- Published: 30/04/2024
Profit First & Healthcare...
Learn how Profit First can maximise profits and streamline operations for retailers and wholesalers in the healthcare...
Did you know that small and micro businesses have an average tax debt of $80,000? This was revealed in a recent study of the tax debts of small and micro businesses clients requesting assistance from the University of New South Wales Tax and Business Advisory Clinic. The study also found that the average microbusiness to visit the clinic has eight years of overdue tax returns and that over one third of the UNSW clients rate their financial stress levels at the maximum threshold. (Source) . Potential causes of this financial distress include failure in understanding one’s tax obligations, family breakdowns and personal issues, and the absence of the Profit First methodology.
The Profit First methodology is an established money management technique for businesses of all sizes, from all industries. The technique prioritises profits over expenses, creating sustainable income and profit. Profit First operates by altering human behaviour surrounding money management from reactive, to proactive based upon Parkinson’s Law. By adapting your habits to better suit your behaviour, you not only improve cash flow but also pay down your debts.
The Profit First methodology is a strategic approach to ensure that your debts are constantly being reduced which guarantees that you will never be in this distressing financial situation again. The framework of this strategy is to get started with Profit First with the one-time setup of opening the allocated bank accounts. You can find out more about the different accounts that are required for Profit First bank balance accounting in our blog post, ‘Profit First: Transforming Your Business for Guaranteed Profitability’. The profit account will be the account used to pay down your debt. Up to 99% of the Profit Account can be allocated to your debt to help pay it down (minimum repayments come from OpEx account) and the remaining 1% is yours.
The next step is to determine your Profit First percentages and ensure that they are functioning correctly. Profit First uses two types of percentages - CAPs (Current Allocated Percentages) and TAPs (Target Allocated Percentages). CAPs represent how your current finances are split between profit, tax, owner’s pay, revenue and operating expenses. TAPs represent your goals and allow you to see more profitability and greater cash flow. You can read more about Profit First percentages and learn how to use the Profit First Instant Assessment worksheet in our last blog post, ‘How Does Profit First Work?’. Start separating your finances by setting money aside for tax, owner’s pay, expenses, and profits. If you start setting your GST aside now, then it will be available and ready for next quarter. You can then utilise your profits account to pay down your debt each financial quarter. This concept is known as the debt snowball.
Profit First utilises the debt reduction method, ‘The Debt Snowball’ in combination with multiple accounting banking to guarantee that your debt is diminished. The Debt Snowball approach involves listing your debts from smallest to largest and prioritises paying them off in the same order. The focus becomes paying off your smallest debt whilst paying minimum payments on all others, until the smallest debt is gone. This process is repeated until all debts are paid off. This approach reduces your financial stress and builds confidence by starting small before approaching the most intimidating debts.
Profit First provides a variety of resources to help you pay off your debts. These resources include tools such as the Debt Snowball Calculator that allows you to input all of your debt and then work out the most cost-effective way to eliminate your debt using various strategies. It is also important to contact your bank regarding lowering interest rates to enhance Profit First debt reduction.
It is important to remember that once you have a repayment plan with the ATO, you must pay future tax bills when they are due. This means that your future bills cannot be added to your previous debt. So, you need to resolve the issue of evergrowing tax bills, and then tackle the debt. Profit First and The Debt Snowball is the perfect solution.
Profit First is a revolutionary financial management system that stabilises cash flow and reduces the ‘feast-to-famine’ cycle no matter the size or industry of your business. Book a call with Profit First Accounting & Coaching and we can work out a plan to eliminate your debt. Get in touch.
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