The Profit First DayMar 16, 2022
Are you the type that wonders where all the cash is gone?
Late on payments to the merchants and paying your self the bare minimum?
Always busy and forever chasing your tail?
What would happen if you began taking your profit first?
You know, the money comes in and you swipe your profit first before all them other overheads eat into it? Sounds like some shady idea to avoid paying your taxes or Del Boys advice to the kids of Peckham!
But what If you knew that many people are starting to adopt this way of thinking?
Turning their business around by adopting the principles set out in that notorious Business classic Profit First by Mike Michowicz..
GAAP vs Profit First
Generally Accepted Accounting Principles gets the middle finger from Profit First
PF The Merchant First Version
Why Merchant First
Day 2 Day Accounting
Your Profit Account
Your Tax Account
The Profit First Day
Swop & Cull
Raise / Slash / Don't Do
The Buffer Zone
Getting and Overdraft
Simplify = Turnover - Merchant - Profit - Tax = Overheads
THE PROFIT FIRST FORMULA
The GAAP (Generally Accepted Accounting Principles) formula for calculating your business profit is Sales – Expenses = Profit. Nice and simple isn’t it?
However most small business owners will often find that after VAT, business overheads and some more Tax, that the Profit left over is not what they hoped for.
So what is this magic Profit First formula? Well its the same ingredients to the Generally accepted formula ( Sales – Expenses = Profit ) except we take the Profit First.. Sales – Profit = Expenses.. 👀
I know this looks simple when written on a blank page but if you are in the same position I was when I first read this book your probably worried you would not be able to pay your out goings on time.. And this is the point! Many of us are not in control of the expenditure, have no idea on what we are spending and have no cash reserves to absorb seasonly fluctuations of revenue!
It is simple, logical and clear. Unfortunately, it’s a lie. The formula, while logically accurate, does not account for human behaviour.
In the GAAP formula profit is a left over, a final consideration, something that is hopefully a nice surprise at the end of the year. Alas, the profit is rarely there and the business continues on its check to check survival. With Profit First you to flip the formula to Sales – Profit = Expenses. Logically the math is the same, but from the standpoint of the entrepreneur’s behavior, it is radically different. With Profit First, you take a predetermined percentage of profit from every sale first, and only the remainder is available for expenses.
Author and historian C. Northcote Parkinson theorized that our demand for a resource increases to meet the supply of it. That is why when we are given two weeks to do a project it takes two weeks, and when we are given eight weeks to do the same project it takes eight weeks. That is why when given $1,000 to complete our work we get it done with $1,000 and when given $10,000 to complete the same work, it takes $10,000. Profit First makes Parkinson’s Law an asset. By taking profit first the money available for expenses lessens, and we are forced to find ways to get the same things done for less money.
BANK BALANCE ACCOUNTING
Most entrepreneurs don’t have the time or gumption to read the different accounting statements necessary to manage the financial aspect of their business. Theoretically, you should review and correlate your Income Statement, Balance Sheet and Cash Flow Statement monthly (or more frequently), but few entrepreneurs do. Most resort to bank balance accounting, where we check our bank balance every day and make financial decisions based upon what we see. Per Parkinson’s Law, we consume what we see in our bank account. Profit First encourages the entrepreneur to continue bank balance accounting by first allocating money to profit (and other accounts) so that the entrepreneur sees the actual portion of deposits that are available for expenses and they automatically adjust their spending accordingly.
DON’T CHANGE HABITS, LEVERAGE THEM
Many entrepreneurs try to force themselves to become better at accounting and to become more disciplined in their fiscal management by pure willpower. But just like a muscle, willpower can be drained. And in a moment of financial stress or bigger than expected expenses the entrepreneur will break their own fiscal rules and spend the money they have. The Profit First principle does not try to change your habits (that is nearly impossible to do), Profit First works with your existing habits. By first allocating money to different accounts, and then removing the temptation to borrow from yourself, your business will become fiscally strong and you will benefit from regular profit distributions.