Why Profit First Works In My Business And Will Work In Yours Too
If you’re a small business owner and have asked anyone for a book recommendation on business finances, they’ve likely mentioned (and maybe shouted) Profit First. But what’s it all about and more importantly, will it work for you?
Profit First is a life changing system for any business owner. Not just some, not just new businesses, small businesses, service based businesses or owners who don’t handle money well. Profit First is literally life changing for anyone who fully implements it in their business! Why? I want to dig into that below with you on a few reasons why I LOVE using the Profit First system in my business and it’s my first step with any business owner to implement.
Here’s what I want to share:
1) What is Profit First?
2) Why does Profit First work?
3) How you can get started using Profit First in your business
Photo by Cristin Goss of Goss Boss http://www.cristingoss.com/
What is Profit First?
Profit First is a book and system developed by bestselling author Mike Michalowicz that helps businesses of all sizes manage their finances and cash flow. It’s a simple system and solution that makes use of your bank accounts, your naturally driven behaviors and grandma’s old envelope system to force your business finances into shape! Profit First flips the famous accounting script that Sales - Expenses = Profit to Sales - Profit = Expenses. Hence, you get used to taking your profit first, and building and planning your expenses on what’s left. What’s normal for most business owners is to plan the expenses and take what’s left home and for profit. Not anymore!
The short explanation about Profit First is that you’ll open a minimum of 5 bank accounts (Income, Profit, Owner’s Pay, Taxes, Operating Expenses) and on a scheduled regular basis (normally 2x a month), you’ll make allocations to each account from the revenue that’s come in. Your numbers will start out based on your historical data from your business and you’ll work towards what are called TAPS - those are target allocation percentages.
So simple, and yet do effective, even for those of us good with numbers because money isn’t about numbers, is it? If it was, we’d all be experts and millionaires! Money is about behaviors and your decisions are emotionally driven. This system works with with your natural behaviors, rather than trying to change your behaviors to work with the system…just one of the many reasons it works for everyone!
Just to be clear, Profit First isn’t bookkeeping or accounting. It’s simply a cash flow management system that will help you to save for your taxes, pay yourself on a regular basis from an irregular income, be profitable instantaneously and help you make financial decisions with simplicity. There’s so much more it will do for you, but that’s the short list to get started!
Why Profit First Works
I told you I’d share why it works in my business and will work in yours too. When I first started business, I didn’t have a clue all the other stuff that comes with it. Email marketing, social media, taxes, networking, software expenses, subscriptions, memberships, etc., and all the expenses that come with them! And it’s so easy to buy into the idea you need it all right away and to pay for systems and everything will be “the thing that grows your business”. Right??
The truth is a business is fun, exciting, provides freedom and so much more, but it’s hard work and most business owners are missing one critical piece for success, which is strong financial foundations to create consistent cash flow and profitability.
Profit First is powerful for many reasons and just one of them is because it gives you boundaries for your money. Cold, hard stopping places of how much you can spend because that’s all that’s in the account.
Most business owners (and people in general with personal finance) make financial decisions like this:
“Is there money in my bank account? Yes ➡️ I can buy that!! No ➡️ Well maybe I should buy it anyway and hope that it helps me!”
We’re ending that cycle here. With Profit First, you have an account specifically for business operating expenses, after you’ve taking your profit, taxes and paid yourself! If it’s in that account you can buy it. If it’s not, you can’t. You need to get innovative and creative and find a way to make it happen. Mike likes to talk about toothpaste to explain this phenomenon, I like to talk about my experience with jelly making my kids (and my husband) pb&j sandwiches. This is the power of Parkinson’s Law.
Parkinson’s Law is “Work expands so as to fill the time available for its completion”. The same is true for time, product and money. You can read more about Parkinson’s Law, my real life application with pb&j, and how it can be used here.
Profit First works on an allocation system of percentages so that regardless of a low or high month, there’s enough to do a little of everything necessary and it can really help you manage those lows and highs in a few different ways. Even further to why it works for every business from startup to $10M+, is because it operates on your businesses ‘Real Revenue’….the real revenue of your business is what your business actually makes and your business actually runs on.
10 things you can do with PF in your business
Pay off business debt quickly
Pay off personal debt quickly
Make strong, simple and easy financial decisions by looking at your bank accounts (not like it is now….)
Save an emergency fund (I like to call it a Vault) for your business quickly and efficiently
Balance out your pays so you make the same amount every month. Just like a W-2 job!
Plan to take a month off in your business with no revenue coming in.
Save for taxes without thinking about it.
Invest in your business without guilt
Know exactly how much you need to make each month to take what you want to home and develop your pricing around that.
Buy equipment and large expenses up front with cash and secure the best deal out there.
How to get started using Profit First
Are you ready yet to start implementing Profit First in your business?? Good! Trust me that no one is more excited for you to take this step than me! I LOVE when the lights start going on and the changes start happening, so here’s a few ways to get started.
If you’re really a person of action, check out my video here (from my course) on what you need from you bank, make sure you have all the makings of a great bank and go open your accounts! Remember, you need 5 total minimum, so if you have one business account already, open 4 more checking accounts.
Buy the book and get started reading, figuring out your numbers and implementing. It’s also a great audio book - just make yourself a promise right now to do it. Most business owners read it, get excited about it, but don’t take action - don’t make that mistake too! You can download the first 2 chapters for FREE right now!
Check out my course that walks you through step by step by step and gets you coaching access to me in the private community to answer your Q&A’s along the way. I have 32 videos, worksheets and guides to help you not only implement Profit First, but walk you through setting your financial goals, develop and strengthen your mindset, learn pricing strategies for your business and advanced strategies you can use to light your business and even personal finances on fire. You can learn more here if you’re looking for a direct walk through and coaching access to get faster and better results!
Regardless, if this spoke to you, take action in some manner and start taking a step today towards improving your cash flow. You won’t regret it. Improving your cash flow will reduce stress and anxiety around money, increase the amount you take home from your business, help you eliminate debt quickly and develop a 3-6 month savings for your business to survive in the event of emergencies. Doesn’t sound like a dream? Let’s get to work making it your reality.
Getting your systems and foundations in place for your business finances is the best step you can take for your business to help everything else fall into place and grow.
Kristen is a Certified Profit First Coach and Personal Finance Coach who specializes in working with small business owners & entrepreneurs in both their business and their personal lives to maximize their financial capabilities and future. To learn more about Profit First & business financial coaching options, click here.