If you aren’t a numbers person, the finance side of business can be intimidating and confusing. However, it doesn’t have to be. The Profit First method and formula, created by Mike Michalowciz, is geared towards helping business owners better understand their finances, set up a simple but effective cash flow system, and make a profit and get paid (no matter how small their income is).
You’re in the right place if this is something you want for your business. I’m a massive fan of the Profit First method and will be breaking down everything you need to know about it on the blog today!
Let’s start with the basics — what is “profit”?
When you look at traditional business profit, you’re thinking about it in terms of the following equation:
Sales — Expenses = Profit
However, the Profit First method flips this equation around so it looks more like this;
Sales — Profit = Expenses
The goal behind Profit First is to help you change the way you think about your cashflow. As the CEO of your business, you DESERVE to put your profit first and reap the benefits of your hard work.
What are the main benefits of Profit First?
Profit First can help you tackle many of the common financial problems that business owners face, including (but not limited to):
- Paying yourself properly while still making a profit
- Putting away enough for taxes
- Eliminating debt
- Committing to smart expenses
- Improving your sales margins
The best part? You don’t need to be a “numbers person” to implement Profit First in your business.
Here’s how to get started with Profit First…
According to the founder of the system, Mike Michalowicz, your first step is simple: read the Profit First book and take advantage of the free resources available on his website to help you get started.
The actual process of setting up your business finances to reflect the Profit First system requires a bit more attention, but it still isn’t “hard''.
You are going to have to set various new bank accounts to cover profits, taxes, operating costs, owner’s payment, and revenue.
How much money goes into each account is determined by Target Allocation Percentages (TAPs). TAPs are where you’d like your financials to be split in order to increase profitability, cash flow, and business growth. These percentages are where you WANT your business to be, as opposed to your Current Allocation Percentages (CAPs), which break down how your revenue is currently being spent.
See the chart below created by Profit First founder Mike Michalowicz to help you understand what your TAPs should be based on your current business revenue:
While I’m personally a big proponent of the Profit First system, it’s important to talk to a trusted professional about if Profit First is right for your business. From there, you can determine if this is something you can implement on your own or if you would prefer to work with a financial advisor to get started. It does require shifting the way you currently approach banking, so it’s always a good idea to work with a professional and make sure you are set up for success correctly.
If you’re interested in going over how you can get set up with Profit First in your business, a strategy call is the perfect option for you. Click here to learn more about how my 90-minute intensives can help your business thrive!