Profit First is a method of keeping your books. But, how does Profit First help your business? It will help your business in two ways. First of all, businesses that use Profit First set up segregated bank accounts to which they allocate funds twice a month. These funds are for profit, owner’s pay, taxes, operating expenses and other categories as needed. Then, the Profit First method is used to instill financial discipline into a business. Businesses that use this approach start banking a profit from day one and gain better control of their budgeting, cash flow management, and previously-hidden costs.
Running a business is difficult. A business owner needs to stay on top of sales of products and services as well as making improvements in their product line. There are always all sorts of personnel problems to attend to, marketing issues, legal and compliance matters, and maintaining good client relationships. Along the way, managing finances often tends to slip by the wayside and, so long as there is some money coming in, profit is a passive matter determined by a whole host of factors. And, for the busy businessperson, those factors that determine profit are too often hidden or seemingly beyond control.
A business owner goes into business to be their own boss and to make more money than they would by working for someone else. Unfortunately, the reverse often tends to be the case. The business becomes a slave to finances and money is all too often quite scarce. To the degree that this picture fits your business, your business needs Profit First.
The first step in the Profit First method is just what the name implies. You will take your profit off the top, twice a month. Your profit, your owner’s pay, money for taxes and operating expenses go into Profit First Bank Accounts. These allocations take place twice a month and can be adjusted as need be. However, the key to success in Profit First is discipline, so most businesses allocate on the tenth and twenty-fifth, don’t vary the dates, and don’t vary the amounts.
Unlike the traditional bookkeeping approach that starts with income, subtracts expenses, and comes up with profit (or loss), Profit First takes income, subtracts your profit, and then expenses are left over. Thus profit becomes a habit and not happenstance.
When a business starts treating profit as a habit, or perhaps a right, something happens that may seem like magic. The profit is always there and other expenses, that can be cut, come to light.
Decades ago a British naval historian and former civil servant, C. Northcote Parkinson, made an observation that was published in The Economist in 1955.
Work expands so as to fill the time available for its completion.
This pithy observation has been expanded upon with numerous “corollaries” to the effect that not only do more and more workers on a project fail to get things done any faster but also the amount of money budgeted for any given task tends to be used up and then some. Even former Soviet Premier Mikhail Gorbachev noted that “Parkinson’s Law works everywhere.” (Wikipedia: Parkinson’s Law)
The point of this little digression into history is that no business is immune from the hidden expenses caused by the dual tendencies for work to “expand” and budgets to be used up in their entirety.
Businesses that diligently apply the Profit First method and allocate money to bank accounts twice a month are removing the “cushion” of variable profits that allows inefficient and costly business processes to hide in plain sight. And, because your “cushion” is gone, you need to track down and get rid of the inefficiencies that have been stealing your profit!
Here is where you will find yourself using tools like QuickBooks Custom Reports or business intelligence software tools like QBAR, Pivot Point, QQube, or Spotlight Reports. It also may be the point at which you choose to outsource your bookkeeping.
When all your bookkeeping does is generate column upon column of numbers, you gain no insight from your reports. Business intelligence software allows a business owner to pull out and inspect information that was “hidden” in all of the numbers. It really becomes a matter of being able to see the forest despite all of the trees!
There is no guarantee of a profit when you are in business. Likewise, there is no law (except perhaps Parkinson’s Law) that says you need to eek by with a tiny profit every month. At Exigo Business Solutions we are the top accounting firm in the Kansas City area. We deal with clients both locally and from coast to coast. And, maximizing your profits is our passion! We are Profit First Professionals and have been helping our clients turn so-so profits into stellar profits for years. From our years of experience, know that there are no “cookie-cutter” or “one size fits all” approaches to guarantee success. So, our approach when you contact us is to evaluate your needs, develop the best strategy, work closely with you to implement that strategy, and then stand by you as you maintain your profits and control your budgeting and cash flow.
All successful journeys start with the first step. In the case of Profit First, that is setting up the bank accounts, then the allocation routine as part of your budgeting, and finally the system for ferreting out the hidden costs of Parkinson’s Law so that your profits can soar! For help with implementing Profit First and optimizing it for your best profits, work with the Profit First Professionals at Exigo Business Solutions. It really is our passion to help you gain the best profits possible!