Target Allocation Percentages (TAPs)
Graduated percentage targets that scale with business revenue
Target Allocation Percentages are the specific percentage goals for how revenue should be distributed across Profit, Owner's Pay, Tax, and Operating Expenses accounts at different revenue levels. They function as benchmarks for business health, much like ideal body measurements vary by height and frame.
The percentages shift as a business grows because the composition of the business changes at each stage. Below two hundred fifty thousand in Real Revenue, the owner is typically the only employee, so Owner's Pay is high and Operating Expenses are low. As the business grows to one to five million, systems become mandatory and require significant investment, increasing Operating Expenses while Owner's Pay shifts more toward profit distributions. At five to fifty million, the founder's compensation comes primarily through profit distributions rather than salary.
The TAPs are not starting points but destinations. You begin at your current actual percentages plus one percent and adjust by small increments each quarter until you reach your TAPs. The progression must always move forward; stepping back even temporarily undermines the behavioral discipline the system creates. The TAPs also serve as a diagnostic tool through the Instant Assessment, revealing exactly where a business is bleeding money and what needs to change.
- Percentages reveal health, not absolute numbers: A million in revenue means nothing if expenses consume it all; focus on the ratio between revenue, profit, pay, and expenses
- TAPs scale with business stage: As revenue grows, the business composition changes and the ideal allocation ratios shift accordingly
- Start where you are and build incrementally: Your current actuals plus one percent is the starting point, with quarterly increases of no more than three percentage points total
- Never step backward: Even if revenue dips temporarily, maintain your current allocation percentages to preserve the behavioral discipline
- Owner's Pay transitions to profit distributions at scale: In smaller businesses the owner earns mainly through salary; in larger businesses the owner earns mainly through profit distributions
- Determine your Real Revenue rangeCalculate your Real Revenue by subtracting materials and subcontractor costs from your Top Line Revenue for the past twelve months. Identify which revenue range your business falls into: under 250K, 250K to 500K, 500K to 1M, 1M to 5M, 5M to 10M, or 10M to 50M.
- Look up your Target Allocation PercentagesFor your revenue range, identify the target percentages for Profit, Owner's Pay, Tax, and Operating Expenses. At lower revenue ranges, Owner's Pay targets are higher and Operating Expenses lower. At higher ranges, profit distribution percentages increase while Owner's Pay from salary decreases.Pro tipResearch public companies in your industry and compare their expense ratios to refine your specific targets beyond the general guidelines.
- Run the Instant AssessmentCalculate your actual percentages for each category over the past twelve months. Compare them to your TAPs. The difference is your Bleed, showing where you are over or under allocating. Most businesses bleed in Profit, Owner's Pay, and Tax while overspending on Operating Expenses.WarningThis step often reveals painful truths. You are normal if you feel overwhelmed, frustrated, or angry about the numbers.
- Set your starting percentagesTake your current actual percentages and add one percent to each category. These become your starting allocation percentages. Even if your targets are much higher, start here to establish the habit without straining the business.Pro tipFor brand new businesses with no history, start at one percent Profit, fifty percent Owner's Pay, and fifteen percent Tax, then adjust quarterly.
- Adjust quarterly toward your TAPsEvery quarter, review your percentages and move them closer to your TAPs. Move no more than three percentage points total across all accounts per quarter. If you move Profit up by two percent, you only have one percent left to distribute among other accounts that quarter.Pro tipPrioritize increasing Profit percentage first. Even small increases create a compounding behavioral effect as the business adapts to operating on less.WarningIf you need to increase your Tax percentage after year-end, temporarily reduce Profit by that amount, then work to restore it the following quarter.
A law firm ran the Instant Assessment and discovered it had only five thousand dollars in actual profit against a target that was one hundred eighteen thousand dollars higher. The two owners were taking combined salaries of one hundred ninety thousand, which was sixty-seven thousand more than the target. Operating expenses were one hundred forty-one thousand over target.
Michalowicz developed the TAPs through years of working with businesses across revenue ranges and observing the patterns of healthy versus struggling companies. He found that percentages, not absolute numbers, reveal the truth about business health. A six-foot-eight bikini model weighing two hundred five pounds is perfectly healthy because the percentage relationships are right for her frame. Similarly, a five-hundred-thousand-dollar business with eighty percent in pay and profit is far healthier than a fifty-million-dollar business with two percent. The specific ranges emerged from aggregating data across the businesses he consulted with and running them against his own experience.