Sometimes the most important business ideas are the simplest. Focus on leads, not sales. Don’t sell products, provide solutions. Start small, build big. As for profitability, you can sum up why that matters in just one word: Stability.
Being profitable means your company can continue to offer its valuable services, even during challenging times. Being profitable means that you, your family, and your employees can maintain their lifestyle, come what may.
“The truth is, Profit First is a concept I wish I had when I began my entrepreneurial career,” explains Rachel Siegel, CPA. “But now that we’ve incorporated it into Go Figure, and shared it with a few of my clients, I’m confident it can help all small businesses improve the overall health of their company. And be profitable. Because let’s be honest: in business we want to be profitable.”
What Is Profit First?
Essentially, Profit First is a book about cash management, but in reality it’s so much more. Authored by Mike Michalowicz, it describes both a philosophy and a system for building businesses in a sustainable way that creates long-term success.
How do we do that? By flipping a universal rule on its head.
The GAAP or Generally Accepted Accounting Principle is Sales – Expenses = Profit. In the formula, profit is a leftover, a final consideration, something that is hopefully a nice surprise at the end of the year.
Profit First is mathematically the same, but it employs a shift in behavior: Sales – Profit = Expenses. With Profit First, every single time revenue comes into your company, you set aside a predetermined percentage of that revenue as profit. You transfer that profit to an account in a different bank, and you watch it accumulate.
Once you realize that your profit should be allocated before distributing money to rent, utilities, overhead, and other bills, the rest is easy.
It’s basically the envelope method for personal finance, applied to business. Profit First is designed to provide clarity around your cashflow, allowing you to make informed decisions rather than emotional reactions or inaction.
Mindset Reset
We think of expenses as unavoidable—cost of material, for example. Rent, salaries, utilities, and so on seem equally intractable, at least in the short run. If we didn’t need to spend on something, we wouldn’t, right?
Not really. In fact, as humans we naturally focus on things that come first, and when profit is at the end of the equation, we seek to increase it by increasing the front—the revenue.
Reducing expenditure is something that simply doesn’t happen, and it may not seem feasible in growing business. The practice of setting aside a percentage of profit and spending only what remains is what makes Michalowicz’s concept work. Expenses actually can be avoided, eliminated, or budgeted for a later date. Doing that can be uncomfortable, of course. It may mean some spending for equipment or expansion doesn’t happen immediately. Sometimes, difficult decisions about people and positions must be made.
Despite those hurdles, and the current bigger-faster-now culture, Michalowicz says that a profit-first approach is actually growth-friendly. When you come across a unique opportunity that will add to revenue and profits to your business, you will have the resources to invest without endangering the current business.
Benefits for Your Business
Rachel explains it this way: “If your company isn’t where you would like it to be and cash is not readily available, it is because you are not managing cash well. Small steps will get you to that goal. And that’s how Profit First works—with small steps.”
Most of the clients who come to Go Figure typically have one, maybe two bank accounts for all of their finances. According to Rachel, when you’re looking at one large lump sum in your bank account, you’re much more likely to spend freely because everything feels like a small sum of the whole account. But if you separate all of your income to pre-determined allocations based on percentages, you force yourself to think more critically about your spending!
The book recommends setting up five foundation accounts to start, but Go Figure suggests starting with two.
Make a savings account in your existing bank and then allocate 1% of your income to that account, the profit account. The logic here is if you bring $1,000 of income this week, you can certainly run your business off $990. Ten dollars seems arbitrary, right?
Then we move to two or three percent. You can run your business on $980 or $970. If you do that for a few months, and grow your profit account, the pain point feels nonexistent and yet you have an entire account that’s just profit. And suddenly, Profit First seems completely logical and you’re ready for more foundation accounts, a.k.a. envelopes.
Your exact percentages will depend on your business structure, type of business, and current financial situation, but let’s use this example:
- 30% Owner’s Pay
- 10% Debt
- 35% Expenses
- 15% Tax
- 10% Profit
Twice a month, the money coming in is divided by the percentages you have calculated and allocated to its applicable account to be used only for its specific purpose.
Go Figure uses Profit First to manage their finances, and so do a number of other clients, including Dr. Scott Colonna of Westminster Eyecare and UpperCut Consulting. “We’re so excited to be able to bring this idea to more and more small businesses, especially those facing challenges in the current economic climate,” says Rachel. “Even though we’ve just launched the program last month, we’ve done the assessment for a few different clients and they are all seeing the results. It’s amazing the difference one small percent can make, even after the first quarter!”
The true and greatest benefit of the Profit First Method: the ability to create real, tangible improvements in your finances—both personally and professionally—on an ongoing, scalable, and sustainable basis.
Want to learn more about Profit First and how it could work for your business? Contact us today at gofigureaccounting.net/profit-first.
