Phillip Ngo
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Concept

Target Allocation Percentages (TAPs)

The per-revenue-tier benchmarks at the operational core of Profit First — the fixed percentages of each incoming business deposit that go to Profit, Owner's Pay, Tax, and Operating Expenses, calibrated by the business's *real revenue* tier.

4 min

Working Definition

A TAP is not a budget. It is a target allocation — a percentage of every deposit that goes to a designated account regardless of what the business "needs" that month. The discipline of the framework is the gap between the Current Allocation Percentages (CAPs) — what the business is doing today — and the TAPs — what the business should be doing at its current revenue tier. The framework prescribes incremental movement from CAPs toward TAPs over 6–18 months, never a leap.

The TAP tables in profit-first are organized by real revenue (gross revenue minus material/subcontractor cost of goods, not gross revenue), grouped into five tiers:

  • $0–$250K (Tier A): Profit 5%, Owner's Pay 50%, Tax 15%, OpEx 30%
  • $250K–$500K (Tier B): Profit 10%, Owner's Pay 35%, Tax 15%, OpEx 40%
  • $500K–$1M (Tier C): Profit 15%, Owner's Pay 20%, Tax 15%, OpEx 50%
  • $1M–$5M (Tier D): Profit 10%, Owner's Pay 10%, Tax 15%, OpEx 65%
  • $5M–$10M (Tier E): Profit 15%, Owner's Pay 5%, Tax 15%, OpEx 65%

(Percentages from the canonical 2014/2017 editions; the framework permits localization.)

The TAPs encode several non-obvious empirical observations: that very small businesses should have low operating-expense ratios (the owner is the business and should be paid most of the revenue); that mid-sized businesses should have lower owner-pay ratios as expenses naturally scale; that profit should not exceed ~15% at any tier (above that, the framework suggests either growth investment or revenue scale-up).

How Different Authors Frame It

  • mike-michalowicz in profit-first: the canonical source. The TAP tables are presented with the confidence of empirical findings but the source is consulting practice across hundreds of small businesses.

Mechanism / How It Works

The TAPs function as reference targets that anchor the cash discipline. Without targets, the question "what percentage should I move to profit?" has no answer and the discipline defaults to "whatever I can spare," which Parkinson's Law degrades to zero. With targets, the question becomes "how do I get from my current 1% to my target 10%?" — a tractable optimization problem.

The mechanism of real revenue (not gross revenue) as the denominator is also significant: it normalizes across industries with different cost-of-goods structures. A construction company with 60% material costs and a service company with 5% material costs cannot use the same gross-revenue percentages; using real revenue puts both on a comparable scale.

Practical Use

  • For someone navigating a career transition. If transitioning into self-employment, set TAPs before the first client invoice. The percentages provide a check against the common transition trap of "I'll just take whatever's left" — which Parkinson's Law guarantees will be nothing.
  • For someone in identity crisis. The TAP exercise — sitting down with the prior 12 months and computing actual percentages against the targets — is often the moment of recognition. Many entrepreneurs experience the TAP audit as a "clinical reading" that names what felt vague.
  • For someone leading an organization. Apply per-business-unit TAPs in multi-unit operations. Each unit gets its own profit, contribution-to-shared-services, and operating allocation. The discipline that works for the unit-level also works for the holding-level.

Tensions ⚠

  • TAPs as heuristics vs. empirics. Michalowicz presents the percentages with empirical confidence but the source is consulting practice. A more accurate framing is "starting points calibrated to typical small-business patterns; subject to industry-specific revision." Service businesses with high gross margins legitimately differ from inventory-heavy businesses with thin margins.
  • The owner-pay decline as revenue grows. The tables prescribe lower owner-pay percentages as revenue scales (from 50% to 5%). This encodes a normative claim — that scaled businesses should have professional management compensated separately from ownership returns — that not all small-business owners will accept. Single-owner operators who intend to remain solo may legitimately keep higher owner-pay ratios.
  • Static tiers vs. dynamic businesses. The five tiers are discrete; real businesses move across them, sometimes seasonally. The framework permits TAP revision but does not formalize the transition rules between tiers.

Frameworks That Use This Concept

Sources Discussing This Concept

  • profit-first (deep) — full per-tier tables and rationale.