Profit First is a hot topic in money management, but if it’s a new concept to you, you probably want to know what it’s all about and how it can improve your financial situation. Furthermore, you probably don’t have time to read the whole book to work out if it’s for you or not, so we’re sharing this short and sweet Profit First summary for you to decide before you dive too deep into the methodology.
So, let’s start with the basics…
A Profit First summary
With 268,000+ readers, the Profit First book has well and truly established itself as a money management methodology for many businesses.
What makes Profit First different from other money management philosophies is the way that it revolutionises how business owners view and then manage their income.
If you’ve just discovered Profit First, then here is what you need to know.
The Profit First approach to money management:
- Is an established money management methodology for business
- Is a popular and successful book written by Mike Michalowicz
- Uses a way of managing money to encourage prioritising profits over expenses
- Helps create sustainable income and profit
- Helps business owners get out debt
- Assists with pricing for profit
- Addresses unhelpful money management habits
- Gives clarity on business budgeting
- Stabilises cashflow and reduces the feast-to-famine cycle
- Prioritises the business owner getting paid
- Can be applied to businesses of various sizes, models and industries
- Can be DIYed or implemented with a Certified Profit First Professional
- Is a sustainable process with measurable results
Profit First is not:
- A piece of software
- Expensive to implement
- A one-size-fits-all application
- An overnight get rich solution
- A complicated formula that requires an accounting degree
- All about making boat-loads of profit by ripping people off
Let’s dive into this Profit First summary a little deeper.
What Profit First is all about
It may sound counterintuitive, but when business owners put their “profit first”, they actually need to flip the way they look at their expenses.
Traditionally in business, profits are calculated by taking expenses away from sales, like this:
SALES – EXPENSES = PROFITS
However, with the Profit First method, the equation becomes focused on calculating expenses, like this:
SALES – PROFITS = EXPENSES
This change in perspective is the ultimate key to how the Profit First methodology helps business owners to sustain cash flow, increase income, and build profits.
Along with putting profit first, there are two other important elements to ensuring ongoing profitability in business: bank accounts and percentage allocations.
The secrets to Profit First’s success
The first secret to Profit First’s success lies in creating multiple bank accounts for each financial function of your business and then setting up automatic allocations of funds into each account.
There are usually about six accounts that require set up:
- Profit – Savings Account
- Tax/GST – Savings Account
- Owner’s Pay – Savings Account
- Revenue – Transaction Account
- Operating costs (Expenses) – Transaction Account
- Materials & Subcontractors (if applicable) – Transaction Account
The percentage of your revenue that you allocate to each of these new bank accounts is the second secret to Profit First’s success.
Understanding how to apply the percentages is essentially how you will create sustainable income and profit.
The general guideline for revenue allocation percentages as presented in the book are:
- Profit 5%
- Tax 15%
- Owners Pay 50%
- OpEx / MatSub 30%
However, the percentages you need for your specific business will be different depending on your:
- Business structure
- Current debt
- GST (if applicable)
- Tax applicable
- Current expenses
- Current revenue
- Your business and financial goals
Your percentages will likely change over time too as you can start your Profit First implementation slowly and build from there.
How Profit First creates sustainable income and profit
Profit First creates sustainable income and profit through regular and calculated management of your:
Regular allocations to the designated Profit First bank accounts ensures:
- Debts are paid
- The owner is paid
- Expenses are kept under control
- Tax and GST is accounted for
- Profits are being saved
- The business is operating at a profit
With this approach to managing your money you will consistently:
- See regular growth in your profit account
- Get paid
- Have ample funds to pay your tax and GST bill on time
- See debts reduce
- Have enough money to pay your expenses, your dues and yourself
Understanding your own unique set of circumstances will help you to apply the Profit First percentages and implementation correctly within your business so that you can realise the profitability from the first month.
The Profit First Professional’s role
A Profit First Professional is a qualified bookkeeper, accountant, financial advisor or business coach that is trained in the successful application of the Profit First methodology.
During their training they are taught how to:
- Use the methodology for maximum results
- Understand profitability on a whole new level
- Review pricing, expenses, money habits, debt habits, financial forecasting
- Implement the system in both small and large businesses
- Match the methodology implementation to business growth plans
- Problem solve implementation variables across a range of industries
- Improve money mindset and reconfigure money habits
As part of their certification, Profit First Professionals are also required to complete mandatory training and successfully implement the methodology in at least three businesses (including their own), to demonstrate cash flow growth and profitability. This proves their ability to help businesses create sustainable income and profit.
They are also backed by a team of professionals that can give specific guidance should they require assistance at any time.
When you choose to work with a Certified Profit First Professional you can rest assured your business is always in safe hands.
Why would you work with a Profit First Professional?
- Money management is not your zone of genius nor your idea of fun.
- You need the business services of a bookkeeper, accountant, advisor or coach and the Profit First approach would be a nice bonus.
- You’re unsure of what your percentages should be or how to implement the methodology.
- You have no interest in reading the book but want all the benefits.
- You run the business but don’t handle the finances.
- You know you need a better way of structuring your business but unsure where to start.
- You need accountability to make the new money management habits stick.
When to implement Profit First
The implementation can happen at any time from start-up through to very established business. There is no right or wrong time, although we believe, the sooner the better!
How to implement Profit First
As you can appreciate, each business is unique. There are factors relating to existing debt, intricacies with particular industries and niches, and of course, financial targets and goals will differ.
To understand what your current allocation of funds are and determine what your future target allocation of funds ought to be will require some calculations and projections. This is because you will likely need to move your business towards future targets in a seamless manner and in a way that also eliminates and/or avoids debt.
If you are inclined to work on your own finances, we have developed a tool that helps you to get your business ready for Profit First.
The Preparing for Profit First calculator and worksheet makes it straightforward for you to work out your current allocation percentages. Once you have established this, the tool then helps you to identify potential problems in cash flow so that you can work towards fixing them.
In preparing your business for sustainable business growth, the Preparing For Profit First guide walks you through establishing goals and financial foundations to determine your future target allocation percentages.
If you do not want to work on your own financials, or you are seeking professional guidance to set up the methodology accurately from the very start of the process, you may be more comfortable working with a Profit First Professional.
What you need to get started with Profit First
When you move your business to Profit First you will see profitability and growth in the short and long term. We see it time and time again, from our PFPs during their mandatory training, and from their happy clients.
And, it’s easy to get started, here’s what you need:
- Download our free Preparing For Profit First guide and follow the preparation process.
- Use the guide to establish your goals and percentages.
- Determine your revenue allocation days.
- Setup your Profit First accounts.
- Book an appointment with a Profit First Professional for personalised advice.
If you’re DIYing, we do recommend reading the book, and having at least one advisory session with a Certified Profit First Professional.
If you’re looking for a Done For You service, then feel free to skip straight to step 5 above and you’ll be on your way to a profitable future in no time!
For more information about Profit First, visit our Frequently Asked Questions page.