Our passion is helping small businesses become more profitable. We utilize this cash management process because their system truly aligned with our vision, mission, and core values. The Profit First Philosophy is radically changing the way entrepreneurs think about revenue, expenses, and profit, linking to one of our core values: Innovation.
Traditionally, the formula for determining profit is Sales - Expenses = Profit, which is a simple Generally Accepted Accounting Principle (GAAP) formula. However, it does not account for human behavior, in this equation "profit" is considered what is left over from your expenses.
The Profit First formula is Sales - Profit = Expenses, which is mathematically the same formula, but changes your mindset of profit and expenses. Using the Profit First Cash Management System, a percentage of the profits are taken from sales before you pay expenses. Profit First uses Parkinson's Law as an asset, meaning that if the money available for expenses is reduced, then the business will be forced to do the same things for less money.
Managing the financial aspect of a business is difficult and requires knowledge to interpret many different financial statements, including: The Income Statement, Balance Sheet, and Statement of Cash Flows. The issue is that most people do not understand how to interpret the data on the financial statements and resort to "bank-balance accounting", which means that you check the balance daily and use the balance to make financial decisions. Profit First utilizes the "bank-balance" method by moving a portion of deposits into different accounts for expenses, taxes, owner's pay, and profit.
By creating many different bank accounts and a simple formula, business owners can take a percentage of deposits for each account and still use the "bank-balance" method, but cut costs throughout the company. Utilizing Profit First can help increase the financial health of your company.
Let us prove that the Profit First Philosophy works! Schedule a free profit maximizer session using the link below. We will assess where you currently stand and provide you with actions that you can use immediately to increase profits.
This session is completely free!
We are confident that we can provide you with value that will help you grow your profits.
The four core principles are using small plates, changing the meal sequence, removing temptations, and building a rhythm. Profit First can help businesses implement this system and reach their financial goals.
Use Multiple Bank Accounts to Manage Money
The Profit First system encourages businesses to use small plates when it comes to their finances. This means that instead of taking a large portion of the sales and allocating it towards expenses, taxes, owner's pay, and profit, the business should divide up the money into smaller portions. This will help ensure that each area is receiving its fair share of the profits and that no one area is being over or underfunded. Additionally, this will help prevent businesses from spending too much on one area and not enough on another.
Change the sequence you use your Cash
The Profit First system encourages businesses to change their meal sequence when it comes to their finances. Instead of paying expenses first, the business should take a percentage of each deposit and allocate it towards profit before allocating money for expenses. This will help ensure that the business is making a profit and that it is not spending more than it can afford. Additionally, this will help prevent businesses from overspending on expenses and not having enough left over for profits.
Remove Your Profit and Tax and Place in Separate Bank
The Profit First system recommends that businesses put their profit account and tax account allocations in a separate bank to keep them from overspending and so that they are not dependent on external funding sources. This will help them stay profitable without putting strain on their finances. Additionally, this will help them stay organized and on track with their financial decisions.
Build a rhythm to allocate your cash
The Profit First system encourages businesses to build a rhythm when it comes to their finances. This means that they should establish a regular schedule, such as the 10th and 25th, for allocating funds towards expenses, taxes, owner's pay, and profit. Mike Michalowicz also recommends that a profitable business take the profit distribution on a quarterly bases. Having a regular schedule for allocating funds will help businesses stay organized and on track with their financial goals.
Real revenue is the lifeblood of any business. It is the money that allows a business to pay its bills, invest in growth, and provide a return to its owners. However, it is important to understand that not all revenue is created equal. After taking out the cost of materials and subcontractors needed to perform a service, the remaining cash is what makes up your true operating expense budget.
By understanding your real business revenue, you can make better decisions about how to allocate funds for expenses, taxes, owner's pay, and profit. Additionally, this will help you stay organized and on track with your financial goals and avoid unnecessary expenses. Profit First encourages businesses to use their real revenue as the basis for allocating funds and setting up a rhythm for their finances.
The Profit First system recommends that businesses allocate a certain percentage of their income to each area of their finances. This includes expenses, taxes, owner's pay, and profit allocations. The book Profit First identifies various Target Allocation percentages (TAP) which will vary depending on the revenue of the business. Working with our team, we identify a strategy that can move your businesses current allocations to that of the TAP for your business size.
Profit First system is a great way for businesses to ensure that they are making a profit and staying organized with their finances. By taking a percentage of each deposit and allocating it towards profit before expenses, businesses can prevent themselves from overspending and not having enough left over for profits. Additionally, by putting their profit and tax allocations in a different bank account and establishing a regular schedule for allocating funds, businesses can stay organized and on track with their financial goals.
Interested in learning more about the Profit First? Schedule a call.