What it Profit First
In this video, Stephen Edwards, Director of We Are Gro Accountants (Formerly Cheltenham Tax Accountants) provides you with an overview of the amazing Profit First system created by Mike Michalowicz
Introduction
Managing cash flow is one of the biggest challenges for business owners. Profit First is a financial management system that flips the traditional accounting formula on its head. Instead of the conventional approach:
Profit First encourages businesses to prioritize profit from the start:
This method ensures businesses build financial stability by allocating profit first and managing expenses with what remains.
How Does Profit First Work?
Profit First is a cash flow management system designed to help business owners control spending, eliminate financial stress, and ensure profitability. Here’s how it works:
1. Set Up Five Core Bank Accounts
To implement Profit First, businesses need to create five main bank accounts:
- Income Account – All business revenue is deposited here before being allocated.
- Profit Account – A percentage of income is transferred here before paying expenses.
- Owner’s Pay Account – Ensures the business owner is properly compensated.
- Tax Account – Covers tax liabilities, so there are no surprises at year-end.
- Operating Expenses Account – The remaining balance is used for business expenses.
2. Allocate Money Based on Percentages
Each time revenue is received, money is divided into the five accounts based on predefined percentages. A basic allocation might look like this:
- Profit: 5%
- Owner’s Pay: 30%
- Taxes: 15%
- Operating Expenses: 50%
Adjustments can be made over time based on business needs and financial goals.
3. Reduce Expenses & Improve Efficiency
By capping operating expenses, businesses naturally become more efficient and eliminate unnecessary spending. This forces owners to run leaner, more profitable companies.
4. Quarterly Profit Distributions
At the end of each quarter, a portion of the profit account is distributed to the business owner as a reward. The rest is retained for long-term growth.
Why Profit First Works
Profit First works because it follows human behavior. Instead of spending first and saving later, it ensures profitability by allocating profit upfront. Key benefits include:
- Guaranteed Profitability – Profit is no longer an afterthought.
- Improved Cash Flow Management – Separating expenses helps avoid overspending.
- Tax Preparedness – No more scrambling for tax payments.
- Owner’s Compensation – Ensures business owners get paid fairly.
Who Can Benefit from Profit First?
Profit First is suitable for small businesses, freelancers, and growing companies looking to take control of their finances. It works across industries, from service-based businesses to product-driven companies.
Common Misconceptions About Profit First
1. “Profit First is Just Another Budgeting Method”
Unlike traditional budgeting, Profit First is a cash flow system that creates financial discipline automatically.
2. “My Business is Too Small for Profit First”
Even businesses with low revenue can implement Profit First and see significant benefits.
3. “I Can’t Afford to Set Aside Profit”
Profit First forces businesses to adapt to their financial reality by controlling expenses more effectively.
How to Get Started with Profit First
- Assess Your Current Financials – Review your income, expenses, and profit margins.
- Open Dedicated Bank Accounts – Create separate accounts for income, profit, tax, owner’s pay, and expenses.
- Determine Your Allocation Percentages – Start with small adjustments and refine over time.
- Stick to the System – Consistency is key to making Profit First successful.
FAQs
1. What is Profit First in simple terms?
Profit First is a cash flow system that helps businesses become more profitable by allocating profit before paying expenses.
2. How do I determine my Profit First percentages?
Start with small percentages based on revenue and gradually adjust as your business grows.
3. Can Profit First work for startups?
Yes, startups can benefit by ensuring financial discipline from day one.
4. Do I need a special accountant to implement Profit First?
While any accountant can help, working with a Profit First Certified Professional can ensure a smoother implementation.
5. How soon can I see results with Profit First?
Many businesses notice positive changes within the first few months of implementing the system.
Conclusion
Profit First is a simple yet powerful financial strategy that helps businesses achieve consistent profitability, improve cash flow, and build long-term financial health. By prioritizing profit and controlling expenses, business owners can experience financial freedom and growth. Start today and take control of your business finances!