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Get to Know the Profit First Method

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July 1, 2020
By
Core Group
Profit First Method

What if there was a way that you, the small business operator, always got paid?

That’s a real thing, and it’s called the Profit First Method.

Right off the bat, we want you to know we’re going to talk about accounting… where are you going? Don’t walk off — this is going to be good!

We’ll make you a promise right up front – no math. At no point will we make you suffer through formulas or numbers. Not even a stray percentage. Don’t worry – you’re in a safe place here.

We want to tell you about the Profit First Method. You might have heard some people touting it before, and it’s a practice we’ve found to be really effective for our clients. It’s a way of handling your money, but it’s really about making a philosophical change in your business. Along the way, we think you’ll find a lot of additional benefits that can help to keep your operation lean and mean.

The best way to illustrate it is to think about what most people do at home. You get a paycheck, and then you start paying the bills. Once you’ve paid the big stuff (rent, utilities, car insurance, Netflix – the essentials), you have some money left over and you’re going to use that for groceries, going to the movies, getting your hair cut, and the other bills during the month. If you play it smart, clip your coupons and stay out of trouble, you might have a few bucks leftover at the end of the month. Some people save that, some people use it to treat themselves, but for a lot of us, that surplus isn’t a common occurrence. At the end of the month, the bank account is scraping close to zero.

The Profit First Method does it all in reverse. If you used the Profit First Method in your home, you’d get that paycheck and the first thing you’d do is take out that bit of cash that you wish you had leftover at the end of the month, THEN you start paying the bills. How cool is that? With the Profit First Method, you’d start every month with a win! 

Profit First for Businesses

Implementing the Profit First Method in your business is pretty much the same as the previous example, although there’s a bit more to it than just paying yourself first. At the risk of over-simplifying this particular cash-management strategy, we’re just going to run down some of the other notable practices that make up the Profit First Method.

Use Smaller Plates

Just like nutritionists tell you to use smaller plates for portion control, Profit First requires you to divide your cash into smaller bank accounts.  This has the added benefit of being able to look at your bank account to manage your business.  The basic accounts are:

  • Deposits (All money goes into this account)
  • Profit (Each deposit into the deposit account, a % is transferred here)
  • Opex (This is the account to pay your bills from)
  • Taxes (Set aside taxes as you go)
  • Owner’s Compensation (Different from profit, this is to pay you for the work you do)

Get into the Groove

One of the upsides to implementing the Profit First system is that it will put you in touch with the natural rhythms of your business. If you stay with it, you can make these rhythms work for you when you start automating your best practices. If you take your profit on the 1st and 15th of each month, for example, you could start to see the ebb and flow of your cash and could begin timing your expenditures and regularly occurring payments. When you understand and control this rhythm, you won’t be caught up in the whirlwind of daily business that seems to always put a mysterious drain on your checking account.

Ok – Question time!

Besides getting me paid, what are the benefits of the Profit First Method?

Most business owners check their bank accounts regularly.  With Profit First, you have the ability to see how much you have left to spend.  No money?  You have to wait until next month.  Oh, and you can see exactly how much profit you’ve made by looking at the Profit account.

Yeah, this sounds neat. But I don’t know that I have the ability to make the switch from my current system.

That’s the beauty of Profit First.  It works, no matter your accounting system (or lack thereof).  Use Quick Books?  Fine, keep using it.  Use an Excel spreadsheet?  No problem!  Profit First has 100% success across all industries and sizes of business when implemented fully!

Making the switch to the Profit First method isn’t nearly as traumatic as switching your entire accounting system to the Accrual Method where you have to reverse-engineer your accounting history. It can be implemented slowly, and you can choose where and when you want to start. We think it’s a solid method that can really help you gain control over your operation, and to that end, we think embracing it and diving in is the way to go, but your comfort level is a consideration too. 

So what do you think? Do you like knowing that you’re going to be paid? Are you interested in actually controlling your business instead of letting it control you? Give us a call and we can show you how to apply the Profit First principles to your operation.

Core Group is certified by Profit First Professionals as a Master Certified Firm, so you can count on us to deliver the full package when it comes to putting this unique system to work in your business!


MORE CASH FLOW INSIGHTS IN THE (FREE!) CORE EBOOK

For more insights into improving your company's cash flow, our free eBook is full of useful strategies and real-life case studies from businesses just like yours. Download it now!

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