The Problem with Mixing Business and Personal Finances

While the aim of Profit First is to build sustainable profit in your business, you need to understand the basics first. This is a snapshot of the basics!

As a tradie or service provider, you must master the art of selling an outcome before people get their hands on a tangible product. If you’ve been in business a while, you’re probably getting used to doing this. 

But how good are you at handling your business finances? If your sales are getting eaten up by taxes, fees, operating expenses and you don’t know how to break the cycle – it’s time to consider the Profit First method. It could be the solution you’ve been looking for.

What is the Profit First Method

Designed by entrepreneur Mike Michalowicz, the method flips traditional accounting practices on their head, prioritising profit over expenses. 

The logic is:

Sales – Profit = Expenses. 

By following this method, you can build a sustainable, profitable business for the long haul. Read on to find out how applying the Profit First method can help improve your financial wellbeing.

Why the change from the traditional accounting method?

Businesses have traditionally been told to focus on the equation: 

Sales – Expenses = Profit.

You can see here, profit is what’s left over after covering all operating costs. This approach can kick off a cycle of chasing more sales to cover ever-growing expenses, leaving little to no profit. 

The Profit First formula is different to the traditional accounting formula
A snapshot of the Profit First Formula vs Traditional Accounting Formula

What is the Profit First Formula

The formula is:

Sales – Profit = Expenses. 

Rather than treating profit as an afterthought, you make it a priority. You adapt your business to run on what’s left after profit, encouraging smarter spending and cost management.

When you take your profit first, your business will tell you immediately whether it can afford your expenses, whether you are streamlined enough and if you have the right margins. If you find you can’t pay your bills after taking profit first, you can address those points and fix them.

Mike Michalowicz, Profit First Author

Where to start with Profit First

Whether you read Mike’s book to learn and DIY implementation or engage a Certified Profit First Professional like Emma in our team, once you have completed your Profit First assessment and analysed the results, you’ll need to set up your bank accounts to allocate your income efficiently.

What are the five Profit First Bank Accounts?

 

1. Income Account: Where all your earnings go.

2. Profit Account: A predetermined percentage of your income set aside as profit.

3. Owners Pay: your compensation for working in your business.  

4. Tax Account: For tax obligations.

5. Operating Expenses Account: To cover daily business costs

Each account should have a predetermined percentage based on the findings in your profit first assessment. 

What is the benefit of setting up the Profit First bank accounts? 

The system works by periodically allocating percentages of your income to each of the different bank accounts for their specific purpose, periodically.

Besides prioritising profit to make sure your business is financially healthy here are some other benefits of implementing the Profit First method for your business. 

Financial Discipline and Accountability

  • Simplified Money Management 

Having separate accounts for different needs (profit, taxes, expenses, etc.) gives you a clear snapshot of your financial health without having to trawl through your accounting software or complex spreadsheets

  • Reduces Unnecessary Expenses

When you have a limited pool of money in your operating expense account, it forces you to scrutinise your expenses and reduce unnecessary spending 

Budgeting and Planning

  • Automated Budgeting

The money gets sorted automatically into different categories, so you’re always clear on what each chunk of your funds is meant for

  • Better Financial Planning

 Knowing exactly what funds are allocated helps you make better financial decisions

  • Being Prepared for Taxes

A separate account for taxes means you have money  set aside to pay your tax bills 

Operational Efficiency

  • Streamlines Operations

The Profit First system can reveal areas in your business that could be operating more efficiently so you can find ways to address them.  

Cash Flow Management

  • Enhanced Cash Flow

By regularly reviewing and adjusting your account allocations, you can manage your cash flow for all stages of your business

  • Focus on Revenue-Generating Activities 

Knowing that profit is taken care of allows you to focus on activities that generate revenue, instead of constantly focusing on getting in work to manage your expenses.

  • Owner’s Pay

One of the accounts is usually designated for owner’s pay – running a business is hard work and you deserve to get paid for it! 

For business owners, mastering the art of profit management can mean the difference between a business that survives (or not!) VS one that thrives. 

The Profit First method offers a simple yet effective approach for ensuring your hard work pays off – literally!

If you want to implement the Profit First method in your business, get in touch for your free consultation.

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Ready to take your books and business to smooth operator level? Smart choice!

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Ready to take your books and business to smooth operator level? Smart choice!

Contact Us

Ready to take your books and business to smooth operator level? Smart choice!

Contact Us

Ready to take your books and business to smooth operator level? Smart choice!