One topic many people ask about when learning about the Profit First method is Real Revenue. We explained what Real Revenue was in a previous blog called, Profit First: What Does "Real Revenue" Mean (check it out if you missed it) But even after people understand Real Revenue, they still aren't sure what it looks like to be used in a business. So we have decided to provide an example using an electrical contractor.
For this example, let’s use simple round numbers and say the
contractor has $100,000 in Total Income. He spends $30,000 in materials
(cables, outlets, etc.) and $25,000 on subcontractors (other electricians he
hires for certain projects.) He also spends $11,000 on an internal
administrator, $9,000 on vehicle costs, $8,000 on rent, and has take home pay
of $15,000. Finally, our electrical contractor has taxes of $2,000, and he
has never had a profit.
55% of the Total Income ($100,000) is being used for
Materials & Subcontractors ($30,000 + $25,000.)
When deposits come in, they would go into the Income
account. On the 10th and 25th, 55% of the Income account total would be
allocated to a Mats & Subs account. The money in the Mats & Subs
account would be used to purchase more materials and to pay subcontractors.
(Side note: The "best practice" is to transfer the funds from the
Mats & Subs account into the Operating Expense account and make purchases and pay
subcontractors from there. Remember, we want to limit the transactions in all
but the Operating Expense account to transfers in and out. To avoid temptation, only
transfer the amount needed for materials purchases and subcontractor payments,
and make those payments immediately.)
The remaining 45% in the Income account would be allocated
to the Profit, Owner’s Comp, Tax, and Operating Expenses accounts. For
this example let’s say that the allocation percentages match the Target
Allocation Percentages (TAPs) specified in Profit First for a business under
$250,000 in Real Revenue. That means 5% goes to Profit, 50% to Owner’s Comp,
15% to Tax, and 30% to Operating Expenses.
Based on $45,000 in annual Real Revenue, the Profit
allocation would be $2,250, Owner’s Comp would be $22,500, $6,750 would
be reserved in the Tax account, and $13,500 would be moved to the Operating Expense account.
With $11,000 going to an admin, $9,000 to vehicle
costs, and $8,000 to rent (a total of $28,000,) this business needs to clearly
cut costs and run leaner. Costs need to be no greater than $13,500 annually.
Feel like this is something you feel needs to be done in your business but you're not sure you know where to start? Or you just don't have time? We can help! Set up your Free Profit Maximizer with one of our Certified Profit First Professionals today!
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