The formula to calculate the Profit First allocation is:
\[ \text{PF} = \text{I} \times \text{p} \]
Where:
Profit First is a financial management concept and methodology designed to ensure businesses become and remain profitable. The principle is simple: instead of calculating profit as what remains after expenses are subtracted from income, businesses should take profit first, setting aside a predetermined percentage of income before expenses. This approach forces businesses to adapt to running on the remaining income, thereby ensuring profitability. The concept was popularized by Mike Michalowicz in his book “Profit First”.
Let's consider an example:
Using the formula to calculate the Profit First allocation:
\[ \text{PF} = 10000 \times 0.20 = 2000 \text{ dollars} \]
This means that the Profit First allocation for this scenario is $2,000.