Does Profit First Work?

The Profit First System makes a bold claim. It is 100% successful when implemented. So how can a small business fail with Profit First?  In a word, behavior.  The process is full-proof, changing human nature, not so much.

What is Profit First?

The Profit First Method is based on the idea that businesses should prioritize profit over revenue, meaning that instead of focusing on increasing sales and revenue, businesses should focus on increasing their profits.

The Profit First system works by having businesses set aside a certain percentage of their revenue as profit before they pay any other expenses. This helps business owners to ensure that they are making a profit and not just breaking even, as well as prioritize their spending and invest in the right areas.

Using multiple bank accounts, business owners have an instant snapshot of their business financial health.

Implementing Profit First

The Profit First System makes a bold claim. It is 100% successful when implemented. So how can a small business fail with Profit First?  In a word, behavior.  The process is full-proof, changing human nature, not so much.

Profit First is a tool, and it is a great one. But, if you do not use a tool correctly, you will probably grow frustrated.  Eventually, you will discard the tool and say it did not work. Do not blame the tool; it is only as good as the user.

One of the most common responses I hear from people when presented with Profit First goes something like this. 

“Yeah that’s great and all, but I don’t enough money to start Profit First.  I need every penny to keep the doors open.” 

The real problem is that you do not have a profitable business, and therefore do not have enough cash. You have to change the narrative from “I can’t implement Profit First, because I don’t enough cash flow” to “I will increase my cash flow when I start Profit First”. Profit First will require you to make a profit by either increasing revenue or decreasing expenses. For a more in-depth discussion on cash flow, check out these articles.

The Human Factor

Mike Michalowicz the author and creator of Profit First recognizes that change is hard, and that success comes with incremental, small changes.  His analogy is you do not decide to run a marathon next week. If you go run 10 miles tomorrow without any previous training, you are going to end up injured, and quit.  

His solution is a simple, but a powerful one. Small Business Owners should set up a separate savings account for profit. With each deposit, you make into your regular account, put 1% of the amount in the savings account. So if you deposit $100 for the day, put a $1 in the profit account. Do it EVERY time you make a deposit.

Now here is the key to success, do not even look at it. I am serious about this. It sounds stupid, but out of sight, it really is out of mind.  So do not even have access to it on your online banking to look. Do this for 90 days, and then you can look. I promise you will be shocked by how much is there. Congratulations!  You have started implementing Profit First!

When we first implemented Profit First in our business, we were not very good at it. Well, actually, we sucked. But, we did this baby step first. When an unexpected shortfall came up, my brother, who was handling the money at the time, had completely forgotten about the money. I reminded him about it, and he was like, “Oh, yeah!  I forgot about that.” And we are accountants!

Once you have done this for 90 days, you can move further into the Profit First Process. Maybe you increase the percentage to two, or maybe go full bore and set up the rest of the bank accounts required in Profit First. It does not matter! Make progress, baby steps. Pretty soon, you will wonder how you ever did without it.

Does The Profit First Method Stop Business Growth?

In short, no. There have been several opinions about how Profit First is not usable in all businesses, especially fast growing ones. That is NOT our experience. In fact, for start up companies with a bunch of cash, Profit First focuses the business owner on spending only what they need.

Fast growing companies have additional capital needs, and although Profit First doesn’t specifically address this in it’s system, it absolutely doesn’t prohibit growth. If your company is growing quickly, you will need some additional projections (not part of the PF method) to ensure you don’t run out of cash. But once you’ve done those projections, Profit First absolutely will ensure you use the money correctly!

To read more about the Profit First Method and the impact it can have, check out our "Get to Know the Profit First Method" article.