The author recalls a colleague’s anecdote about a funny and inspiring misunderstanding. As a businesswoman, she attended a sales boot camp in which the mentor taught them strategies that would help them achieve sales of around 80%. The woman worked hard to understand and apply these techniques in her sales presentations. Over the following years, her sales increased from low numbers up to 75%, but she struggled to achieve more. When she met up with the mentor again, he was shocked by her success: he had said 18%, not 80%. Michalowicz uses this story as an example of how what someone believe greatly impacts what they achieve.

The chapter explores two common issues in people applying their new “allocation percentages,” or dividing money into Profit, Owner’s Comp, Operating Expenses, etc. One common problem is that some entrepreneurs get “bogged down in the details” and fail to really take action to start allocating their money differently (76). Other entrepreneurs embrace the opposite extreme, impulsively trying to force their allocations to be whatever they believe is the most ideal. This reckless approach does not reflect the reality of their finances and ends in financial dysfunction. For instance, if a business owner aspires to have 20% of their business’s revenue as profit, they should consider this a long-term goal rather than something they implement right away.

“Current Allocation Percentages” or (CAPS) are how the business allocates money now. Owners must slowly adjust these numbers to meet their “Target Allocation Percentages” or (TAPS). Slow but steady changes in behavior are essential to reaching TAPS someday. The author believes that most entrepreneurs should begin their profit allocation at 5%. This creates a cushion for their business, helping it survive if something disastrous happened and sales plummeted.

Business owners must also take a healthy but realistic salary, based on the work they do and the revenue they create. Some people pay themselves less than their employees, thinking that this is a way to grow the business, but Michalowicz disagrees. He believes that it is better to pay yourself more and do more work yourself to continue having a healthy, livable salary. He recommends never cutting your own salary to “make the numbers work” and argues that investing in oneself is another way of investing in the health and potential of your business (85).

Another important goal is to aim for a company to cover all of its own corporate taxes and the owner’s personal taxes, too. This can be done with the help of an accountant to understand possible taxes and how to prepare for them habitually. Michalowicz tells the reader to combine their personal and corporate taxes from recent years and compare these percentages to their overall real revenue to get a general sense of their expected tax burden. The author concludes his chapter on allocation percentages by reiterating that business owners must first understand their CAPS, and then set their TAPS, and slowly but surely begin changing their habits to move towards these targets.

Michalowicz’s assessment of shifting one’s financial allocations to meet ideal targets strongly emphasizes the importance of slow, moderate changes. This approach makes the author seem reasonable and responsible, as he urges the reader to not make abrupt changes to their finances that they cannot actually afford. Michalowicz rounds out this advice with encouraging words about self-care, telling entrepreneurs that they must prioritize rewarding themselves and living on a healthy salary. He writes, “Remember, your business is supposed to serve you; you are not in service to your business! No more leftovers for you!” (80). This encouragement adds a sense of positivity to this chapter, deepening Michalowicz’s image as a caring mentor figure.

While his approach to allocations is largely rooted in common sense, he stretches his argument when he addresses the specifics of how entrepreneurs should move from CAPs to TAPs. He writes, “For your company to join the fiscally elite, you will slowly, deliberately, and consistently move toward the TAPs. What you will do is move from 0 percent profit CAP to 1 percent. Then, next quarter, you will move your CAP to 3 percent, and then next quarter, 5 percent” (77). In reality, businesses’ financials will vary widely, and as a result, some readers may not be able to follow his recommendations on increasing profits each quarter until they reach 5% (77). Instead, they will need to track their business’s finances carefully to create their own realistic timeline of increasing their business’s profit.

Chapter Lessons

• CAPs show your current financials, TAPs are your ideal financials
• Do not be too timid or too reckless in moving towards your TAPS
• Make slow and steady progress in allocating revenue more wisely

Reflection Questions

• Compare your CAPS to your TAPS. How far apart are they? Why?
• Michalowicz blames perfectionism and recklessness for ruining the transition to TAPS. Are you more likely to over-analyze or act impulsively when it comes to big changes?
• The author considers self-belief and slow, moderate changes as essential in this process. How might you embrace both?