Before I discovered Profit First, when my clients asked for help to them become more profitable, I based my answers on my knowledge of their business from me being their bookkeeper. But that meant I could only help a few people and my approach wasn’t consistent.
When I came across “Profit First”, the book by Mike Michalowicz, I couldn’t put it down until I finished. Here was a method to help my clients become profitable, using simple, repeatable, small steps that would gradually move them in the right direction, without being scary or overwhelming.
I signed up with Profit First Australia to learn more about the Profit First system and I am now a Certified Profit First Professional. As such, I have tools that help me analyse your business without needing to have worked with you for years and I can help you identify the key areas to change to improve your profitability.
So how does it work? Very simply, we look at how much money is coming in and where it is going. We work out how much of your income you need for each purpose, then open bank accounts for each purpose, and transfer the money for each purpose to the corresponding bank account.
Then the magic happens! Before Profit First, when you look into your bank account to see if you can afford that bright new shiny object that costs $5,000, you see you have $20,000 so you think it is ok. With Profit First, you look into your Operating Expenses account and see you only have $6,000, because the rest of the money has been allocated to other purposes. Not such an easy decision now! Time to think if you really need that object, do you have something already that will do the job, or is there something else you could buy which wouldn’t swallow so much cash.
And guess what? Those purposes we are putting money aside for include paying your suppliers and your taxes, but most importantly, it includes paying you for the work you do for you business. The goal is to pay you what you would have to pay an employee to do what you do. After all, you are the most important employee in your business. And then there’s Profit – you are the owner/shareholder of your business and you deserve a Profit Distribution for taking the risk of running a business.
Why is it called “Profit First”? That’s because we change the usual accounting equation to put Profit First. Most people work on the equation:
Caroline is just amazing!
Her knowledge goes far beyond what I had hoped for when looking for someone to help me implement systems in my business to make it run smoother. Financials are not my favourite thing but I know they're so darn important.
Caroline's ability to explain things to me in a practical and easy to understand manner was greatly appreciated. Then to explain how the system I was interested in – Profit First, would help find & leverage the profits in my business and was so valuable.
Thank you Caroline. A massive weight has come off my shoulders and I'm excited about my numbers. Woohoo!
Nat Wright – Verissima Natural Skincare
Income – Expenses = Profit
That means you earn your money, you spend your money and what is left is your Profit. Except that number at the bottom of the report isn’t in your bank account. And because Expenses come first, you focus more on them. Profit is an afterthought.
So let’s change the equation:
Income – Profit = Expenses
With this equation, Profit comes first, and then expenses have to fit into what is left. And that’s real Cash Profit, not a number on a report, because we have set aside a percentage of income for it. Changes are made one percentage point at a time, so you hardly notice the reduction for expenses. Until you get your first Profit Distribution! My first Profit Distribution was around $50 – it’s a lot more than that now!