As an entrepreneur who is yet to master their cash flow, you may find some benefit in putting the Profit First percentages to work in your business. Not only will it ease any financial anxiety or worry you may be feeling, but it will help you to manage your expenses in a way that helps you see more profit; and quickly.
Based on the very popular book, Profit First, by Mike Michalowicz, and brought to Australia and New Zealand by the team here at Profit First Australia & New Zealand, the allocation percentages are fundamental to the success of the money management methodology.
The Profit First percentages help you to change the way you view your profits to better manage your expenses and ultimately have your business work for you.
The Percentages Underpin The Profit First Methodology
The principle of the Profit First methodology is all about flipping your perspective around how you manage your expenses.
Traditionally in business, we are told to calculate profits by minusing our expenses from our sales. A calculation that looks like this:
SALES – EXPENSES = PROFITS
But, when we look at the Profit First methodology, the calculation is all about minusing profits from sales, like this:
SALES – PROFITS = EXPENSES
This principle is key to helping you sustain cash flow in your profitable business, and it starts first with creating multiple bank accounts.
How Do Multiple Bank Accounts Help To Put Profit First?
Creating multiple bank accounts allows you to set up automatic processes to allocate funds for each financial function of your business. It also means that you will not overspend in areas that could easily occur with one bank account. For an easy bank account solution set up, check out Thriday.
When you follow the Profit First methodology you will create one account for each of:
- Profit – Savings Account
- Tax – Savings Account
- Owner’s Pay – Savings Account
- Revenue – Transaction Account
- Operating Expenses – Transaction Account
However, to work out the funds to allocate to each account requires an understanding of the Profit First percentages.
What Are The Profit First Percentages?
The percentages allow you to get a snapshot of what your current financials look like, and a process for moving towards your future financial goals, in a methodical manner.
There are two types of percentages: current allocation and target allocation.
The current allocation percentages are essentially how your current finances are split between each of the aspects of profit, tax, owner’s pay, revenue, and operation expenses.
The target allocation percentages are where you want to move your business towards to allow you to see more profitability and greater cash flow.
How To Apply The Percentages To My Business?
Applying the percentages to your business is the most technical part of the methodology.
Our Preparing for Profit First calculator and worksheet makes it straight forward for you to work out your current allocation percentages.
It will also help you to see potential problems in cash flow and pricing so that you can fix them. You’ll be walking through the first key steps of establishing goals and financial foundations that are essential to helping you determine your target allocation percentages.
You will then use these percentages as a basis for distributing money into your new bank accounts, preparing your business for sustainable business growth.
It’s at this stage that some business owners choose to work with a Profit First Professional (PFP) to help determine their target allocation percentages. This is because the percentages are dependent on factors unique to your business, and may include:
- Any current debt
- Whether you have employees or contractors
- Any industry or niche-specific intricacies that may impact your financials
- Business structure differences
Why Work With A Profit First Professional?
Working out your target allocation percentages could mean making changes to some of your business processes, or even to your money mindset.
A certified Profit First Professional completes mandatory training around the Profit First methodology and is required to prove their ability to help businesses create, and then continuously increase their profitability.
Additionally, a PFP receives their official certification only after having successfully helped at least three businesses (their own included) to see profits using the Profit First percentages.
PFPs can choose to specialise in a specific industry meaning they know how to best implement the Profit First methodology successfully within those industries and are privy to strategies that work best to achieve sustainable cash flow.
This is key, because just like every business is different, so is every industry. The industries that some of our PFPs specialise in are:
- Start-up businesses
- Solopreneurs, Freelancers, and Contractors
- Online Entrepreneurs
- Small-Medium Service Businesses
- Creatives and Makers
- Hospitality & Leisure
- E-commerce and Tech
- Companies <50 staff
- Business with $10mil + turnover
- And many more
Yes, Making Your Business Profitable Is Easy!
Regardless of what your current financials look like, you most definitely can use the accounting formula that is Profit First to see sustainable profitability and growth in your business.
A PFP is going to keep you accountable, is available as a sounding board for business decisions, and can guide your business to growth and profitability.
For more information, visit our Profit First Frequently Asked Questions page.