For those of you new to the concept of Profit First, it is a book written by Mike Michalowicz, about a unique way to structure your business finances to build a sustainable, get out of debt, and get paid as the business owner. His mission is to eradicate entrepreneurial poverty, and the Profit First method is a great approach to make this happen.
Think Big have first hand seen the life and business changing results achieved through implementation of Profit First in not only our own business, but our clients’. So we wanted to share a brief insight into what Profit First is all about, and if you’d like some more info, give us a call, we’re more than happy to talk about Profit First with you.
THE must-read money management book for every business owner
Here’s the thing, there aren’t many books out there on accounting and finance. The ones that do exist generally fall into two camps: the highly specific ones infused with jargon and designed for accountants and finance professionals, and the basic introductions/guides designed for people who have no professional experience in finance but need to make financial decisions.
Some are designed for managing personal finance, but a lot are geared towards business. And the majority of finance books are unbelievably disappointing or confusing.
The reason being that most finance books on the market don’t actually provide an actionable plan that will produce tangible, immediate results, or any results at all.
In other words, even if these guides succeed in explaining finance concepts and methods in an accessible way people can understand, the information doesn’t give them a practical way of increasing their profits or building a sustainable business.
Enter Profit First, the accessible, practical, actionable blueprint for creating and steadily increasing your profits.
If you haven’t already read the book, we highly recommend it (you can get a copy here).
Not only does it explain the concept (fairly jargon free), it also carves out the basics for you to start implementing the methodology in your own business or personal finances.
And for those of you who are not keen on reading all the details or dealing with finances, skip this article and head straight to booking a meeting with us, as Certified Profit First Professionals, we can advise you on the strategy AND roll out implementation. Book a meeting here.
What Is Profit First
Essentially, Profit First is a book about cash management, but in reality it’s so much more than that. It is the perfect accounting hack for busy business owners who are time-poor, overwhelmed, and not achieving the financial goals or stability they seek in their business.
It is a system that is rooted in human nature and psychology, easy to understand, and perfect for any business to implement from start-up to multi-million dollar company.
Sound too good to be true? Trust us, it’s the real deal, it actually works!
The Profit First Principle
The core principle behind Profit First is flipping the traditional view of accounting and cash flow on its head by changing the equation used to calculate profits.
The traditional method of calculating profit, as we all know it, is:
SALES – EXPENSES = PROFIT
Mike Michalowicz’s innovative Profit First approach is to reverse this equation, encouraging the prioritisation on the level of profit they want to achieve. More importantly it is changing your mindset around profit and how you manage the money flowing through your business:
SALES – PROFIT = EXPENSES
How Parkinson’s Law Works With Profit First
There’s a little theory called Parkinson’s law which tells us that work always expands to fill however much time we have available to complete it.
Profits and expenses work under the same principle.
When profit comes at the end of the equation we make do with what’s left over and all of the money we have coming in appears to be “available” for spending. If we have X amount of money “available” our expenses will increase to use that money.
If we have less money available to spend, we will find a way to do the same thing for less.
The problem with viewing profit last is that your expenses are free to expand into that space.
Flip the equation around, and the amount of money available for expenses is suddenly reduced. It’s finite. The amount we want to earn in profit simply isn’t available and we get the job done with what’s left over.
This isn’t to say that this change will come at the expense of the quality of our services or the products we produce. Rather, it forces us to stick to what cash is actually available.
It also provides a stable foundation for budgeting and a buffer for growth.
The Link Between Profit And Psychology
There are huge psychological benefits to this simple technique, and it’s easy to see why – especially if you’re not a finance professional.
We’re the first to admit that accountants and bookkeepers are different in their thinking to the majority. Making sense of numbers comes naturally to us.
Equations and calculations of any kind can be really tough for people to grasp because it requires them to literally change the way they think.
Having profit at the end of the equation is, for most people, a clear indication that it is the end result of your efforts. It’s almost a subliminal cue to not make it a priority because it comes last.
As humans we naturally focus on things that come first, and when profit is at the end of the equation we seek to increase it by increasing the front – the revenue.
Reducing expenditure is something that simply doesn’t occur or seem feasible in growing business.
This is where Profit First comes in, because the simple reframing used to place profits before expenses means that expenses are the last piece of the puzzle.
It’s seems so simple in concept, but it’s an incredibly powerful shift in mindset.
The Benefits Of Profit First For Business
Although this simple shift in mindset is, in itself, a huge benefit to the Profit First system, it is by no means the only one. Profit First expands far beyond a model for managing your business cash flow, and becomes a tool that can be used for actively promoting the growth of your business as a whole.
It can even be applied to your personal finances, truly helping you to create the lifestyle and business you want to create.
This is the next huge benefit of using Profit First – it doesn’t require agonising over financial decisions. Once you set the system up for your business, it pretty much runs itself. The key is to ensure that you have it set up to suit your particular business.
You then need only check in occasionally to make sure you’re still using the optimum cash allocation percentages for your current financial situation. A situation that, if you’re using Profit First correctly, will constantly be improving.
The true and greatest benefit: the ability to create real tangible improvements in your finances – both personally and professionally – on an ongoing, scalable and sustainable basis.
The Problem With Growth Before Profit
Growth is important to many business owners, and for good reason. We’re all looking to grow our businesses, expand, and find ways of improving their success and profitability.
But it’s easier said than done.
A common problem a lot of businesses face is that they devote years of effort to consistently increasing sales. Year on year, their revenue increases, and they continually invest in new technology, methods, staff, and other things that are deemed vital to their continued efforts at growth.
They have a goal in mind. Maybe it’s $1 million, maybe $10 million, maybe even $100 million, but somewhere there’s a goal. If they can reach that number, they’ll feel successful.
To reach that goal many business owners are focusing solely on the revenue with the idea that pushing those numbers up every year will eventually will hit their goal revenue eventually.
The question so many business owners fail to ask is, ‘What’s it going to cost to get there?’
And beyond that, ‘What will we have to show for it when we finally achieve that goal?’
The all too common conversation we see in our role as Profit First Professionals is that of companies skyrocketing in revenue but operating under the pressure of mountains of debt, no way to cover running costs, the owners not being paid for their time and energy devoted to the business, and the very real knowledge that without continued external investment the business would fold in a matter of months.
Despite fast growth and increasing revenue, there are usually zero profits remaining and poor cash flow management to maintain sustainable growth.
The thought of “If we can just get to here, it will all turn around” only perpetuates the problem, it does not solve it.
Growth is put before profit in the belief that it will lead to profit, but what actually happens is you sacrifice profit for the sake of growth.
Trapped in this cycle, you end up in serious financial trouble. We don’t want that for anyone! Hence why we love how Profit First works and the results it achieves for so many businesses.
Sustainable Growth Through Profit
It may seem counterintuitive when you flip your perspective on growth so that you place profit first, and growth second – how can you profit if you don’t grow?
But actually it’s a very growth-friendly model: profit leads to growth.
When you are creating real profit in your business, you place yourself in a position to invest in true growth opportunities when they occur. You’re also able to do it without putting your current business and the success you have achieved at risk.
You can still hit your magic number, and you can still grow, but with the Profit First system you have a profit ‘buffer’ that protects your business and ensures that every stage of growth is sustainable.
How To Use The Profit First System
Now we’ve covered exactly why using Profit First is such a good idea, let’s get down to the system itself, and how you can put it into practice in your business.
The concept is simple, though at first glance it can seem complicated.
Your revenue is essentially broken down in 4 percentage brackets. Your exact percentages will depend on your business structure, type of business, and current financial situation. Contact a Profit First Professional to determine your true percentages.
As an example you may have:
40% Owners Pay
Twice a month, the money coming in is divided by the percentages you have calculated and allocated to it’s applicable account to be used only for it’s specific purpose.
The profit account is used to pay down debt (up to 99% of the profit account) and the owner. Or 50% to buffer for business and 50% to owner. It is not meant to be reinvested in business. A separate account should be set up to reinvest in business so that the profit account is not used for this.
The Tax account enables business owners to pay their personal and business tax dues and GST without stress.
The mandatory Owner’s Pay ensures that the business owners are actually getting paid.
The Expense account holds the available funds to pay overheads, wages and operating expenses. This allocation ensures your business is not running at your expense.
Part of the Profit First system and structuring of percentages also works towards reducing debts incurred by the business. To be sure what your percentages need to be, contact a Think Big Profit First Professional.
Implementing Profit First In Your Business
Profit First is as simple as setting up a few bank transfers, but there’s quite a bit of thought that goes into exactly how much those amounts will be for, and how you will effectively manage your business and cash flow to make it truly work for you.
Even if you’re comfortable with numbers implementing this system presents some challenges. The most important thing to remember as you work through these steps is that Profit First is more of a mindset shift and change in habits than it is a technical accounting system.
The greatest challenge you’re going to face is not with the numbers, but with yourself and getting used to changing life-long habits. But if you have a true desire for change it’s entirely achievable.
You can apply the same model to any business, of any size, and the principle remains the same.
If the whole system sounds good, but you have no idea how to even start making that happen in your business, that’s where Profit First Professionals such as Think Big Financial Group can truly help. They can work with you (and your finance team) to start small and work towards full implementation, keeping you accountable along the way.
Getting the Profit First system setup can take a little time and patience, and don’t be surprised if it takes you awhile to get used to it. It’s definitely not going to be an overnight change.
Starting any new habit is tough, and money habits are particularly tricky – especially when ingrained in a business. Persevere, the results are well worth it!
Want to learn more about Profit First and how it could work for your business? Contact us today.