Fundamentals of Profit First

Profit First seems is rapidly becoming one of the must reads of the small and medium business world with many business owners we speak to having read it, a large proportion of those would love to implement it but do not know where to start. How can something so simple feel so complex to start. It is completely logical to have separate pots of money saved to ensure that you have all the money saved for your tax and know that you will be able to pay yourself to cover your own expenses next month.

?As Profit First Professionals it has been suggested more than once that I write something to help break this down.

?Fundamental Number 1 – Use Smaller Plates

?This is a standard budgeting principle of dividing your income (turnover) into smaller sections so that you know what is left over. Conventional wisdom for small businesses is that what is left over is your Profit, however, the overriding principle of Profit First is that profit should be the first thing that you pay otherwise how do you benefit from running your own business? With modern day banking using challenger banks such as Starling or Monzo this has never been easier as you can create ‘spaces’ which can be given names. The Profit First standard is to have 5 spaces:

• ?Profit
• Owners’ compensation
• Expenses
• Tax
• Income (this is normally your main account which invoices are paid into).

?Fundamental Number 2 – Changing Your Meal Sequence

?For those of you with children how often do you mutter to yourself ‘eat the vegetables first’ as they dive into the preferred bits. We do this as business owners as well, first we pay everyone else then leave the leftover to give to ourselves as profit.

?Profit is the nutritious part of our business and should always be allocated first, then all other areas allocated.

This is the step that causes the largest intake of breath when we speak to our mentees, with gasps of ‘but what if I cannot pay my suppliers.’ Please remember that prior to this process you should have worked out what your expenses are and looked to see if they are necessary and if they can be reduced. Profit only needs to start at 1%, if you can run your business with a turnover of ￡1,000 per month then you can run it with ￡990 per month.

?Fundamental Number 3 – Remove The Temptation

?Its 10pm at night and you have a serious case of needing a snack, if you only have healthy choices in the house then that is what you will have, but if you know that there is a tub of Ben and Jerrys hiding in the freezer you will dig it out. The only thing we know for sure is that you will not be getting in the car to go and buy some snacks on a whim. Think of your profit as those snacks, we want to stash it away somewhere that it isn’t easy to get to so that you cannot access it at 10.30pm at night when something shiny on TikTok has taken your fancy or you have hit on an absolute must have for your business. The easiest way to do this is with a bank account which you have no mobile banking app from but a paper statement arrives once per month.

?When it is time for your profit distribution you will happily skip down to the bank to be able to withdraw your money.

?Fundamental Number 4 – Building a Rhythm

?Profit First should not be hard work and it shouldn’t become a big job within your business. We are moving away from bank balance accounting!

?There are two important rhythms:

• Daily – check your main incoming bank balance and outgoings account to ensure that nothing unexpected has happened overnight. This should happen as part of your standard invoicing to ensure they are paid on time.
• Twice a month – it is allocations day, time to move money in the correct percentages to your small plates and pay any invoices owed.

Hopefully this has given you an easy way to start with Profit First however, if you want some help with this we offer an implementation session which you can book in directly with Dan using this link