As a small business owner, managing your finances can be overwhelming and stressful, especially if you’re not a financial expert. However, The Profit First System, created by Entrepreneur and Author Mike Michalowicz, can help you take control of your finances and maximize your profits.
The Profit First System is a cash management system that focuses on the idea that you should pay yourself first before paying any expenses.
The traditional accounting method teaches that revenue – expenses = profit. However, this formula is flawed because it assumes that profit is the leftover money after all expenses have been paid. The Profit First system, on the other hand, teaches that revenue – profit = expenses. This means that you prioritize profit by setting aside a predetermined percentage of revenue before paying any expenses.
Here’s how you can implement the Profit First system in your small business:
Determine Your “Target Allocation Percentages”
The first step in implementing the Profit First system is to determine how much of your revenue you want to allocate towards different accounts. The Profit First system recommends the following accounts:
- Income: This account receives all your revenue, and from there, you allocate percentages to other accounts.
- Profit: This account receives a percentage of your revenue, and it’s meant to be used for personal and business profit.
- Owner’s compensation: This account receives a percentage of your revenue, and it’s meant to be used for your salary and benefits.
- Taxes: This account receives a percentage of your revenue, and it’s meant to be used for taxes.
- Operating expenses: This account receives the remaining percentage of your revenue, and it’s meant to be used for your business expenses.
For example, you could allocate 5% of your revenue to the profit account, 50% to the owner’s compensation account, 15% to the taxes account, and 30% to the operating expenses account. These percentages will vary depending on your business’s needs and goals.
Set Up Separate Bank Accounts
Once you’ve determined your target allocation percentages, set up separate bank accounts for each of the accounts mentioned above. This will help you visually see your finances and prevent you from dipping into one account to pay for expenses in another account.
Implement The System
Start implementing the Profit First system by transferring the predetermined percentages of revenue to each account every time you receive income. For example, if you receive $10,000 in revenue, you would transfer $500 to the profit account, $5,000 to the owner’s compensation account, $1,500 to the taxes account, and $3,000 to the operating expenses account.
Adjust As Necessary
It’s essential to monitor your finances regularly and adjust your percentages as necessary. If your business is growing and you’re earning more revenue, you may want to allocate a higher percentage to the profit account. Alternatively, if your business is struggling, you may need to adjust your allocation percentages to prioritize your operating expenses.
The Profit First System may seem challenging to implement at first, but it’s worth the effort. By prioritizing profit and paying yourself first, you’ll be able to take control of your finances and maximize your profits. Additionally, the system will help you make more informed financial decisions and ensure that you always have enough money to cover your expenses and pay yourself a salary.
The Profit First System is an excellent cash management system for small business owners. By prioritizing profit and allocating percentages of revenue to different accounts, you’ll be able to take control of your finances and maximize your profits. If you’re struggling to manage your finances, consider implementing the Profit First System in your business. With a little effort and dedication, you’ll be on your way to financial freedom and success.