Streamline Your Business Finances With The Profit First Method
Did you know that only about 40% of businesses are profitable? Another 30% break-even, but the last 30% consistently LOSE money until they go out of business.
Business doesn’t have to be complicated. There are many proven models and frameworks that can streamline your success.
One financial model is Profit First, created by Mike Michalowicz, founder of several multi-million dollar businesses.
I love it because it’s easy to implement, and it bucks the traditional idea that we should prioritize business expenses before profit.
Let’s take a look at each of the three pieces of the Profit First formula, starting with, you guessed it, profit!
What Is The Profit First Formula?
You’ve probably seen this before:
“Sales – Expenses = Profit”
The traditional financial formula means our profit is the leftover after paying expenses. Michalowicz encourages us to take profit first.
“Sales – Profit = Expenses”
This means expenses are no longer inevitable features of the business.
Suddenly, there’s a possibility that we can completely remove any expenses —or at least reduce them!
Introducing A New Way Of Managing Cash
We live in a world of amazing innovation, but rarely does anything revolutionary happen.
I’m always excited to introduce clients to the Profit First model because it offers this revolutionary idea: You can run a profitable business from the start.
So much of life is devoted to paying debts: college loans, credit cards, mortgages, business loans, etc.
Profit First challenges us to ask ourselves, “How can I run my business profitably and frugally—without charging another expense?”
How Does Profit First Work?
Profit First is simple enough:
- Set up new bank accounts (as explained below.)
- Decide what percentage of income you’ll place in each account.
- Transfer that payment to the proper accounts.
You’ll need these five bank accounts to manage your income:
- Revenue. This is the master account. All the money you earn from your business comes here. Then, allocate a percentage of your choosing to each of the following accounts.
- Profit. Naturally, under the Profit First model, this is the first account you will pay a portion of your income. The goal is to run your business with the amount remaining in your Revenue account.
- Owner’s Pay. You also need to pay yourself a salary or wage. This percentage of your income isn’t reinvested into your business.
- Taxes. Send your quarterly taxes to this account. If needed, you may need to adjust percentages in other accounts to make sure taxes are covered. Taxes are collected on behalf of the government and you do NOT want to get in trouble with the government!
- Operating Expenses. These are the day-to-day costs of running a business. This account includes everything from marketing fees and staff payroll to utilities and rent.
What percentage should you transfer? Well, it depends on your business.
A solo accountant doesn’t have as many operational expenses as a restaurant owner, so the percentages they choose will be different.
Play around to find what’s best for your business. Here’s an example of one possible combination:
- Profit: 5%
- Owner’s Pay: 55%
- Taxes: 20%
- Operating Expenses: 20%
“Shouldn’t I Reinvest In My Business First?”
In the early years, you’ll often invest the profit back into your business.
But, you’re NOT going to use it for ongoing day-to-day operations.
It’s better to use the profit on an endeavor that grows your business.
And because you’re the greatest asset of your business, sometimes that means investing in yourself.
Profit First is a model that allows you to focus on self-care, which is an essential investment I talk about in my book. (She Rules: What You Didn’t Know Is Holding You Back In Business)
You help your business when you help yourself.
Setting aside a dedicated percentage of profit gives you the freedom to invest in your well-being… You don’t need to grind even harder to afford to care about you.
Expense: When Growth Becomes An Obstacle
Many new entrepreneurs regularly invest in their businesses to grow faster.
Hire more staff. Launch new services or products. Explore different marketing. And it works for a while.
But, the tree often falls over when its roots aren’t strong enough…
Reinvesting profit in our business can become an opportunity to overspend on new bells and whistles.
Rethink Your Debts
Before buying another new widget to grow your business, ask yourself, “How will this take me closer to the next level?”
It might be better to strengthen your foundation first.
One way to do that is by reducing business debt:
- Cancel memberships you don’t use often. (BNI or Chamber of Commerce, for example)
- Lease office space and earn extra income.
- Hire contractors instead of employees for certain roles.
- Cancel recurring credit card fees you don’t need. (SaaS fees add up!)
- Cap any expenses you know your business could run without.
NOTE: You might need to reduce the percentage you intend to keep as profit until your business expenses are manageable.
The Small Plate Analogy
Mike Michalowicz uses the Small Plate Diet analogy to explain Profit First.
Basically, smaller plates tell our brain that there’s more food than there is. The same applies to bank accounts.
If we leave our revenue in a single bank account, we increase the risk of spending more of it than we intended.
But, just like switching dinner plates, we divert less toward expenses after dividing our revenue among other bank accounts.
The brain believes there’s fewer funds overall because the figures in each account are smaller.
Paying Yourself A Wage Is Different Than Collecting Profit
The second figure you’ll need to set is the amount for your Owner’s Pay account.
But it can be challenging for new entrepreneurs to establish a fair wage.
There’s a lot to think about:
- The cost of acquiring new customers.
- The cost to deliver your product or service.
- Outsourcing fees and staff wages.
- Physical costs like rent, transportation, and marketing.
- Time and energy that goes into your work, personally.
Those are all expenses that your revenue will need to cover. And it can be tempting to undervalue ourselves so we can afford other expenses.
Remember, you can set a 1% profit at this point. Then, gradually increase the amount (to 3% then 6%, etc.) until you can comfortably hit your profit goal without missing any expense payments.
Earning A Steady Income
So, what kind of revenue do you want from your business?
Unless you already have a clear budget outlined, answering that question might be tough!
Sometimes our financial goals have a bumpy start, and we need extra help making ends meet—after all, entrepreneurship isn’t stable.
I recommend my clients create a budget that details their monthly obligations. That way you’ll know if your current income will meet your profit goal and cover expenses.
This isn’t always easy to do.
There may be a transition period where you hold a part-time job while building your business.
It’s fine for you to look at your budget and decide that, for now, you also need to work for someone else because you need more stability.
A stable side-job lets you avoid dipping into your profit to cover expenses.
As women with large lives, we need simple businesses.
Templates, frameworks, and models (like Profit First) create simplicity. They are shortcuts that streamline our businesses quickly.
It’s like having a cheat sheet for making tough business decisions!
I’ve struggled with budgets too. I get it.
And I believe that you can make your goals happen.
P.S. Profit First is a great model for businesses, but there’s a similar version called The Envelope Method. It’s the same technique, but for smaller, personal funds like groceries and car payments. Try it out if you want to streamline your home life, too.
P.S. Whenever you’re ready… here are 3 ways I can help you grow your business:
1. Grab my Guide & Workbook to keeping your cool and making money- even during a global pandemic!
Can you make money, grow your business, and survive a pandemic all at the same time? The quick answer is yes. — Click Here
2. Book a free strategy chat
You can grow your business bigger than you imagine possible, even during a pandemic. Here’s what will happen – we will chat about your vision for your biz, where you are right now and any challenges you are facing.— Click Here
3. I’m looking for a few specific people to join me for my live training, where we will spend 90 minutes a week for 90 days to exponentially grow your business.
Just send me a message with DOUBLE in the subject line to get more details.