Putting Your Profit First – A Review of Implementing the Profit First System
I’ve always been good with avoiding massive debt – never had a credit card and always saved to buy things I wanted in cash. Yet I also wasn’t very good at saving money – I seemed to always find something to spend it on.
As a side note, I recently read a fantastic book called Millionaire Mind which explains WHY I am a spender and why you might be too, and how to change your mindset to grow your wealth instead of always getting rid of it so quickly.
As a dog trainer, work fluctuates. While this is normal it can make for stressful times in periods of less work. So the smart thing to do is to “save for a rainy day,” throughout the year. They say you should have an emergency fund that could cover your running costs for three months if necessary.
However every time I started a savings account, I would grow it then spend it, rinse, repeat.
I then saw several entrepreneurs recommending a book called Profit First by Mike Michalowicz and when I see successful people recommending something, I take it seriously, so I bought the book.
Then I didn’t take it so seriously in the beginning. I read a few chapters and I’ll admit it, I got a little bored. I knew the idea was good. I knew the system was good. I knew it would be good for my business… but sometimes the best things for you aren’t the most fun things so I put it off for a bit…
Then I kept seeing people talk about it more and more and how great it’s been for their business and I finally pulled my finger out, finished the book and decided to implement the system into my business.
Isn’t funny how we put things off that we know are good for us?
How Most Small Business Owners Manage Their Accounts
If you’re running like most small businesses, all your income goes into a business bank account and hopefully, you draw your pay from that so that personal expenses aren’t mixed in with business expenses.
Then, when business expenses come up, you hope that you haven’t just spent the required money on a shopping spree and use the same account to pay for those expenses, perhaps sometimes having to put off the payment or wait until the last possible minute because on that day you wanted to go shopping, you had money… but now somehow you don’t.
If you have a good month, you lust over alllll that money sitting in your account and think, “ I feel so rich! What can I buy?”
If you’re somewhat disciplined you might put regular money aside into a savings account.
How The Profit First System Works
As you read through the book, Mike has you do some exercises to calculate how your business is doing and what your allocations should be.
There’s a few variations on how many accounts you’ll need dependant on whether you need to pay staff or how much debt you have. Getting out of debt quickly is a priority.
So everyone’s Profit First set up can look slightly different but there’s one main goal of this system:
Sales – Profit = Expenses
Most people take the expenses out of their sales income and then whatever is left is their profit. Profit First has you do this the other way around to ensure that your business is always profitable BEFORE it spends more money.
Because if your business doesn’t make a profit, it defeats the purpose of having a business in the first place.
The Profit First system is all about making sure funds are allocated to where they need to go BEFORE the expenses come in, but that before you pay expenses or sign up for new ones, you’ve taken a profit.
A typical breakdown of accounts is as follows:
Income account – this is where all your incoming money goes and you disperse the percentages from here when you do you allocations
Operating expenses – This is the account that you pay your expenses from
Owner’s pay – this is the account that you then pay yourself from
Tax – setting aside money for tax – very important (separate bank recommended so you don’t touch it)
Profit – Different to owner’s pay, this is the profit of the business. You can withdraw this quarterly as a bonus to celebrate and use as play money! (separate bank recommended so you don’t touch it)
Materials & Subcontractors – In this account set aside money to replenish stock when you sell stock.
(Have you ever sold stock and spent all the money before ordering replacement stock, only to be left short? Cause same.)
Also recommended is an emergency fund – save up enough money to be able to run your business for 3 months if income suddenly stopped.
When you’ve done your profit first assessment, you’ll know which percentage of your income you’ll need to disperse into each account.
How often? It’s up to you – I chose once a week and now have, “finance Fridays.”
Some people do twice a month and some people do it daily. Find the rhythm that works for you.
You can set this all up yourself based on the book, or you can get a Profit First accountant to help you. I was lucky enough to find Phil from Panic Atax to help me put this system into place. He’s the best accountant I have ever had and working with Phil has made me feel better about managing my money than ever!
If you’re in Australia, check out Phil at Panic Atax and tell him I sent you!
“But it’s MY MONEY”
This was my first objection that I found difficult when I implemented this system. I loved seeing a bulk amount of money grow in one account and knowing it’s mine, I earned that. Thinking of all the things I could use it for…
Except it wasn’t ever truly all mine. Phil explained it to me:
Some already belongs to the tax man. Some will be owed to suppliers. Some needs to go to subscriptions I pay for – all necessary to run the business.
It only took a couple of weeks for me to feel better about this and really get it. Whether it’s all in one account or not, not all of it is mine. Some has to go to expenses and tax whether I like it or not. I may as well be prepared for that.
Now, when a bill comes in, I know which account I’m paying it out of and I know the money is there already, set aside just for that purpose.
By paying myself first, I know exactly how much money I can freely enjoy and not have to worry about the rest. It’s taken care of. Ready to go.
When tax time comes, I have plenty set aside to cover it and to lessen the pain of handing that money over, I get a bonus from my profit account.
It was a bit scary at first, but like most scary things, it’s worth it.