4 Reasons to "Profit First" Your Business
If you haven't heard of Profit First before, it's an incredible system that teaches you how to manage your cash flow in a way that nurtures permanent profitability.
Let’s face it; you likely started a business to improve your lifestyle. Whether it was the freedom of working for yourself, or the limitless earning potential, most business owners jump into entrepreneurship to support their personal dreams (in addition to the self-less “save the world” reasons, of course).
Unfortunately, what most individuals find (myself included), is that being your own boss does immediately lead to freedom! You likely found that you worked more hours for less money. What a crock!
So what’s the solution? More sales, of course! If we could only increase our top line revenue, the finances would balance and I could spend the majority of my time sipping Mai Tai’s on my own private island.
Not. The truth is, revenue isn’t the problem. Lack of profit is the problem.
So how can you pivot your focus toward profitability? Use the system Profit First.
Profit First helps you organize your cash flow so that your business is more profitable and you, the business owner, get to take more cash home in your pocket. The best part? You don’t need an accounting degree to do it.
Here are 4 reasons why Profit First WORKS, and you should implement it in your business today.
1. It Pays You First
It's that old system that your grandma probably used that you've heard many financial gurus out there say, "You should pay yourself first." If it were only that easy.
With Profit First, it is that easy. With every deposit you make, every time a client pays you or every sale you make, take a percentage of it and set it aside as profit. Right out the gate before you do anything.
Now standard accounting would tell you that Sales - Expenses = Profit, right? With Profit First, we're flipping that around. We're doing Sales - Profit = Expenses. So you're going to run your business on what's left after you take out your profit.
So where can you start? Go open a separate checking account and start setting aside 1% of all revenue. That's it. Just 1% of all sales goes into that profit account from now on before you do anything else.
2. It Uses the Envelope System
Again, an age old concept, the things that our grandparents used to do. They would pay their bills by labeling paper envelopes stuffing cash into them. Profit First is uses this system (It’s a little more sophisticated, but not really).
With Profit First we’re opening 5 bank accounts as your “digital envelopes.” These accounts are:
As money comes into your income account, you’ll disperse it into those “envelopes”, or bank accounts. So you’re dividing the money out right when we get it. A little goes to profit, some of it goes to your operating expenses, some of it goes to you, some to taxes, etc.
This ensures you have clarity on what's happening in your business, where money's going, and exactly how much you have to grow your business.
3. It Uses the Theory of Smaller Plates
We’re all accustomed to finishing all the food on our plate, right? When you were growing up, you were likely told to finish what's on your plate, eat everything you have. Remember, there are starving children in [enter country here].
In personal fitness, they encourage us to harness that behavior of finishing everything on our plates by just decreasing the size of the plate. That's what Profit First does with the bank accounts.
Most businesses run everything through one bank account, with money coming in and out all Willy Nilly. They’re paying employees, rent, subscriptions and taxes all in one place. No wonder there’s rarely anything left for the business owner to take home.
By using the smaller plates theory, we can reduce our spending and find clarity in our cash flow. You have money you're putting into this operating expense account, and that's the plate you're running the business on. Instead of basing decisions on gross revenue, you’re basing them on the smaller operating expense plate.
The beauty is the money is being placed on the other plates first. So as you run your business from the operating expense account, you have peace of mind knowing your profit, salary and taxes are untouched.
4. It Nurtures Health Growth
Profit First ensure your business grows in a financially healthy way. By allocating your revenue based set percentages, you’ll stay within a healthy threshold regardless of your income.
Most business owners try and grow too quickly. They hire too soon or move to a bigger office too soon. They have no way of knowing if they can financially afford it. The revenue is good, so it shouldn’t be a problem, right?
A system like Profit First will give you constant clarity on where you business stands in all areas, and will help guide decisions on when the timing is right for expansion.
Ready to make your business permanently profitable? That’s my specialty. Click here to book a free coaching call. You’ll walk away with clarity on where your business stands today and how to reach ultimate profitability.
Craig is a Certified Profit First Professional who is passionate about helping service based businesses become permanently profitable.