- Nov 27, 2023
- 2 min read

How to Strategize Budget Allocation Averages for Maximum Profit First

Updated: Feb 3

Cost of Goods Sold (COGS): 40-60% This includes the direct costs associated with producing goods or services sold by the company. For a manufacturing business, this might include raw materials and labor, while for a service business, it could include labor costs directly tied to service delivery and a retail business, inventory.

Operating Expenses (OPEX): 20-40%

Operating expenses cover the day-to-day activities of a business that are not directly tied to the production of goods or services. This category includes items like rent, utilities, salaries for non-production staff, software and office supplies.

Salary and Benefits: 15-30%

This includes the total compensation for all employees, including salaries, wages, and benefits such as health insurance, retirement contributions, and other employee perks.

Administrative Expenses: 2-15%

This includes general administrative costs such as R&D, legal and professional services and accounting and finance.

Marketing and Advertising: 5-10%

Businesses typically allocate a portion of their budget to marketing and advertising to promote their products or services and attract customers.

Capital Expenditures (CAPEX): 5-10%

This includes equipment, machinery, technology infrastructure, facilities and property.

Depreciation: 20-25%

Depreciation accounts for the decrease in value of assets over time. It is a non-cash expense that is often included in financial statements.

Taxes: 5-15% This includes income taxes, property taxes, and other applicable taxes.

Interest Expense: 1-5%

If the business has loans or other forms of debt, interest expenses may be a significant portion of the budget.

Miscellaneous Expenses: 5-10%

This category can include various miscellaneous expenses that don't fit neatly into other categories.

Retirement:

Assuming you'll need 70-90% Of pre-retirement income to live comfortably in retirement. For example, if you estimate that you'll need $50,000 per year in retirement, you would need to save $50,000 * 25 = $1,250,000. This assumes you'll be withdrawing 4% of your savings annually.

The Profit First system suggests that business owners transfer to interest bearing accounts, approximately 60% from their main operating bank account, once a month allocating income (twice a month) to 2% profit (50% profit distribution/50% remains in account), 30% owner draw (80% of time and cost you would reasonably pay someone to do your job) and 15% +/- for income taxes and 13% +/- for State and Local Taxes.

Sale - Profit = Expenses

Source: Ragona, J. (2024, January 28). "Profit First" In M. Michaowicz (Ed.), How to Use Profit First Accounting System (You Tube).

It's important to note that these percentages are general guidelines, and the actual budget allocation averages can vary based on the nature of the business. Some industries may have higher COGS, while others may have higher marketing expenses during startup. For a more accurate and industry-specific breakdown, it's advisable to consult with financial experts or industry benchmarks. Each business is unique, and expense allocation should be tailored to its specific circumstances.