If you’re a small business owner, you already know the ugly figure that haunts new businesses: two to three years.
That’s how long it takes the average new business to start seeing a profit.
It makes sense: running a business is expensive. Nearly every new business is founded already in debt, and it takes a while for your investments to start seeing a return.
Even after you see a profit, it might come in seasons. Business fluctuates, but overhead doesn’t. And your profit portion is often sacrificed to pay bills, wages, or debt.
What if you could turn it around and make a profit first though?
With a simple change of mindset and money management, you could do just that.
In his revolutionary book Profit First, author Mike Michalowicz tells readers of a system that can allow any company—in any industry, of any size—to make a profit every month from day one.
Wondering if this Profit First system is right for you? Read on!
But first…
What is the Profit First System?
The Profit First system is rooted in Parkinson’s Law, developed by C. Northcote Parkinson. Parkinson states that demand for a resource increases to meet the supply of it.
For example, if you decide to do your taxes this week, it will take you a week. If you decide to do it in a month, it will take a month.
It works similarly with money. If you have a $5,000 budget for a project, it will cost $5,000. But if you allocate $2,000 for the same project, you may complete it for only $2,000.
Many business owners look at their expenses and their revenue and decide there’s no way that they can take a profit from it. However, Mike Michalowicz suggests that by taking out the profit first, you start thinking more resourcefully about the money you have left.
Flipping the Formula
For most businesses, the formula to determine profit goes something like this.
Income – Expenses = Profit
When low seasons or unexpected expenses come, you end up digging into your profit jar to pay for it. But Michalowicz suggests using this formula instead.
Income – Profit = Expenses
Instead of looking at your bank account at the end of the month to see how little money you’re taking home, with this system, you look at your expenses and see what else you need to make.
And according to Parkinson’s Law, it should be relatively easy.
Allocating Funds
The Profit First system works by dividing your revenue into 5 different segments (it can be more or less depending on your business and goals). If you’re not great with numbers, sometimes it’s easier to allocate the percentage of revenue funds to five different bank accounts so that you can see where you stand with clarity. With Thriday you can easily set up all the bank accounts you need for profit first, quickly and easily, check it out.
Revenue
When any money comes into your business, it lands in this account. You can even use your existing bank account for this.
Profit
Set a percentage of revenue that you want to take home as profit. Transfer this out of the revenue account first. We recommend starting with somewhere in the 1-5% of revenue range.
Owner’s Pay
As the owner, your payment shouldn’t only be dependent on profit. Give yourself a salary, including PAYG & superannuation (dependant on your business structure) and transfer that money into this account.
Whilst the payment to you is a set figure, the amount distributed to the Owner’s Pay account is still a percentage of real revenue.
Taxes
The ATO is going to want their cut of the profit too. While your exact tax liability may change depending on a number of factors, it’s a good idea to start with allocating 15-20%.
If you are currently running at a loss, then this percentage can start at a lower point.
To get tax percentages specific for your business get in touch with a Certified Profit First Professional for advice.
Operating Expenses
Transfer all of the money for rent, utilities, wages, etc. into a separate account.
Twice a month, go through your Revenue account and transfer money to the other accounts based on your Profit First target percentages. You can also do your transfer on a more regular or less frequent basis, depending on your business. The key is consistency.
As a broad example, your percentages may look like this:
- Profit 5%
- Owners Pay 40%
- Tax 20%
- Expenses 35%
This might seem like a lot to take on—and if you’re working with a regular accountant, they may think that you’re insane. However, many accountants swear by this system and can help you implement it.
Take note that you probably won’t be able to take all of your target profit or owners pay percentage at first. That’s normal. It takes time to adjust to this new system.
Is Profit First Right For Your Business?
The Profit First system is relatively simple, but implementing it isn’t always easy.
Even now, you may be learning more about the system and wondering if it’s right for you and your business.
Here are a few questions you should ask yourself to decide.
How Stable Is Your Business?
Barring the funeral industry, every business goes through cyclical fluctuations.
Many retail companies operate at a loss until the Holiday shopping season. Landscaping and construction companies often don’t operate at all during the wet months of the year.
During these low months, you may find yourself going home without pay for weeks on end.
The Profit First system can help you find freedom from the oppression of these fluctuations and find financial stability.
What Are Your Long Term Business Goals?
Often, business owners are so focused on making sure that this month’s goals are met that they lose sight of their goals for years down the road.
Chances are, you started your business with the intention of making a profit someday. But if you’re letting short-term expenses take priority over your profit, that day might be further than you want it to be.
Profit First can help you bring your long-term goals to reality.
Do You Need A Raise?
Let’s be honest: most business owners work far harder than they get paid for.
When things are low, they’re the first to sacrifice their own pay for the sake of the company.
But with the Profit First system, you can do what’s best for your company while taking home a wage at the same time.
Ready to Put Profit First?
Have you been robbing your company’s profits to pay your expenses every month? Have you been slaving away to make sure the lights stay on while your personal take-home dwindles?
If so, it’s time to adopt the Profit First system.
And we want to help. Download our free Profit First instant assessment to see what you should be doing with your money to give yourself—and your business—the raise you deserve.
Or, submit this form to be paired with a Certified Profit First Professional who can help you implement the system in a way that supports your specific business.
