Profit First works as a method for improving your business practices as it helps you sock away profits. It does this because Profit First is built on an understanding of human nature. Because Profit First understands human nature is why profit first moves money twice and addresses the negative effects on your business of Parkinson’s Law. When you learn from our Profit First Certified Masters in Exigo Business Solutions, you will understand how Profit First does this to the betterment of your business. But first, just why does the Profit First method move money twice.
When you use the advanced method of Profit First you will have at least five bank accounts and probably several more. You may also have accounts at separate banks. A standard practice in the Profit First advanced method is to transfer money from the income account to the profit account at the same bank on the tenth and the twenty-fifth. Then, almost immediately, the money in the profit account is moved to a profit account at a separate bank. Here is why Profit First moves money twice in this instance.
The first transfer at the same bank is virtually instantaneous and allows you to see at a glance where the money is in your various accounts and for what purpose it is intended. Knowing human nature, you want to make this transfer right away before other needs come to mind and you are tempted to divert the “profit transfer” elsewhere for other uses. And also, knowing human nature, it can be too easy when that money has been transferred to another account at the same bank to transfer the money again to another account and for another purpose. Both of these actions, of course, would defeat the bedrock purpose of Profit First which is to routinely take a profit, put it away, and watch the profits grow.
So, there is a second bank transfer from the profit account at the first bank to a profit account at the second bank. While the first transfer is immediate and allows you to see in real time where your money is, the second transfer may take a day or two during which time the money “disappears” from view at both banks, except as a note in the bank transfer section.
While the money is “in transit” any temptation to use it for purposes other than profit is gone and when the money “arrives” at the other bank, in a savings account with limited transfers allowed each month, it is safer from any weaknesses brought on by human nature. The old saying, “out of sight, out of mind,” certainly applies in this situation and is an example of how Profit First helps protect a business owner from the perils of human frailty.
Certainly, over the years, many have observed how work does not get done until there is a deadline or pressure exerted by the boss on the workers. However, it was a person who had spent time as a British Civil Servant who put this into words back in the middle of the twentieth century.
C. Northcote Parkinson wrote in the British journal, The Economist, in 1955 that "work expands so as to fill the time available for its completion". The article is a fine example of dry British humor mixed with useful insight into why organizations end up having more and more employees and spending more and more money while not accomplishing any more useful work than when they had fewer employees and less funding.
Over the years many “corollaries” have been added to Mr. Parkinson’s “Law” to the effect that the money spent on any given project will invariably rise to the amount initially budgeted, or beyond.
As Mr. Parkinson observed long ago, none of this is done with ill intent. It is simply human nature at work when insufficient management is applied to the task at hand.
Let’s say that in developing a marketing plan for produce A or service B, you assign a team of four people, allot $10,000, and give them a month to report back. When the month is up they will have spent the $10,000, collected their salaries, and come up with a serviceable marketing plan. And what would have happened with a $20,000 budget or assigning eight people to the task, or giving them two months to accomplish the task. If you understand how Parkinson’s Law works, as the Profit First system does, you will know already that all the money will be used up, all the people will have been paid for their time, and the job will get done on time, in two months! Knowing this you may wonder what would have happened with two people assigned to the task, $5,000 to work with, and a timeline of two weeks!
It is always easy in hindsight to see how some actions in business are wasteful but to be able to see these things as they happen or to be able to predict and avoid waste requires attention to detail and effective tools. At Exigo Business Solutions we train our clients in the use of the best small business accounting software, QuickBooks and create tools like QuickBooks Custom reports or even help them use even more advanced business intelligence solutions.
Using our “marketing plan” example, we could “game out” various solutions based on our own business experience with the goal of getting the best marketing plan, within reason, with a reasonable length of time, assigning a reasonable number of workers, and a workable but not excessive timeframe.
When Profit First allots money to profit, taxes, owners, pay and the rest, there is not an unlimited amount of money left over. This forces the business owner, using the right tools and with the help of folks Exigo Business Solutions, to optimize the time and money budgeted for various business tasks, track the results and further optimize as time goes on. There is no “end result” to this activity but rather a steady improvement in business efficiency and a steady increase in profits.
If you still have questions or are interested in implementing Profit First in your business, visit our website, ExigoBusiness.com, or contact us at (816) 394-6818.
Click here to watch the YouTube video about why Profit First moves money twice.