Traditionally, business finance models have told us to subtract our expenses from our revenue, and whatever is left is profit. But the Profit First method from Mike Michalowicz changes that around, as shown below. This revolutionary yet simple idea is changing how people track their business and personal finances.
Profit First practices may feel intimidating at first, but with some expert coaching, you’ll be in the flow of it in no time. At Fisher Bookkeeping, we love helping clients understand the power behind Profit First methods. We serve business owners around the country from our offices in Portland, OR, and Lexington, KY. Reach out today to learn more.
If you’re new to Profit First or haven’t had the chance to dig in yet, here is a brief primer on how it works.
Typical corporate accounting has relied on the equation: Revenue – Expenses = PROFIT
However, the Profit First model does some switching around: Revenue – PROFIT = Expenses
Business owners set up five separate financial accounts that each serve a distinct purpose:
All income goes to the “Revenue” account, and then you move specified percentages to the other accounts on a set schedule. Generally, people do this allocating every two weeks. Our Profit First experts can help you determine your percentages and coach you on how and when to increase them.
The idea is that you set aside a certain amount of your income as profit first before paying any other expenses. That means that you account for profit before payroll, utilities, inventory, etc.
It’s important to note that profit and owner’s compensation are two different things here. With this methodology, you are paying yourself for the work you do and earning a profit as the business shareholder.
At face value, it seems as if the two equations above are saying the same thing. Technically, they are.
But the power of the second equation lies in the psychological mindset shift that business owners make when following Profit First. Here are four ways that this practice helps you reach your financial goals.
Unfortunately, the entrepreneurial life has a tired cliche attached to it. The notion that business owners must hustle and grind for every penny for years before seeing a profit is widespread. Also, it’s wrong.
When you follow the Profit First method in your business, you can “be profitable” after your first sale. Even if you only move 1% of a $10 sale into your profit account, that counts. You now have made a profit! Celebrate!
On paper, this is all just numbers. However, the mental boost that comes with seeing a profit account begin and grow, no matter how quickly, is tremendous. Try reading these two statements out loud:
See how different it feels just to verbalize your profitability? It’s empowering and encouraging and motivating. There is no need to get hung up on the numbers and amounts at this point. The power is in knowing that you are profitable right away. With this mindset shift, your business can thrive, and that bank account will continue to grow.
When you follow the traditional equation, accounting for expenses before profit, it’s tempting to see every cost as necessary. Suddenly, you find there is nothing left for profit.
But once you flip it to subtract profit first, you see your operating expense account as finite. When you have a specific amount to work with, you become strategic in streamlining these costs.
Perhaps you will look for more cost-effective shipping methods. Maybe you will find and cancel recurring payments for subscriptions you don’t use. There are countless ways to control your expenses once you make profit non-negotiable.
Many business owners feel scared of their finances. They often avoid looking at their accounts because they are worried about how much will or won’t be there.
But playing ostrich and burying your head in the sand won’t grow your business or allow you to enjoy success. By staying in touch with your money regularly, you will feel empowered to make decisions that help your company thrive.
You do not have to be an accountant or have a head for numbers to have a good relationship with your finances. I promise!
Once you get your accounts in place, you will only need a little bit of time every couple of weeks to make the allocations. Some people prefer to distribute their allocations weekly and do a money check-in at the same time.
The genius of the Profit First method is that it gives business owners permission to look at their bank account to see how much money they have to spend. It’s not only ok to do this. It’s encouraged!
You no longer have to fight the urge to check your account – embrace it! The one rule is that you can only spend money from the Operating Expenses account.
Another benefit to this communication with your dollars is that you quickly notice if there is a problem. False charges or signs of fraud are much easier to detect if you keep an eye on your accounts consistently.
By building a profit account that grows consistently, you give yourself more freedom to invest in opportunities that arise.
When a high-quality training program catches your eye, you will have the funds to pay for it – no more adding a balance to your credit card. (Of course, earning miles on a card is awesome. Just be sure you pay off the full balance each month). Or perhaps you can purchase a more robust CRM to help grow your company’s ability to take more clients.
Having the funds immediately available means that you can take a leap toward growth whenever it’s time. And as another benefit, your profit also allows you to have a rainy-day fund for emergencies.
You can set up your business to follow the Profit First method at any time. Whether you have not yet made a sale or have a six-figure revenue and beyond, this system is for you.
Our Fisher Bookkeeping team is here to help you set up and understand your Profit First practices. From solopreneurs to multinational corporations, this system works.
Connect with one of our friendly bookkeepers today to see how we can serve you and your business. We’re here to help you thrive.
Barb is the CEO of Fisher Bookkeeping, an outsourced bookkeeping consultancy that provides small businesses with a full-service financial department. Her favorite aspect of work is to break down the accounting to meaningful bits, so entrepreneurs can make a powerful difference in their own business. She's also a power lifter (squat: 215, DL: 270).