Putting Your Profit First: Transforming Your Business Finances with the Profit First System

I've always prided myself on my ability to steer clear of massive debt. With no credit cards and a penchant for saving up for purchases in cash, I thought I had my financial game on lock. However, I soon realised that while I was adept at avoiding debt, I struggled with saving money. It seemed like no matter how much I accumulated, I always found a way to spend it.

Recently, I stumbled upon a remarkable book called "Millionaire Mind," which shed light on the reasons behind my spending habits and how to reframe my mindset to foster wealth growth. Intrigued by the possibilities, I decided to explore further and discover practical strategies to not only save but also maximize profits in my business.

As a dog trainer, I understand the ebb and flow of work. It's normal for the demand to fluctuate, but it can also lead to periods of financial stress when business slows down. That's why it's crucial to proactively prepare for those lean times and create a financial safety net. Experts recommend having an emergency fund that can cover at least three months' worth of operating expenses.

However, every time I attempted to establish a savings account, I found myself trapped in a cycle of growth and subsequent depletion. It was a rinse-and-repeat pattern that hindered my ability to secure a stable financial foundation.

Amidst my search for effective financial strategies, I kept encountering recommendations for a book called "Profit First" by Mike Michalowicz. When successful entrepreneurs vouched for its transformative impact, I knew it was time to take it seriously. So, I made the decision to delve into the book and explore the profit-first approach.

I'll admit that when I initially started reading "Profit First," I wasn't fully committed. Some chapters felt tedious, and I found myself tempted to put the book aside. However, as more and more people raved about the system's effectiveness in improving their businesses, I realized that sometimes the best things for us aren't always the most exciting. With renewed determination, I finished the book and decided to implement the profit-first system into my own business.

Traditionally, small business owners follow a common approach to managing their accounts. All income flows into a business bank account, ideally separate from personal expenses. When business-related expenses arise, we hope that we haven't impulsively spent the necessary funds on personal indulgences. It's a delicate balancing act, often leading to delayed payments or last-minute scrambling when money intended for business expenses is no longer available.

The Profit First system introduced in Mike Michalowicz's book revolutionizes this conventional approach to business accounting. Instead of allocating expenses from sales income and considering whatever is left as profit, Profit First reverses the equation:

Sales - Profit = Expenses

This simple shift ensures that your business generates profit before allocating funds to cover expenses. After all, without profitability, the purpose of having a business diminishes.

To implement Profit First, you need to set up different accounts to manage your business finances effectively. While the exact configuration may vary depending on your specific circumstances, the primary objective remains the same: to allocate funds before expenses arise.

Income Account: This serves as the central hub for all incoming money, from which you distribute percentages to various allocations.

Operating Expenses: This account covers your day-to-day business expenses. It's where you pay for essential costs such as rent, utilities, supplies, and other expenditures necessary to keep your business running smoothly.

Owner's Pay: The owner's pay account is where you allocate funds to pay yourself, ensuring that you receive fair compensation for your hard work and dedication.

Tax: Setting aside money for taxes is crucial to avoid any surprises when tax season rolls around. By allocating funds specifically for taxes, you can fulfil your tax obligations without dipping into other essential business accounts.

Profit: The profit account is where the magic happens. This is where you allocate a portion of your income as profit, which you can withdraw as a bonus or celebration of your business's success. Having a separate bank account for profit ensures that you don't unintentionally dip into those funds.

Materials & Subcontractors: If your business involves selling products or relying on subcontractors, it's important to set aside funds specifically for replenishing stock or paying subcontractors. This account ensures you always have the necessary resources to fulfil orders and maintain smooth operations.

In addition to the allocation accounts mentioned above, it's wise to establish an emergency fund. This fund acts as a safety net to cover your business's expenses for at least three months if unforeseen circumstances or a sudden drop in income occur. Having this financial cushion provides peace of mind and allows you to navigate challenging times without jeopardizing the stability of your business.

Implementing the Profit First system requires establishing a routine for allocating funds. Whether you choose to allocate on a weekly, bi-weekly, or monthly basis, consistency is key. Find a rhythm that works best for you and your business, and stick to it. I personally opted for a weekly allocation system, dedicating specific time each week to manage my finances and ensure the proper distribution of funds.

While you can set up the Profit First system independently based on the book's guidance, seeking assistance from a Profit First accountant can be incredibly beneficial. These professionals specialize in implementing the system and can provide personalized advice tailored to your business's unique needs. I was fortunate enough to find an exceptional Profit First accountant named Phil from Panic Atax. His expertise and support have made managing my finances feel more secure and empowered than ever before.

One of the initial objections I encountered when implementing the Profit First system was the emotional attachment to seeing a large sum of money in a single account. I relished the feeling of abundance and the freedom to spend it as I pleased. However, through conversations with Phil, my Profit First accountant, I came to realize that not all of that money was truly mine. Some of it belonged to taxes, suppliers, and other necessary expenses. Accepting this perspective helped me understand the importance of being prepared and allocating funds accordingly.

The Profit First system teaches us to embrace the reality that not all income is ours to keep. By separating funds and assigning specific purposes to each account, we gain a deeper understanding of our financial obligations and responsibilities as business owners. This system ensures that we allocate funds for expenses and taxes first, safeguarding the stability of our businesses.

One of the significant benefits of the Profit First system is the peace of mind that comes with knowing you have allocated funds ready to cover expenses. When a bill or payment is due, you can confidently draw from the appropriate account, knowing that the money has already been set aside for that purpose. This level of organization and preparedness eliminates the stress and uncertainty that often accompanies financial obligations.

One aspect of the Profit First system that initially concerned me was the approach to taxes. However, by setting aside funds specifically for taxes throughout the year, I now have ample resources to meet my tax obligations without causing undue strain on my business finances. Additionally, as a rewarding incentive, the profit account allows me to withdraw quarterly bonuses to celebrate the success of my business. These bonuses provide a sense of accomplishment and serve as play money to enjoy the fruits of my hard work.

I won't deny that implementing the Profit First system was a bit daunting at first. Change always brings a certain level of apprehension. However, like most things that initially appear intimidating, the rewards far outweigh the initial fear. By prioritizing profitability and implementing a structured financial management approach, I've witnessed remarkable improvements in the stability and growth of my business.

If you're a small business owner seeking financial stability and long-term success, I highly recommend exploring the Profit First system. By reevaluating how you manage your business finances and adopting a profit-first mindset, you can transform your financial situation and pave the way for sustainable growth.

Remember, it's not just about avoiding debt and managing expenses; it's about prioritizing profitability. By allocating funds to profit, paying yourself first, and ensuring that your business is always generating a profit, you set the stage for a thriving enterprise.

Whether you choose to implement the system independently or seek the guidance of a Profit First accountant like Phil from Panic Atax, taking the leap towards putting your profit first will empower you to make sound financial decisions, secure your business's stability, and ultimately reap the rewards of your hard work.

Get your copy of "Profit First" and embark on a transformative journey to financial success. It may be a bit scary at first, but trust me, it's worth it.