As a business owner, you face tough decisions and challenges, with competition everywhere. Expanding your business is crucial, especially when revenue is tight. This is where the Profit First method becomes essential.
What is Profit First
A revolutionary accounting system, Profit First prioritises paying yourself first by withdrawing money from your business. It’s an easy-to-understand method that boosts profits, expedites payments to you, and enhances cash flow. This straightforward system compels spending less than incoming revenue, ensuring there’s always enough for your pay. This shift reduces reliance on business income, offering greater financial freedom.
How to implement Profit First
A lot of people are familiar with the idea of Profit First and how it can help businesses become more profitable. But how do you actually implement it?
Here are some tips to help you get started:
TIP 1 : Come up with a personal minimum cash flow target.
Your target number is the amount of money you aim to see entering the business each month before covering expenses. For instance, if you require $1,000 monthly cash flow before your pay, that’s your target.
TIP 2: Calculate what percentage of your monthly revenue goes toward paying yourself as an owner or partner.
This is called owner take-home pay and is typically around 20 percent for small businesses and up to 50 percent for larger companies (depending on how much money needs to be invested back into the business). As an example, if your monthly revenue is $10,000 per month, then 20 percent would be $2,000 per month and 50 percent would be $5,000 per month.
TIP 3: Subtract your personal minimum cash flow target from your owner take-home pay amount (step 2).
The remaining amount will be left over as profit that can be used for reinvestment into your business or distributed among partners/owners (including yourself)
Profit First works for all businesses
Profit First can benefit both startups and multi-million dollar businesses. This system compels you to be more intentional about spending money. It’s easy to overlook expenses when they’re not deducted daily. With Profit First, you must transfer a set amount into savings weekly, highlighting every expenditure and ensuring financial awareness daily.
Why is Profit First necessary?
A business owner may think that the best way to increase profits is by increasing revenue. This makes sense because it’s always easier to make a profit when you have more money coming in than going out. In fact, this is one of the reasons why so many businesses fail. They make the mistake of focusing on revenue but not expenses.
Think about it this way: if you had no expenses at all, you would have unlimited profits! But unfortunately, most businesses do have expenses so they have to focus on them instead.
The problem with focusing on revenue first is that it can lead us down a slippery slope towards financial ruin if we aren’t careful.
For example, let’s say that sales are down for the year and your expenses are higher than expected due to increased utility costs or payroll taxes. You might decide to take on more debt or cut salaries in order to cover these costs which will only make things worse from an overall profit standpoint because now both revenues and expenses are lower than expected or budgeted for for that year – or perhaps even worse – there will be no profits at all!
Who can benefit from using the Profit First Method?
The Profit First Method is a system that can work for any business, regardless of its size or industry. It works for service-based businesses and product-based businesses alike. It works for brick-and-mortar businesses, online businesses and mobile businesses. It works for companies with one location or multiple locations.
If you have employees, Profit First can help you manage their payroll more efficiently. If you’re an entrepreneur working alone, it will help you manage your own finances more efficiently as well.
It’s easy to see how this tool could be useful for any business owner who wants to take control over their money management practices.
Takeaway
Encompassing numerous aspects, Profit First can initially be overwhelming. It’s a novel philosophy rooted in unconventional ideas, challenging your accustomed thinking patterns.
However, for determined business owners seeking financial transformation, Profit First implementation can yield significant profits by prioritising essential investments.
If you need further help, we offer a free 1:1 Profit First consultation. You can either contact us or schedule your appointment today