If you’re a small business owner, you’ve probably heard of the Profit First system. But what exactly is it, and how can it make a difference in your business? Let’s break it down in simple terms.
What Is the Profit First Method?
The Profit First method flips the traditional business model on its head. Normally, we think of the equation:
Sales – Expenses = Profit
In this model, profit is whatever is left over after all your expenses are paid. But here’s the catch: for many small businesses, there’s not much left at the end of the day. This is where Profit First comes in and changes the game.
Profit First changes the equation to:
Sales – Profit = Expenses
Sounds simple, right? But this small tweak can make a huge difference. The idea is to prioritise your profit. You take your profit out first, and then what’s left is what you use to cover your expenses. It forces you to be smarter and more efficient with your spending.
How Does It Work?
Here’s how you can start using the Profit First system in your business:
Step 1. Set Up Multiple Bank Accounts*
The first step is to set up several bank accounts, each for a specific purpose:
- Income Account: All your sales revenue goes here.
- Profit Account: A percentage of your income goes directly into this account.
- Owner’s Pay Account: This is where you put the money you’ll pay yourself.
- Tax Account (GST & BAS): Set aside a percentage for taxes, so you’re not caught off guard come tax time.
- Operating Expenses Account: What’s left over after allocating to the other accounts goes here.
* These are examples and should be tailored to your particular circumstances. Book a call with us or speak with your bookkeeper or accountant.
Step 2. Allocate Income
When money comes into your Income Account, you distribute it across the other accounts based on predetermined percentages. This way, you’re ensuring that profit and taxes are always covered before anything else.
Step 3. Reduce Expenses
With the Profit First system, you’re forced to operate your business with the money left in the Operating Expenses account. This constraint encourages you to cut unnecessary costs and find more efficient ways to run your business and can find multiple areas for efficiency or where you’re wasting money.
Step 4. Distribute Profits
At the end of each quarter, you can take a portion of the money from your Profit Account as a reward. This isn’t just extra cash; it’s a way to reinforce the habit of putting profit first.
Why It Works
The Profit First system works because it aligns with human behavior. It’s easy to fall into the trap of spending whatever’s in your account. By setting up multiple accounts and allocating funds before they’re spent, you’re essentially tricking yourself into saving and ensuring profitability.
It also brings clarity and discipline to your business finances. Instead of wondering where all the money went at the end of the month, you know exactly how much is allocated to each area of your business.
Is It Right for Your Business?
Profit First isn’t just for struggling businesses; it can be a game-changer for any small business looking to be more profitable and sustainable. If you find yourself constantly worried about cash flow or struggling to turn a profit, this system could be exactly what you need to regain control.
Getting Started
Implementing the Profit First system might take a little work upfront, especially in setting up those bank accounts and figuring out the right percentages. But once you’re up and running, it becomes a simple and effective way to ensure your business is always profitable.
So, why not give it a try? Start small, make adjustments as needed, and watch as the Profit First system transforms your business finances. After all, profit isn’t just a bonus—it’s the foundation of your business’s success!
Retriever can help make the management a whole lot easier by automating your Profit First Allocations. You’re always in control and can adjust the percentages being split at any time. Contact us for more information or Book a call with us today to find out more.