to discuss your next step. Bring your sales figures, costs, and questions about owner pay. The aim is a plan you can follow through busy weeks and quiet ones. What would change if your pay had a place before every bill arrived?
FAQs
Q1: What percentages should a small business use?
There is no single split that fits every business. Use revenue-based targets as a starting point for review. Your costs, team, debt, and tax needs shape the final plan.
Q2: Is the tax percentage the same as my tax rate?
No, it is a share of funds saved toward taxes. Your tax bill depends on taxable income and other factors. Have a tax professional check whether your reserve is enough.
Q3: Can I start with just 1% for profit?
A small starting share can help build the saving habit. First check that your plan funds wages and required payments. Increase the share as costs and cash flow allow.
Q4: Does owner pay include employee wages?
Owner pay covers compensation for the owner’s work. Employee wages generally belong within operating expenses in the basic setup. Your payroll and tax treatment still depend on your business structure.
Q5: How often should I review my percentages?
Review the plan regularly and when sales or costs change. A new hire or lease can shift what works. Does your current split still fit the business you run today?