“My business has grown so much and it feels like I need to level-up my financial management skills.”
Sound familiar?
I went through the same thing, as many small business owners, self-employed consultants, service providers, and 1099 contractors do. When sales grow, expenses usually grow right along with it, and it can make you feel completely out of control and unsure of the financial outcomes you are creating.
I decided to try the Profit First system, and ended up using it for several years. It’s a simple yet effective tool that helps you prioritize profit and owner’s pay amidst the rollercoaster of business cycles.
I now recommend it to most business owners, with some nuance for inventory-based business models. In this article, I’ll explore why and how business owners like you can use the Profit First System to improve your financial well-being and set yourself up for long-term success.
So, Why Profit First?
When it comes to managing money, many traditional methods focus mainly on how much money is coming in versus how much is going out. But this can sometimes mean your profits end up disappearing into everyday expenses. The Profit First System flips this idea on its head by making sure you prioritize setting aside profits right from the start. This helps keep your business profitable, even when things in the market or your industry change.
What is it, exactly?
The Profit First System was created by Mike Michalowicz, an entrepreneur, speaker, and bestselling author renowned for his expertise in small business management and financial strategies. He developed the system based on his own experiences as an entrepreneur and introduced it to the world through his bestselling book, "Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine.”
The system is all about ensuring that you set aside a portion of your earnings for profit before you spend a dime on anything else. It involves having dedicated bank accounts for your business deposits, expenses, and profits. Then, on a weekly basis, you transfer funds from your deposits to the appropriate accounts.
It sounds like busy-work, but spending just 15 minutes each week following the process will help you prioritize financial health and profitability without the guesswork.
How to Implement Profit First
1. Check Your Finances: Start by taking a good look at your money situation. Look at what's coming in, what's going out, and how much profit you're actually making. This gives you a starting point to work from.
2. Categorize Money Movement: Divide your money into simple categories including Profit, Owners Pay, Expenses, Tax Savings, and Deposits (aka Real Revenue). We often add in Payroll and similar categories when they have major impacts on the business. Keep this as simple as possible while accounting for major money movements.
3. Set Profit Goals: Michalowicz spelled it all out for us in his book. Identify your real revenue range - that is, the actual amount of money you will collect in your business for a full year. From there you can see the recommended percentage that you should allocate to each category. Adjust it according to your business needs. For example:
If your business has low operating expenses, saving 15% for tax may be too low and still leave you in a pinch at tax time.
If you have big expenses that occur regularly, like rent or payroll, make sure the percent you are allocating to operating expenses will cover them, or set up a separate category specifically for those expenses.
4. Divide & Clarify: Open a unique bank account for each of these activities. Having separate accounts allows you to automate much of the system and makes it easier to see where your money is going.
Here’s what that looks like:
Revenue Checking Account: Arrange for all your deposits to go to this account. If you’ve already been receiving ACH or wire payments to a current account, it’s easiest to convert that existing account to be your Revenue Account.
Having a deposits-only account creates complete control over where your money will GO, since you will not be taking money out of this account except for transfers to your other Profit First Accounts.
Profit Savings Account: Where you will save profits from your business for a rainy day, or for investments into future growth.
Owners Pay Account: Your current personal account, where you will deposit your salary or owner’s pay distributions.
Operating Expenses Account: This is where all of your business expenses should draw from.
Tax Savings: Allows you to save for income taxes (and sales taxes if you’re a product-based business) so you won’t be blindsided at tax time.
5. Put Profits First: With the Profit First System, the whole point is to set aside a portion of your earnings for profit before you spend anything else.
Schedule 15 minutes on a weekly basis to make transfers out of the Deposits account into the other accounts, based on the percentages you identified earlier.
6. Get Some Help: If you're not sure how to get started or you want some advice along the way, consider talking to an accountant (like us!) or financial advisor. We can give you personalized guidance AND our crystal-clear Profit First template we used to implement this system for all sorts of small businesses since 2016.
Benefits of Profit First for Business Owners
Make More Money: By focusing on profits, you're more likely to see your bottom line grow, even in competitive markets.
Stay Stable: The Profit First System helps you build financial habits that keep your business strong, even when things get tough.
Manage Your Money Better: By setting aside profits first, you have more control over your cash flow and spending, reducing the risk of running into money problems.
Plan for the Long Term: When you make profit a priority, you're setting yourself up for success in the future, no matter what changes come your way.
For self-employed business owners, service providers, and 1099 contractors, using the Profit First System can be a game-changer. It's a simple way to manage your money that puts profits front and center, helping you build a strong, sustainable business that can weather any storm.
We’d love to help you implement the profit first system for your business. Send us a note to schedule a complimentary call: hello@sonderaccounting.com
