“Profit” Isn’t a Dirty Word - Why You Should Master Profit Distribution vs. Owner's Compensation

Since writing Profit First, I’ve heard quite a few comments (and eye rolls) over the word, “profit”, itself. This always makes me curious. What’s so bad about making a profit?

Overall, making a profit gets a bad rap.?

Misconception of profit: Some individuals might associate profit with greed or exploitation, believing that it comes at the expense of others. This misconception overlooks the fact that profit is essential for the sustainability and growth of businesses.

Negative corporate practices: Instances of unethical business practices, where profit is pursued at the expense of employees, customers, or the environment, can tarnish the reputation of profit-oriented initiatives. I do feel that today, there are more businesses with integrity and truly put good out into the world.

Emphasis on social responsibility: In an era where corporate social responsibility and ethical business practices are increasingly valued, some people view profit-centric approaches as incompatible with broader societal well-being.

Fear of exploitation: People may fear being taken advantage of by businesses solely focused on profit maximization, leading to skepticism or resistance towards profit-centric strategies.

I get it - and, another way of looking at profit is that it’s essential. You do have to recognize that profit, when earned ethically and responsibly, serves as a vital metric of your business success. It enables reinvestment in the business, job creation, innovation, and ultimately, the ability to make a positive impact on employees, customers, and communities.?.

Ok, now that’s out of the way. Let’s look at the difference between the owner's comp and your profit.?

Central to the Profit First methodology is the clear distinction between profit distribution and owner's compensation, a concept that can significantly impact the financial health and longevity of your business.

Profit is non negotiable.

Building wealth for your business - In the Profit First system, profit distribution refers to setting aside a predetermined percentage of revenue for the business's profit accounts. This allocation is separate from other accounts, such as operating expenses or taxes, and is intended to accumulate over time to build wealth for the business owner. By prioritizing profit distribution, you’ll create a sustainable financial foundation that enables long-term growth and stability.

Owner's compensation (your reward) - On the other hand, owner's compensation represents the salary or draw that the business owner takes from the company to cover personal living expenses. Unlike profit distribution, which is allocated to build wealth for the business, owner's compensation is intended to support the entrepreneur's livelihood. While it is essential to ensure that the business remains profitable, owner's compensation ensures you can enjoy the fruits of their labor and maintain a balanced lifestyle.

Differentiating between the two - By clearly delineating these two components of your financial management, you can make more informed decisions about how to allocate resources effectively. Profit distribution fuels the growth and sustainability of the business, while owner's compensation ensures that the entrepreneur's personal needs are met.

When you’ve mastered the management of your cash flow to this degree, you’ll not only sustain a thriving business that generates revenue but also prioritizes profit and personal well-being. And that? That allows you to put even more good into the world.

I am wishing you tremendous success!

-Mike?

Ps - Last I saw there was a discount! Get Profit First for you or a friend at Amazon, Barnes & Noble, or any of your favorite booksellers.