Starting a business is so exciting, but it can also be a complex and challenging task, especially when it comes to managing finances. That's why many entrepreneurs turn to the Profit First approach. This innovative business model revolutionizes how businesses handle their finances, helping them remain profitable and sustainable. This post will take you through a step-by-step guide to implementing Profit First in your business. We'll also explore how "Simplified Profit First," our enlightening course, can provide the support you need during this transformative journey. Or, if you prefer a more personal touch, I am here for you with 1:1 coaching.
What is Profit First?
Profit First is a money management system that helps businesses prioritize profitability from the outset. The system, developed by Mike Michalowicz, challenges traditional business finance methods by advising entrepreneurs to put profit above all else. Instead of the traditional formula of Sales - Expenses = Profit, Profit First flips the script to Sales - Profit = Expenses.
This shift in thinking changes the game entirely. By taking profit first, you are ensuring the financial health of your business, making growth sustainable, and making business financials easier to manage.
Step-by-step Guide to Implementing Profit First
Step 1: Understand the Profit First Fundamentals
Before jumping into implementing Profit First, you need to understand its philosophy and rationale. This system works on the premise that human behavior leans toward consumption. If we see money in our business account, we will likely spend it. However, by taking our profit first, we essentially hide that money from ourselves, forcing our business to run on the remaining funds.
This premise of "we spend what we have available" is derived from Parkinson's law, which assumes that the more we have available, the more we will use. The most common example of this is when we open a new toothpaste tube; we are pretty generous with the amount we use; once it's reaching the end, we can brush our teeth the same, with just a tiny amount of toothpaste.
Step 2: Set Up Your Bank Accounts
Profit First money management system is similar to your envelope method: each envelope has a purpose: rent, food, bills, etc, and the money goes there for this particular reason. Inside Profit First, we'll have bank accounts instead of envelopes and hard cold cash. This will simplify the implementation and help you avoid dipping into funds meant for another purpose.
At a minimum, you should have the following accounts:
1. Income [or revenue] Account: All income goes into this account. You don't pay any expenses from this account. Its sole purpose is to collect all your revenues.
2. Profit Account: This is your reward for being an entrepreneur. A percentage of your income will be transferred here every time you receive money.
3. Owner's Pay Account: This account is for your salary. As the owner, you should be the best-paid employee in your company. This account will ensure you are paid fairly for your hard work.
4. Tax Account: This is to accumulate funds for tax payments. As an entrepreneur, you are responsible for your own taxes. Saving for them regularly ensures you are prepared when tax time comes around.
5. Operating Expense [OPEX] Account: This account covers all the costs of running your business. By limiting this to what's left after taking profit, owner's pay, and taxes, you're effectively operating within your means.
Step 3: Determine Your Allocation Percentages
Each business is unique, so there's no one-size-fits-all approach. You'll need to find allocation percentages that work for you. Start small with your Profit and Owner's Pay allocations, then gradually increase them over time. This slow increase is what we call a Roll-Out Plan.
Remember, your financial freedom is a marathon, not a sprint.
Step 4: Get into a Regular Rhythm
One of the key elements of Profit First is regular transfers. Typically, these occur twice a month, aligning with your revenue cycles. Consistency is critical, as it helps you manage your cash flow effectively.
Step 5: Use Profit First to Make Business Decisions
The beauty of Profit First is that it gives you an immediate snapshot of the financial health of your business. If there isn't enough money in the Operating Expenses account to cover a cost, then the business can't afford it.
If you're thinking, "This sounds fantastic, but how do I start?" don't worry – we've got you covered. The 'Simplified Profit First' course is specifically designed to guide you through this financial transformation. Here are just a few ways the course can help:
1. Understanding Profit First: The course starts with the basics, helping you grasp the Profit First philosophy, how it works, and why it's beneficial.
2. Setting Up Your Accounts: We walk you through setting up your bank accounts, providing tips and advice to make the process as straightforward as possible.
3. Determining Your Allocation Percentages: This can be tricky, but the course provides a comprehensive guide to help you figure out what percentages work best for you.
4. Implementing Profit First: We'll guide you through implementation, from your first allocation to managing your regular transfers, and adjusting your percentages as your business grows.
If you prefer a more personalized touch, or if your business has specific challenges that need tailored solutions, then our 1:1 coaching might be the perfect option for you. In these sessions, we can dig deep into your business, answer any questions, and guide you through any obstacles you encounter during your Profit First journey.
Implementing Profit First in your business might seem daunting at first, but remember, it's a journey. With the right resources like the Simplified Profit First course, and dedicated 1:1 coaching support, you can transform your business's financial health and set it on a path of sustainable growth and profitability. Start your Profit First journey today and take the first step towards securing your business’s financial future.