Starting out as a business owner can be a tough decision. It can also potentially be a very difficult path. You must find ways to expand your business, because competition is everywhere. But how can you do this when you’re already stretched thin with revenues? This is where the Profit First method comes into play.
What is Profit First
Profit First is a revolutionary accounting system that takes money out of your business to pay yourself first. It’s an easy-to-understand system that helps you maximize profits, pay yourself faster and improve cash flow.
It’s simple but it works!
This simple system forces you to spend less than the revenue coming into your business so that there is always enough money left over to pay yourself first. By paying yourself first, you will become less reliant on income from your business and have more financial freedom.
How to implement Profit First
A lot of people are familiar with the idea of Profit First and how it can help businesses become more profitable. But how do you actually implement it?
Here are some tips to help you get started:
TIP 1 : Come up with a personal minimum cash flow target.
This is the amount of money you want to see coming into the business each month before expenses are paid. For example, if you need $1,000 per month in cash flow before paying yourself, then that’s your target number.
TIP 2: Calculate what percentage of your monthly revenue goes toward paying yourself as an owner or partner.
This is called owner take-home pay and is typically around 20 percent for small businesses and up to 50 percent for larger companies (depending on how much money needs to be invested back into the business). As an example, if your monthly revenue is $10,000 per month, then 20 percent would be $2,000 per month and 50 percent would be $5,000 per month.
TIP 3: Subtract your personal minimum cash flow target from your owner take-home pay amount (step 2).
The remaining amount will be left over as profit that can be used for reinvestment into your business or distributed among partners/owners (including yourself)
Profit First works for all businesses
Whether you’re a startup or a multi-million dollar business, Profit First can help you. The reason is simple: Profit First forces you to be more intentional about how you spend money.
It’s easy to spend money if you don’t see it coming out of your bank account every day. You might not even realize how much you’re spending on things like coffee, lunches and snacks when they aren’t taken out of your paycheck every week.
With Profit First, it’s impossible to ignore where your money is going because the system requires that you transfer a set amount into your savings account at the end of each week. This means that any time you spend money outside of this transfer (on anything), you’re literally taking money out of savings and putting it back into your checking account — making it impossible for you not to see what’s happening with your finances on a daily basis.
Why is Profit First necessary?
A business owner may think that the best way to increase profits is by increasing revenue. This makes sense because it’s always easier to make a profit when you have more money coming in than going out. In fact, this is one of the reasons why so many businesses fail. They make the mistake of focusing on revenue but not expenses.
Think about it this way: if you had no expenses at all, you would have unlimited profits! But unfortunately, most businesses do have expenses so they have to focus on them instead.
The problem with focusing on revenue first is that it can lead us down a slippery slope towards financial ruin if we aren’t careful.
For example, let’s say that sales are down for the year and your expenses are higher than expected due to increased utility costs or payroll taxes. You might decide to take on more debt or cut salaries in order to cover these costs which will only make things worse from an overall profit standpoint because now both revenues and expenses are lower than expected or budgeted for for that year – or perhaps even worse – there will be no profits at all!
Who can benefit from using the Profit First Method?
The Profit First Method is a system that can work for any business, regardless of its size or industry. It works for service-based businesses and product-based businesses alike. It works for brick-and-mortar businesses, online businesses and mobile businesses. It works for companies with one location or multiple locations.
If you have employees, Profit First can help you manage their payroll more efficiently. If you’re an entrepreneur working alone, it will help you manage your own finances more efficiently as well.
It’s easy to see how this tool could be useful for any business owner who wants to take control over their money management practices.
Profit First has a lot of aspects to it, and it’s definitely a lot to take in at first. It’s a whole new philosophy that’s based on ideas you might not be used to thinking about (let alone putting into practice).
But if business owner like you is determined to change financial outlook for the better, implementing Profit First can help make more money by investing in what matters most.