Profit First is a simple, practical and even fun money system to manage your cash flow and gain more profit. When I started using it a few years ago, it changed my business. It changed the amount of money I pay myself and, maybe even more importantly, it changed the flow in which I paid myself.
Profit First – the basics
Profit Frist comes from Mike Michalowicz. He literally wrote the book on it. The principle of Profit First is that money comes in on your ‘received money’ account. From there you divide it over several different categories:
- Pay – from here you pay yourself the same amount each month
- Taxes – meant to pay taxes for your business to the government
- Profit – profit is split into 2 every quarter, half goes to you as a business owner, the other half to Profit Savings. Your Profit Savings are for emergencies or significant unexpected expenses.
- Expenses – this is where you pay expenses from (not the received money account!)
I do this after I have moved money over to my fifth category: VAT. This way, I always know I have enough money for my VAT returns that I need to do quarterly.
How the money is divided amongst those four categories depends on the amount of taxes where you live and how much revenue you make. In the book, Mike gives several examples and teaches you how to calculate your ideal percentages. How that does NOT work is that you start by saying: I have x amount of expenses, I owe x amount of money in taxes and the rest will be divided into profit and pay. No, Mike talks about how you need to set your percentage for salary first. And then if there is not enough money for your expenses coming in, you either need to make more money, or you need to cut the costs.
Other ‘rules’ of Profit First
There are a few other rules to Profit First that make it work:
- You work on your system twice a month on set days. I have it set on the 10th and 25th. On that day, you see what came in in the ‘received money’ account, you move money to the different categories, and you pay invoices from your expense account.
- Use a different bank or savings account for each of the categories (and one for Profit Savings)
Starting when you already have a business
I would recommend starting immediately with Profit First, if you are a new entrepreneur. I think it’s easier if you start immediately because you don’t have a set amount of expenses yet. You can grow into the system as you go.
But for most of you, as it was for me, you will find this when you already have been in business for a while, and you need to make it work.
How I started was by setting an intention of where I wanted to get my percentages. But I also calculated how my percentages were right now. And instead of starting with my ideal percentages immediately, I changed my ‘current’ ones slightly (towards my ideal percentages) and did that for a month. Then I changed them slightly again. That way, I got to go through expenses (do I need to pay for this?) and lower that amount while slowly upping my pay and my profit.
Why Profit First rocks
The reason I love Profit First and tell as many entrepreneurs as I can about it is that it gives you great structure. And instead of the old ‘revenue – costs = profit’ you move to ‘revenue – profit = costs’. Your focus moves from costs to profit, and that means you make more money.
You get so much more knowledge about your state of affairs when it comes to both your revenue and your profit. You also become more aware of which products and services do great or which are not so profitable.
Want to start with Profit First now?
The easiest way to start is by adding a ‘profit’ account and just saving 1% of all revenue to that account. Each quarter you pay half of that to yourself. Just that will make such a difference in how you perceive money, money systems ánd your business!