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How to Determine your Farm's Profit First Allocations

How to Determine your Farm's Profit First Allocations

The last post covered the accounts I set up for my farm's Profit First cash management system and how income from all sources flows into the income account.

The book Profit First covers how to create an "instant assessment" to get you started on figuring out your cash category allocations.

You use your current numbers to assess where you are at and then make a plan to work towards your targeted goals in "baby steps" - small increments at the time. 

The information below is a simplified version of the detailed calculations that a Profit First Professional will do to create a plan, but it is a good starting point if you want to DIY or get started right away.

Analyzing data from the past 12 months (Income Statement, Balance Sheet and Cash Flow Statement) are best but you can use last year's tax return and your checkbook if you have to. 

Some get hung up on the books (or lack of books) at this point.  If you do not trust your records, do the best you can with what you have or reach out if you are interested in getting setup on Quickbooks Online.  You can schedule a Bookkeeping Checkup if you are already on Quickbooks Online and want to know if you should trust your numbers.

If all else fails, estimate the best you can and get your books set up so you can track where you are at (more coming on books soon).

Back to the categories ... the Profit First book has more detail but here are some industry specific details and basics:

  • Feed, seed, fertilizer, processing, and inventory costs go into what the book refers to as "Mats & Subs" category.  Most "direct expenses" or actual "Cost of Goods Sold" go here.  Credit card fees and subcontract labor also are included here.  (Salary and employee wages are "Operating Expenses".)
  • "Mats and Subs" are deducted from your total revenue to get what Mike Michalowicz calls "Real Revenue".  Looking at Real Revenue as opposed to total revenue allows you to compare your performance with profitable service businesses.
  • If you intentionally put money into a bank account for Profit, that would go in the "Profit" category - otherwise that amount will be zero.  If you ADDED money in to cover business expenses, the profit amount will be negative.  Negative is common.
  • Owner draws, owner salary and any personal expenses out of the business account will go into the "Owner's Pay" category.  This amount being zero is common.
  • Income taxes set aside in a savings account or business taxes paid out of the business go into the "Tax" category.  (Property taxes are "Operating Expenses" and Sales Taxes should not have been counted in revenue.)
  • "Operating Expenses" are everything that is left over.  Marketing, travel, employee wages, advertising, training/education, rent, utilities, phone, internet, equipment, and minimum payments on debt.  This category is often the highest next to the feed/inventory expenses when businesses get started in Profit First.  Do not be alarmed if you number is really high here.

Now that you have an idea where you are at right now, let's look at figuring out your goals. 

The chart image at the top of this page has the allocation percentages for profitable companies at the respective "real revenue" levels.  Key point -target allocation percentages are based on "Real Revenue" NOT total revenue (real revenue is left over AFTER you take out your" Mats & Subs" or feed/inventory/processing expenses). 

Reach for your targets slowly over time - many make the mistake of adjusting one big leap and quit.  You gotta take baby steps.

For me, I was taking no Pay and our Profit was negative because we were putting money into our startup farm when I started Profit First.  So, I allocated 1% to each of the Owner accounts for the first 3 months as “baby steps” to get into the routine of taking profit and paying myself.

With an easy-to-follow plan of how and when to intentionally allocate my money came more free time, less stress, and more quality to my life.

Knowing how much money was available to spend in each budget category with a simple glance at my bank accounts meant no more mental math to figure if there was enough money in the account to cover an expense which meant less stress and more focus.

Clearly seeing when I needed more cash ahead of time allowed me to focus on marketing and correcting the foundational problems of my farm rather than putting out fires. 

My natural behavior to spend every penny was curbed by the accounts holding smaller amounts and having a clearly stated purpose.  I became more intentional with my spending and more strategic with my financial decisions.

You can have this too - you just need to get started. 

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