By Better Biz Info | A Profit First Professional Firm | Profit First in Kansas City, Missouri 

Profit First is a proven cash flow system that has been implemented in over 500,000 small businesses. Read on to understand the basics of what Profit First is and why it works. 

You started your business expecting to take a profit after all your hard work. If you’re in a position now when you are still struggling to see sustained profit in your business, then this system is for you. The Profit First cash flow system organizes and manages your finances in such a way that will increase profits, cut expenses, and reduce the stress of operating a business!

Profit First is a cash flow management system developed for small business owners by small business owners. It was founded by Mike Michalowicz, and asserts that you, as the owner, should be rewarded for your hard work and take your profit first! It takes many of the strategies that Dave Ramsey suggests for personal finances, and applies them to business finances.

The system splits your revenue into separate business accounts (Profit, Tax, Owner’s Comp, and Operating Expenses). You regularly allocate a pre-determined percentage of your revenue into each of these accounts, starting with Profit, and watch as the balances grow.

After implementing the system, you will have set aside more money for profits, be better prepared for your tax liabilities, and you will learn to cut expenses across your business.

The Profit First formula: 

The GAAP (Generally Accepted Accounting Principles) formula for determining a business’s profit is Sales – Expenses = Profit. It is simple, logical and clear. Unfortunately, it’s a lie. The formula, while logically accurate, does not account for human behavior. In the GAAP formula profit is a left over, a final consideration, something that is hopefully a nice surprise at the end of the year. Alas, the profit is rarely there and the business continues on its check-to-check survival. With Profit First, the GAAP formula of…

With Profit First you to flip the formula to Sales – Profit = Expenses. Logically the math is the same, but from the stand point of the entrepreneur’s behavior it is radically different. With Profit First, you take a predetermined percentage of profit from every sale first, and only the remainder is available for expenses.

Parkinson’s Law: 

Author and historian C. Northcote Parkinson theorized that our demand for a resource increases to meet the supply of it. That is why when we are given two weeks to do a project it takes two weeks, and when we are given eight weeks to do the same project it takes eight weeks. That is also why when given $1,000 to complete our work we get it done with $1,000 and when given $10,000 to complete the same work, it takes $10,000.

Profit First makes Parkinson’s Law an asset. By taking profit first, the money available for expenses lessens, and we are forced to find ways to get the same things done for less money.

Profit First encourages the entrepreneur to continue “bank balance accounting” by first allocating money to profit (and other accounts) so that the entrepreneur sees the actual portion of deposits that are available for expenses and they automatically adjust their spending accordingly. It creates multiple pots so that you can spend everything in your operating expenses account without having to worry about taking a profit, because you’ve already taken it!

Leveraging Your Habits:

Many entrepreneurs try to force themselves to become better at accounting and to become more disciplined in their fiscal management by pure willpower. But just like a muscle, willpower can be drained. And in a moment of financial stress or bigger than expected expenses the entrepreneur will break their own fiscal rules and spend the money they have.

The Profit First principle does not try to change your habits (that is nearly impossible to do), Profit First works with your existing habits. By first allocating money to different accounts, and then removing the temptation to “borrow” from yourself, your business will become fiscally strong and you will benefit from regular profit distributions.

1. Set up the 5 key bank accounts (Income, Profit, Tax, Owner’s Pay, and Operating Expenses).

This is usually the hardest step, but it is so worth it. One of our clients said that just having these accounts made her feel like she had way more money and helped her manage her cash flow much better. 

2. Determine your TAP (Target Allocation Percentages)

We will do an Instant Assessment for your business to determine what percentage of your income should go into each account. We will then set up a schedule for when to perform transfers/allocations into these accounts. 

3. Perform your allocations

Per the schedule you created, you'll transfer money from your income account to your other accounts on a regular basis. The amount you transfer is based on the allocation calculator that we have configured for you. 

4. Pay Your Bills with what remains in the Operating Expenses account

What is left in your operating expenses after each allocation is what you have to pay all your operating costs until the next allocation. This allows you to set aside money for things like Profit first, and reduce your spending on unnecessary expenses. If you don’t have enough to buy something, this forces you to be creative and find other ways to pay your bills or cut them down.

5. Take a quarterly profit bonus

Each quarter, you will take some of your profit account and pay yourself as a Profit Distribution. This is a bonus to you as the hardest working employee in your business and a reward!

Real Benefits of Implementing the Profit First System

This proven system has helped thousands of business owners see more cash in their pocket and achieve financial freedom in their business. I encourage you to really think about what you want from your business, and if you would like to see more profits, finally get paid, and have a cash flow that works for you instead of against you--Profit First is the system for you. If you're looking for a way to increase profits and reduce the stress surrounding your finances, schedule a free profit call with us today!

I've heard this question dozens of times. And my answer is always the same. The Profit First system is simple. But implementing it, sticking with it, and being accountable to it is something that you can't do on your own. I have seen very very few business owner successfully implement Profit First on their own. Not because it is an overly complicated system-but because having a Profit First Professional to guide you, help you shift your mindset, and keep you accountable makes all the difference. Check out this video from the founder, Mike, explain this more. So please, please give us a call to see how we can help you implement this amazing system in your business!