Is Profit First for You? Transform Your Business Finances Without Being an Accountant

How not to suck at business finances if you're not an accountant.

Prior to being a Negotiation Specialist, I was a qualified Management Accountant. For 17+ years, I worked in commercial finance for large global corporates, predominantly in the fast-moving consumer goods industry with brands like Coca-Cola, Twinings Tea, and Pataks Indian Curry Sauces, to name a few.

When it came to finance, the profit formula was simple: in a nutshell, it was Revenue - Expenses = Profit

Sure, there was a little more to it than that for global businesses, but you get the gist! However, when I left corporate to start my own business the strangest thing happened, this traditional profit formula didn't work.

Starting out, I didn't have a salary expense - I needed to build revenue before I could consider paying myself. I didn't really have a profit either because what came in would be reinvested in growing the business.

However, I soon realised if I continued to do my finances this way I wouldn't be able to sensibly and strategically grow my business. What I learned is that small business owners need to keep things super simple, and most of them don't know their numbers - a scary realisation!

What was more scary was that I was in the trap of not knowing my own financial position. It wasn't easy without getting my accounting hat on and looking at the right numbers in Xero.

As a business owner wearing many hats, I didn't have time for being a Finance Director 100% of the time. I needed a better solution.

Why 'Profit First' Could Be Your Smartest Move

Created by entrepreneur and author Mike Michalowicz, 'Profit First' challenges the conventional approach and insists that profit shouldn't be what's left over after expenses; instead, it should be the priority.

The formula is Revenue - Profit = Expenses.

This simple yet radical shift in financial planning is not just about numbers; it's about changing your entire mindset towards business finances. I know it completely changed mine.

Why 'Profit First' Matters

Whether you're a seasoned business owner or a corporate executive with a side-hustle, understanding and applying the 'Profit First' principle can set you on a path to more consistent profitability and a stronger business model.

If you don't have a business, remember the same principle can be applied to personal savings and investments.

At its core, 'Profit First' is more than just a method; it's a paradigm shift.

Traditional accounting principles suggest that profit is what remains after all your expenses. But let's face it — in reality, this often translates to little or no profit at all, as expenses tend to expand to consume available income.

'Profit First' turns this equation upside down, ensuring that profit is not an afterthought but a deliberate outcome.

Profit is not optional. Change your psychology to change your results.

One of the biggest strengths of 'Profit First' lies in its psychological impact. When you prioritise profit, you're essentially telling yourself and your business that profitability is not optional; it's essential.

This mindset shift can lead to significant behavioural changes in how you manage and allocate funds. It encourages a more disciplined approach to spending, nudging you to critically assess expenses and cut unnecessary costs.

Profit is your growth fuel; you can't run on empty.

Adopting a 'Profit First' approach can be a key driver of long-term sustainability and growth for your business. By allocating profit first, you not only create a buffer to help your business weather tough times but also lay the groundwork for reinvestment and growth. Whether it's through upgrading equipment, expanding your team, or investing in marketing. Profit is the fuel for growth, and 'Profit First' ensures you're consistently refueling.

Make profit a habit, not a happenstance 

Many businesses treat profit as a happy byproduct of operations. 'Profit First', however, advocates for making profit a habit. By regularly allocating a portion of your income to profit, you’re ensuring that profitability becomes a core part of your business rhythm, not just a sporadic event that happens if conditions are right. 

It's time for action!

Implementing 'Profit First' in Your Business

Step 1: Set Up Multiple Bank Accounts

The foundation of 'Profit First' lies in dividing your finances into clear categories.

Start by setting up separate bank accounts for profit, owner's compensation, taxes, and operating expenses. This separation makes it easier to manage your money and see exactly where your business stands financially. This is similar to the Barefoot Investor separate bank account approach, only for business!

Step 2: Allocate Percentages to Each Account

Next, determine what percentage of your revenue goes into each account. A simple way to start could be allocating 5% to profit, 50% to expenses, 30% to owner's compensation, and 15% to taxes. These percentages can be adjusted based on your business’s specific needs and goals.

Step 3: Use Profit Allocations to Make Financial Decisions

With 'Profit First', profit is not what's leftover; it's your priority. This means after allocating revenue to your profit account, you use the remaining funds to cover expenses. This approach often necessitates cutting unnecessary costs and encourages smarter spending.

Step 4: Regularly Review and Adjust

Consistent review is key. Every month or quarter, assess your financial allocations. Are you meeting your profit goals? Do expenses need to be adjusted? Regular reviews allow you to stay on top of your business’s financial health and make informed decisions.

Adopting the 'Profit First' approach can be a game changer, but it's not without its challenges. It requires a significant shift not just in your financial practices, but in your mindset.

For many folk, this shift can be difficult, especially when it comes to cutting costs or changing long-standing financial habits. It may also require some initial adjustment in terms of setting realistic profit percentages and understanding your business's unique financial flow.

But the potential benefits — a healthier, more sustainable, and profitable business — are well worth the effort!

Remember, 'Profit First' is not about being stingy; it's about being smart and strategic with your financial resources. 

Big journeys begins with small steps:

1. Reflect on Your Current Finances: Take a moment to honestly assess your current financial situation. Are you satisfied with how profits are handled in your business or personal finances?

2. Educate Yourself Further: If 'Profit First' intrigues you, consider reading Mike Michalowicz's book for a deeper understanding. Knowledge is power, especially when it comes to financial management.

3. Start Small, Think Big: Begin with small, manageable changes. You don't have to overhaul your financial system overnight. Small, consistent actions can lead to significant transformations.