Profit First for Beginners: Overview
In the realm of business, profitability isn’t just a goal; it’s the very oxygen that keeps a venture alive. But how does one ensure that their business isn’t just surviving, but actually thriving financially? This is where the ‘Profit First’ methodology becomes helpful—a transformative approach that flips the script on traditional accounting. For many, especially beginners, the question remains: How does Profit First work? Let’s break it down.
The Traditional Approach and Its Pitfalls
Traditionally, the profit equation has been simple: Sales minus Expenses equals Profit. However, this formula subtly prioritises expenses, often leaving profit as an afterthought. It’s no surprise that many businesses find themselves struggling to keep their financial heads above water.
In fact, one of the main reasons businesses fail, according to an article by CrowdSpring, is running out of money. One should focus on investing in knowledge to gain profit and how to ensure that it remains consistent in the long term.
The Profit First Philosophy
Profit First, pioneered by Mike Michalowicz, suggests a radical yet straightforward switch: Sales minus Profit equals Expenses. This philosophy advocates that you allocate your profit as soon as you make a sale, essentially treating it as the most important expense of all. It’s about taking your profit first and then learning to operate within the remaining means.
“Profit is not something to add on at the end, it is something to plan for in the beginning.” – Megan Auman, Metalsmith, Artist, Writer, Teacher, and Creative Business Coach
The Core Steps of Implementing Profit First
For beginners, understanding and applying Profit First can be akin to learning a new language. Here’s a simplified guide:
Set Up Bank Accounts
You start by setting up multiple bank accounts for specific purposes: income, profit, taxes, owner’s compensation, and operating expenses.
Determine Percentages
Determine what your current operational percentages are for each of the different areas. And start with an incremental approach to increasing the profit percentage.
Allocate Funds Accordingly
When revenue comes in, you distribute it into these accounts based on predetermined percentages (and in the order noted above). This is a continual process that happens on a set rhythm. At The Healthy Business Lab we recommend weekly or fortnightly.
Remove Temptation
Transfer your profit and tax allocations to separate accounts, potentially at a different bank, to make it harder to dip into when not necessary.
Regularly Assess and Adjust
Review your allocations and account balances to ensure they reflect your business’s actual needs and to adjust as you grow.
Taking the First Step
There are a number of potential ways to begin your Profit First journey. Each dependant on where you are currently at in your business, your comfort with finances and how you came across this article.
To simplify what your first step could be. Here are 3 options depending on your starting point:
- Reading the Profit First book
- Free and low cost resources (more on this below)
- Book a Profit Plan Call with us today to accelerate the process
Measuring Your Financial Health
The Healthy Business Lab offers a Financial Health Check, which is also super helpful to get started. You can’t find a cure if you don’t have a diagnosis.
It’s not just about having a healthy bottom line but understanding how your profitability compares with other successful businesses. It’s a metric that can guide you in making informed decisions and setting realistic financial goals.
“Financial health is restored in two ways–first by doing the inner work of changing how you think and feel about money and then by doing the outer work of practical money management.” – Marianne Williamson, an American Author, Speaker, Humanitarian, and Presidential Candidate
Profit First DIY
From reading the book you are in a position to DIY Profit First implementation. For some this works, for others it raises more questions than answers.
Profit First 101, a self-paced online course with 15 modules, created by Profit First Australia, can be a game-changer for smaller business owners. It eases you into the methodology, allowing you to adapt to a system that promises sustainability at your own pace.
Profit First Beyond the Basics
You might crave a deeper dive into the Profit First ecosystem. Maybe you want to fast track the whole process with experts that do this day in and day out.
That’s where services like our Profit Accelerator come in—a three-month hybrid implementation program that includes dedicated 1:1 calls and group coaching, helping you stay on track and deepen your financial acumen.
For the most comprehensive transformation, a Profit Transformation program that is more like a CFO type service. It provides intensive, personalised implementation of the Profit First method, complete with growth and debt plans.
Further details can be found here.
Final Word
Profit First is not just an accounting technique; it’s a mindset shift. It champions the radical concept that every business, regardless of size or sector, can and should be profitable from the get-go. For beginners, adopting Profit First with support from experts like us can be the keystone to not just a prosperous business, but a legacy of impact.
FAQS
What is Profit First and how does it work?
Profit First is a financial management system designed to ensure profitability by allocating income to profit before operating expenses. Upon receiving payment, a business distributes funds into separate bank accounts designated for profit, owner’s compensation, taxes, and operating expenses, in that order.
Can Profit First work for small businesses?
Absolutely. Profit First is especially beneficial for small businesses, as it helps prioritise financial health from the start, ensuring sustainability and growth.
How do you set up a Profit First system?
To set up Profit First, open multiple bank accounts for income, profit, owner’s compensation, taxes, and operating expenses. Then, allocate incoming funds into these accounts according to predefined percentages.
What are the initial steps to take when implementing Profit First?
Begin with a thorough assessment of your current financial status. Then, establish your bank accounts for distribution, and decide on the allocation percentages that suit your business’s unique needs.
How often should you review your Profit First system?
Review and adjust your Profit First allocations at least every quarter to ensure they align with your business’s changing financial situation and goals.
Is the Profit First method suitable for health and wellness businesses?
Yes, health and wellness businesses, which often focus on service over profitability, can greatly benefit from the structure and financial clarity that Profit First provides.
How can Profit First help in managing business debt?
Profit First encourages businesses to allocate for profit first, reducing the temptation to overspend and helping to manage and prioritise debt repayment within the operating expenses.
Where can I learn more about Profit First for my business?
The Healthy Business Lab offers various programs tailored to beginners, from self-paced online courses to intensive one-on-one CFO-type services.
Each business is unique, and so should be your financial strategy. Schedule your Profit Plan Call with a Profit First expert from The Healthy Business Lab and uncover tailored opportunities for your business’s growth.
