Why don’t you let us crunch those numbers so you can get back to the finer things in life.
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Frequently Asked Questions
Should Profit First be done retroactively?
No. The allocations start the day you implement Profit First, with your very next deposit. You don’t do anything retroactive. So the money in your accounts currently just stay where they are (probably in one checking account). You setup Profit First with all new accounts at this same bank, but don’t use the existing checking account with all the money currently pooled up in it as one of the Profit First accounts. Then you start doing Profit First allocations with the next deposit and follow the process. You handle the money that is pooled up in the prior account as you normally have been… until that money is fully drain (to $0.00) over time. Then you can close the account or use it for another profit first account. Expenses that are fully for the owner’s benefit (leasing a car, club membership or something) would be paid out of the Owner’s Pay account…since it is an owner benefit. But since it is paid by the company from that account, for tax purposes, it still acts like an expense.
Can I implement the Profit First system before my business is profitable?
Always start right away. By implementing the system you will force profitability (not wait for it). Start at a low percentage… maybe 1%, but get started NOW!
Can I use Profit First to identify a good business to buy?
Yes!!!! Do an Instant Assessment on them. It shows what needs to be “corrected” in the numbers. Less correction = Better buy.
My business is a brand new startup. When should I implement Profit First?
Immediately. In fact the sooner you start with Profit First the sooner you will master financial discipline and force your business to run efficiently. No matter how new or established your business is, you should not wait to implement Profit First.
My business has debt. Is it true it can’t be profitable until I pay off all my debt?
Wrong. In fact, the only way to pay off debt (which is simply past expenses that you haven’t paid for yet) is to be profitable. You must currently make more than you are currently spending, so that you have current profits. Then you use those profits to pay off your debt (past expenses).
I have multiple loans and forms of debt. How do I pay it all off?
Pay all the minimum fees out of your Operating Expenses. Then use any remaining money you have in Operating Expenses (after paying other bills) to pay off your smallest debt as fast as you can. No matter what keep doing the profit allocation of Profit First every 10th and 25th. I know this sounds crazy, since you have debt to pay… but you MUST build up that habit of always taking your profit first. Then when you do your quarterly profit distribution, take 95% to 99% of that distribution money and use it to crush one of your debts. The remainder (5% to 1%) is used for you to celebrate. This process has you constantly chipping away debt (from Operating Expenses) and then quarterly hitting that debt really hard. It is kinda like boxing… jab, jab, jab then a massive right hook.
I have lots of debts including credit cards, personal loans, and banks loans. Some are very high interest rates. Which debts do I pay first?
While logically you want to pay off your highest interest rate loans first, Profit First is all about leveraging human behavior. One of the critical behaviors is “early successes.” When we see early, even if it is small, progress in our management of money, we become more committed to the process. In regards to debt, Dave Ramsey (author of The Total Money Makeover) suggests a technique that is in perfect alignment with Profit First. The process is simple. First sort all your debts from smallest amount due to largest. Then put all your financial effort in eradicating the smallest debt (in dollar amount) first, while maintaining the minimums due on all other debts. Then once the smallest debt is paid off, target the next smallest debt on your list. Wipe that out, and then hit the next. This will build a series of “early successes” and create a “snowball effect” as more and more money is freed up (as the small debts are paid off) to target the remaining debts.