When it comes to business profit, we’ve been taught that it’s supposed to be: sales - expenses = profit. That’s why I recommend leveraging the profit first method in your business.
But just because that’s how something has always been done, does not mean that’s how it should always be done. For small business owners especially, I believe this approach is a bit outdated {& not the most motivating}. Instead, I recommend adapting the Profit First Method ~ the system I use in my own business.
I LOVE this approach, and friend, if implemented correctly, I bet you will love it, too
What is the Profit First Method?
Let’s start with the basics. What is this thing called “profit first”? Doesn't a business owner put profit first already?
First off, I want to clarify that the Profit First Method is more than just an accounting/cash flow method…it’s a mindset! Of course, as a small business owner, you’re thinking about profit. It’s kind of the thing you need to make the wheels keep spinning. However, the traditional approach to business accounting makes profit an output after revenue and expenses {AKA not a guarantee}.
Profit First flips the script.
Bestselling author Mike Michalowicz developed this system in his book Profit First ~ snag a copy here! It boils down to prioritizing profit by making it an input in the equation, not an output.
In other words: sales - profit = expenses.
This means your business gets paid a certain percent no matter what!
To ensure this, the Profit First Method requires you to operate out of a minimum of five different bank accounts, instead of all the money in one place. You’ll have an account for:
- Revenue (where sales are deposited)
- Profit
- Owner’s Pay
- Taxes
- Operating Expenses
Then, on a regular basis, you’ll use the money for the revenue account to make deposits into the other ones. And voila!
As a business owner, some months you might be crushing it…while other months might be on the slower side. With this system you are always bringing in a profit, saving for taxes, and paying yourself from an irregular income.
Why the Profit First Method Works
There are a ton of reasons why this method works, but I think it boils down to boundaries. At the end of the day, the goal of your business is to make a profit. Having a set and solid budget is a start. But we’re human, and sometimes {ahem a lot of the time} we make decisions based on our emotions, not on the numbers in front of us.
For example, you decide that it’s time to ramp up your email marketing game with new automation software {I’m a personal fan of Flodesk}. It’s shiny and new and you just know it’ll kick your email game up a notch.
But maybe it’s been a slow month, and the cost of a subscription is out of your budget. As humans, we convince ourselves, “Maybe I should just buy it anyway because this is going to be the thing to take my business to the next level.”
Even if that’s true…it’s still smarter to wait till you have the funds for it.
That’s why I love the Profit First method. It gives a boundary. A stopping point. You have a set account for operating expenses, and if the money isn’t there, it isn’t there. You're not sacrificing your bottom line for something that might not pan out in the long run.
How to Implement the Profit First Method
Throughout my career, I’ve seen various “game changers.” When it comes to the numbers stuff, I constantly come back to two things: a well-organized system and implementing the Profit First Method.
Here’s how to get started:
- Read the book. Again, grab a copy of Mike Michalowicz’s book {you can find it in my Amazon store}. There is so much good information in there to dig into as a small business owner. Plus, he walks you through the process and provides all the extra tips and tricks you need.
- Open all your accounts. Chances are, you already have a business account. Now it’s time to open up four more. Remember, you want separate accounts for profit, taxes, owner’s pay, and operation expenses.
- Calculate your allocation percentages. You need to decide what percentage of sales will become profit. It can range anywhere from 5% to 20% ~ it all depends on your business and historical data. In his book, Michalowicz provides resources to help you calculate this. AFTER you determine profit percentage, then you’ll look at calculating expenses.
Start increasing your profits. You’re ready!
The key with using Profit First is simply getting started ~ take the first step today toward increasing your business’s profitability.
Need fresh eyes on your business’s systems {financial & otherwise}? Let us know if we can help!
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