As a small business owner, you often take a simplified approach to business by not putting profit first. You end up having to pay yourself last most of the time, so it takes a long time to get to the point where you’re able to realize the benefits that attracted you to start a business in the first place- PROFIT. You could end up running yourself into the ground if you can’t balance running a business and making profits.

Take Tim, for example-

Tim has been running a small business for about 4 years. He’s had steady growth year after year; with this year on track to do about a million dollars in revenue.

Great right?

But the irony is that he’s literally three months away from bankruptcy if things slow down a bit or get dicey. Can you guess the problem here?

If you didn’t know already, it all boils down to profit and cash flow.  Business owners can be terrible at paying themselves. The issue is that putting Profit Last instead of Profit First can hinder your business growth and cause financial insecurity.

If this is you, then we have good news for you. There’s a great way to manage your cash flow and reach your full financial potential- the Profit First Method.

What Does Profit First Mean

Imagine giving yourself a 5% raise by simply setting aside  5% of all your revenue. While you may think it will reduce your operating and investment capital, it actually forces you to work on a tighter budget and ensure you make money. 

And that’s the basic summary of the Profit First method. 

The Profit First method revolves around the idea of setting aside your revenue into different accounts, especially a profit account. 

The profit-first method helps you make profit your top priority as a business owner. Profit First is a system of accounting that businesses use to set aside a percentage of their Profit First and determine which expenses they can afford afterward.

Profit First is a divergent and new approach to cash flow management that shifts focus from overburdening expenses to revenue growth.

Introduced by Mike Michalowicz in his book Profit First, Michalowicz created this new approach after selling and launching two multi-million dollar companies and realizing how difficult it was to build a profitable business with traditional cash flow management methods. Leaning on his experiences, iMichalowicz came up with the Profit First Method, and in 2014, he wrote the book -Profit First- Transform Your Business from a Cash-Eating Monster to a Money-Making Machine.

 What Are The Five Profit First Accounts?

These five different accounts are the accounts you need to open to help you distribute funds and track your Target Allocation Percentages(TAPs). They are- income, operating expenses (OpEx), owner’s compensation, profit, and tax.

Your business revenue should be deposited into a primary income account before being distributed into other accounts based on the percentages you have decided to allot to each account.

If your real revenue is 100%,  then the percentage of cash you should put into each account is determined by your Target Allocation Percentages (TAPS), while your Current Allocation Percentage (CAPS) is how your real revenue is actually being spent.

The chart below shows the recommended percentages for small businesses according to their annual revenue.

How Does Profit First Work?

Thinking about it mathematically, Profit first is basically sales - profit =expenses, unlike the traditional method of accounting that is based on sales -expenses= profit.

 In Profit First, you typically take your profit out of your cash deposits before putting it all into your expenses and paying yourself only what’s left. The method includes transferring a predetermined percentage of your revenue into various bank accounts to cover your business's financial needs, such as operating expenses (OpEx), revenue, owner’s payments, and profits.

If you’re wondering if this might be laden with complicated steps, you’ll be glad to know that Profit First works in four easy steps. 

1. Determine your profit margin:

First, you need to evaluate your business budget and cash flow to determine the percentage of revenue you plan to allocate to your profit. Start as low as a 5% profit margin, depending on your financial needs and business goals.

2. Set up A Profit First Account:

The next thing you need to do is set up a separate account for your business (If you haven’t done that already). When opening a Profit First business, you should open three checking accounts for Income, owner's compensation, and operating expenses. In addition, you should also have two savings accounts created for profit and tax.

3. Allocate Revenue To Each Account

Start allocating a percentage of your revenue to your profit account and other expense accounts you’ve set up. For instance, you could allocate 25% to taxes, 15% to profit, 25% to your operation expenses, and 35% to your owner’s compensation account.

4. Pay From The Right Account

While you might be tempted to pay from any account that’s easily accessible to you, it’s best to ensure you are paying for your expenses from the appropriate account; if you’re paying taxes, pay from your tax account, and if you need to pay for operating expenses, you could use your Operating Expenses account. 

Will Profit First Help Your Business Grow?

In this period of economic hardship, you need to focus on maintaining a healthy cash flow and avoiding being at the brim of indebtedness, and that’s why Profit First helps you prioritize your financial security. The Profit First method offers an array of benefits, including:

Prioritizing profit: Profit First pushes you to be proactive in setting profit aside before you even consider expenses. Tit encourages you to think of profitability instead of revenues and expenses. 

Planning For The Future: while it can be difficult to save for your business expenses when your cash flow is unstable, the Profit First method helps you remove financial temptation and imbibe good financial habits to improve your financial decision-making and financial security in the future.

Keeping Your Business Organized: managing your business expenses can be complicated. But the great thing is that the Profit First method helps you separate your revenue into different accounts to keep your business organized and simplified. Rather than leaning on inaccurate guesses, with Profit First, you’ll know exactly how much you have and what you need to reach your financial goals.

Get The Help You Need 

Getting the Profit First system set up could take a while to get used to. If you’re ready to implement it in your business but don’t know where to start, Cash Goblin is the best way to go. 

Cash Goblin is created to help you automate allocation and payment collection, reducing the whole boring financial admin process and making Profit First easier for you to practice.

Cash Goblin transforms the way entrepreneurs and business owners approach finance. Our innovative tool empowers you to maximize profits, optimize cash flow, and achieve financial freedom. 

Join us on a journey to financial success! Download the Cash Goblin app today.