For the vast majority of small business entrepreneurs: profitability appears to be an unattainable objective. Despite putting in long weeks, ensuring production targets are met and achieving strong sales, all of that effort seems to vanish without reward. It’s a challenge that most small business owners face at some point on their path. What makes it even more challenging is that the majority of financial management systems are not geared up to help. They are setup to track expenses and report progress towards business goals after the fact rather than build systems that put profit first.
If this sounds familiar then proactively managing your funds could be the solution to the problem. Enter the Profit First method—a revolutionary cash management system designed to ensure that businesses are consistently profitable.
In this step-by-step guide, we’ll walk you through the Profit First method and show how small businesses can implement it to improve their financial health. We’ll also highlight why working with Profit First certified professionals can be a game-changer in ensuring the success of your business.
What is Profit First?
The Profit First method, created by entrepreneur Mike Michalowicz, flips traditional accounting on its head. Instead of the conventional formula Sales – Expenses = Profit, the Profit First formula reads Sales – Profit = Expenses. Profit is now an essential focus that forces companies to manage their budget effectively.
With this approach in place small business owners can create lasting financial security by allocating profit funds before covering expenses.
Step 1: Set Up Your Profit First Bank Accounts
A key part of implementing the Profit First system is using multiple bank accounts to divide your income into different categories. All accounts provide a particular service to support your budgeting and directing resources effectively.
Here’s how to set up the five essential bank accounts:
- Income Account: Deposits of sale proceeds happen directly into this account. Periodically (such as weekly or biweekly), funds will move from this account into the other accounts according to set percentages.
- Profit Account: You deposit a portion of your income into this account to make sure profit is your first priority. This funds are reserved for profit sharing rather than used for daily costs.
- Owner’s Pay Account: This account aims to give you compensation as the entrepreneur. Too many business owners neglect to pay themselves properly, but with Profit First, this becomes a priority.
- Tax Account: Put aside cash for taxes to prevent a major expense from taking you by surprise at the end of the year.
- Operating Expenses Account: What’s left supports the costs associated with daily operations including rent and payroll.
Action Steps:
- Create five different bank accounts for Income and Profit.
- Calculate proportions for every category linked to your revenue and corporate necessities.
- Each month or biweekly shift funds from the Income Account to all the designated categories.
Step 2: Establish Your Profit Allocation Percentages
One of the key principles of Profit First is to allocate a percentage of your revenue to each of the above accounts. How much should you distribute to individual accounts? The amount of variance will depend on both your business aims and its size.
Typical starting percentages might look like this:
- Profit: 5%
- Owner’s Pay: 30%
- Taxes: 15%
- Operating Expenses: 50%
Over time you can modify these percentages. One objective is to progressively enhance the profit share while lowering avoidable expenses.
Action Steps:
- Analyze your actual cash flow and expenditures to obtain decent first percentages.
- Start with a modest approach regarding profit and incrementally boost the percentage after your business improves.
- Check your percentages on a quarterly basis to guarantee they showcase your business progress and monetary soundness.
Step 3: Transfer Funds Based on Your Allocations
Once you decide your allocation percentages you must move money from the Income Account to the others on a consistent basis. Make these transfers on a set timetable of weekly or monthly.
Example: When you make $10k during the week you split your earnings into 5% for Profit 30% for Owner’s Pay 15% for Taxes and 50% for Operating Expenses which leads to these transfers:
- Profit Account: $500
- Owner’s Pay Account: $3,000
- Tax Account: $1,500
- Operating Expenses Account: $5,000
Action Steps:
- Develop an ongoing process to transfer funds from your Income Account to different accounts as specified by your percentages.
- Stick to a systematic approach for these transfers—profit must go first in every case.
- Cutting costs while overseeing cash flow
Step 4: Reduce Expenses and Manage Cash Flow
One of the most significant benefits of the Profit First method is that it forces business owners to operate within a more disciplined financial structure. As your operating costs depend on what is left after dividing profit and taxes your spending must become more conservative.
Run out of funds in the Operating Expenses Account to manage all your expenses? You need to reassess your spending.
Tips for reducing expenses:
Engage with suppliers for improved rates or savings.
Find and get rid of excessive or inessential spending.
Outsource or automate activities that are less expensive to manage.
Action Steps:
- Monitor your operating expenses on a regular basis and search for opportunities to decrease expenses that do not impact your business functions.
- Adopt software designed for expense monitoring to see exactly how you spend your money.
Step 5: Conduct Quarterly Profit Distributions
One of the most rewarding aspects of the Profit First method is distributing profit to yourself as the business owner. Allocate half of the balance in the Profit Account for yourself at quarter’s end and keep the other half as an emergency or growth fund.
Action Steps:
- At the conclusion of each quarter calculate half of the funds in the Profit Account.
- This figure acts as your compensation for establishing a flourishing business! That half remains in the account to provide financial stability.
Step 6: Adjust and Improve Your Profit First System
With business growth changes might become necessary for your profit allocations. This indicates your financial well-being is enhancing! As your business evolves over time increase how much you set aside for profit and maintain a grip on expenses.
Work with a Profit First certified professional to ensure you’re making the most out of the system and fine-tuning your allocations based on your evolving financial needs.
Action Steps:
- Check your allocation percentages every three months to make sure they match your present income and objectives.
- Consult with a Profit First professional to help adjust the system as your business scales.
Final Step (Recommended): Work with a Profit First Certified Professional
While implementing the Profit First system can significantly improve your business’s profitability, it can be challenging to set it up correctly, align your team and financial systems. This is where a Profit First certified professional can make all the difference.
Profit First certified professionals are trained to help business owners implement the system in a way that aligns with their unique financial situation. Experts deliver valuable assistance in establishing bank accounts and figuring out percentage allocations along with effective cash flow management.
Benefits of working with a certified professional:
- Approaches suited to the distinct needs of your company.
- Regular backing and oversight to maintain your progress.
- Expert financial counsel that guarantees enduring success is available.
Want to Implement Profit First? We Can Help!
Helping small businesses secure long-lasting financial well-being is our goal. As Profit First certified professionals, we can guide you through every step of implementing this transformative system, ensuring that your business not only survives but thrives. Let’s chat… and we’ll help you build a profitable, sustainable future for your business.
All assets used with permission from Profit First
