As any entrepreneur will likely share in conversation, running a successful business is hard. Or, at very minimum, running a successful business has its challenging seasons.
And running a business that is not only successful but also profitable? Well, that’s even harder, especially if you are like thousands of business owners around the world who are admittedly not great at money management.
It’s okay, it’s nothing to be ashamed of. Maybe you were never taught about money growing up or in college, maybe you never knew the right questions to ask, and maybe you were never given the opportunity to learn to manage money well. You’re definitely not alone.
Or maybe you’re haven’t been that bad at managing money, but your current revenue and expense numbers are a wake-up call to just how much cash is flowing through your systems, what the business is costing to run, and how much profit (or lack thereof) is on the table at the end of the day.
Whatever the situation or scenario, entrepreneurs agree that revenue is a key performance indicator (KPI) for the health of their businesses, but fewer rank profit as a more important key performance indicator.
Where do you stand? If you’re searching for information on profit and Profit First, it’s likely an accurate assumption that you are looking to put more emphasis on healthy profit margins in your business. If so, congratulations! You’re already on your way to growing a business that pays you more.
Let’s dive into how the Profit First method works and how it can help you grow.
How Profit First Helps Grow Your Business
The Profit First is a cash management strategy that flips your typical business accounting model on its head with the foundational belief that it’s not about how much revenue you earn as a business owner, but about how much money you KEEP in your own pocket. Profit First believes that your overall success as a business owner ultimately comes down to how satisfied and fulfilled you are through the work you’re putting in as the CEO of your company, and how much money you’re able to bring home to your family.
Profit First breaks the mold of traditional accounting and cash allocation by placing profit allocation first (where it actually belongs) rather than at the end of all expense accounting where you might get a little tiny bit of profit left over at the end.
As an entrepreneur, you don’t deserve the scraps – you deserve to be paid well for the work you do, the leadership you provide, and the risk you take every day as a business owner.
The Four Core Principles of Profit First
In his book, Profit First, author Mike Michalowitz likens this method of allocating cash flow in a healthy business to the tenets of a healthy diet. He breaks down Profit First into four core principles based on this analogy of a healthy diet:
- Use smaller plates.
- Serve sequentially.
- Remove temptation.
- Enforce a rhythm. This needs #4
On page 38 of Profit First, Mike writes:
“In 20212, ??a report by Koert Van Ittersum and Brian Wansink in the Journal of Consumer Research concluded that the average plate size in America had grown 23 percent between the years 1900 and 2012, from 9.6 inches to 11.8 inches… should this increase in plate size encourage an individual to consume just fifty more calories per day, that person would put on an extra five pounds of weight each year.”
In the same way, we as business owners can tend to start doing the same thing as cash flow increases. As our “plate size”, or revenue, starts to increase, our expenses start to increase alongside it. If we have extra money to spend, we’ll often spend it, unless we have a plan in place to put the extra cash flow somewhere else (ideally, take it as profit or put it into savings).
Here are the four core principles of Profit First:
- Use smaller plates.
Using a smaller plate starts a chain reaction. You get smaller portions at each meal, which means you consume fewer calories overall.
- Serve sequentially.
Eating vegetables first means that you start satisfying your hunger with what is nutritionally beneficial for your body and will ultimately eat less of what comes after (carbs, dessert, etc).
- Remove temptation.
People are driven by convenience, so if there are less nutritionally valuable foods sitting around your house, you’ll feel inclined to eat them, even when you aren’t hungry.
- Enforce a rhythm.
Create a system of eating the good stuff even before you’re tempted to binge on too much. Eat regularly so you never get so hungry that you go from starving to stuffed. Without those peaks and valleys, you’ll eat fewer calories overall.
It’s the same way with the money in our businesses. We need to use smaller plates, or in other words, keep our expense budgets the same size, or even smaller, even when cash flow increases.
We need to serve sequentially, meaning to allocate profit first. What you see or experience first is where your focus remains, which is why the typical equation of Sales – Expenses = Profit can be so discouraging, and even damaging. Profit comes into the equation at the end, almost as an afterthought, instead of the primary focus of the money flowing in and out of the business. No wonder it gets pushed aside.
We need to remove temptation by allocating profit first. This gets it out of the general money bucket and out of immediate access. When you don’t have easy access to it as you’re paying bills, you’ll learn to make do with what money you do have and adjust spending accordingly.
Finally, by enforcing a rhythm with your money, just like you do with your eating habits, allocating profit (and the good things it brings into your life and into the business) will become second nature to you. You won’t have to deal with those patterns of peaks and valleys, of starving and stuffed, in your budget because you’ll come to depend on the steady cadence of setting aside your profit percentage first (Profit First teaches allocating profit on the 10th and 25th of each month), then working the business with the rest of the funds available.
The new equation we use becomes Sales – Profit = Expenses.
Profit First is GOOD for you, the business owner.
Profit First is a good thing for you, the business owner, but you might be wondering if you set aside your profits, how will your company continue to grow?
That’s an important question and one that we as Profit First professionals hear all the time. We’ll be the first to gently tell you that if you’re chasing growth for growth’s sake, then your business probably won’t make it very long or far, but it doesn’t mean that growth isn’t important, or shouldn’t be something we work toward.
There are growth strategies that don’t require you to spend every spare penny on extra marketing efforts that may or may not impact the bottom line. There are growth strategies that ask you as the business owner to take a careful look at your money to determine where its best use would be. Which key performance indicator (you know, those KPIs mentioned in the beginning) is going to make the most impact?
The Profit First methodology is designed to help you change your mindset around money. It’s meant to change the way you think about your cash flow, revenue, expenses, and all the business buckets that take up the money in the business faster than we can blink. It’s meant to cause a shift in your priorities so you realize that it’s not always about making more money just to spend more money to make more money to spend more money. That vicious cycle will only lead to burnout and exhaustion.
Instead, if you can think about your cash flow, first and foremost, funding the profit bucket of the business, and structuring the expenses around the money that the business can actually afford to spend, you’ll see fast AND healthy growth. Not just fast expansion. Not just a healthy bottom line. But both together.
Allocating your profit first using the Profit First method actually sparks faster growth because it makes you reverse engineer your profitability. You’ll know immediately what money you have to spend on expenses like product, labor, fulfillment, and overhead, and can use that number to make smart spending decisions for every aspect of your business. Plus, you’ll sleep at night knowing that you have money set aside from the business for extra investments, to save for a rainy day, and to provide for your family.
Not only does a healthy profit margin mean more cash in your pocket and for the good of your family, but profits also mean growth for the business. Those two good, good things (a healthy business owner actually paying himself or herself from the business, and the business running on a lean, effective budget) work hand in hand to help you create a company that endures.
You’re called to impact, called to growth. Profit First enables us to do both well, in a sustainable, manageable, fulfilling way.
Through the Profit First process, you can create a system in your business to facilitate great impact, more freedom, and higher passion, all while following the purpose you were created for.
*Ready to take your first step toward putting profit FIRST in your business?
I challenge you today to start taking your profit first. Starting with your next deposit, save 1% of that deposit into a saving account and watch that account begin to grow with each deposit. This is the first step of your profit journey, Congratulations! Share your profit wins with us at firstname.lastname@example.org!
You’re invited to reach out for a discovery call to see if you would be a good fit for one of our services or programs.