Reasons Why You Need Profit First In Your Business
Updated: Dec 18, 2021
People say that business is all about taking risks.
You spend money on the capital, take out loans, find partners and suppliers--all in the hope of making more money.
But what if all these risks take you nowhere in the end?
What if instead of making more and more money for yourself and all your other personal endeavors, you end up just serving the business itself?
These are the brutal, yet important questions we have to ask ourselves before we make giant leaps without much guarantee.
And speaking of guarantee, one simple yet revolutionary way to make sure that your business will get you somewhere is by learning and adopting the Profit First principle.
But before we get into the nitty-gritty of the Profit First method, let's have a quick rundown of some common profit mistakes you may find yourself guilty of.
Common Profit Mistakes
Mixing personal with business funds
There will be times when you'd want to make improvements that may be beyond your business' projected budget. And of course, it's much easier to just reach into your pocket than to go over all your invoices and budget plans and make all the necessary tweaks.
Sure, you'll probably see an increase in profit. But would that satisfy the money you've just taken from your personal account?
Just “winging it"
It's easy for small startups to fall into the trap of flying blind and experimenting on business ideas without making clear, solid plans and measuring the profit they're actually making.
However, regardless of the size of your business, it's important to note that you've taken risks to establish it and you have to make all these risks count. Thus, you can't just "wing it" and expect high returns--you have to keep track of all your sales, expenses, and other finances whether you have your own accountant or not.
Spending too much
Greater risks entail higher rewards.
But that's not always the case for businesses. And perhaps, even in our personal finances.
Aside from being mindful of where our money goes, we have to gauge every potential expense and determine which ones are worth it. It'd also help to always look for more options and define the ones that would result in higher and more sustainable profits.
Spending too little
While spending too much can be harmful to both our business and our own pockets, spending too little can also spell trouble.
This includes hiring fewer employees, not spending enough on marketing campaigns and other cost-saving practices that can hinder your business growth.
After all, profit is profit--you can't earn much if you don't make the effort to work it out.
Putting profits at the end of the equation
It's quite understandable if you're still using the traditional profit formula,
Sales - Expenses = Profit
However, putting profit at the end of the equation could make your business, in Mike Michalowicz' words, a "cash-eating monster" in the long run. That's why it's important to make paying ourselves first our priority and make the business work for us.
Now all these mistakes lead us to one simple solution: reevaluating our finances and putting profits at the top of our priorities. And this is where Michael Michalowicz' Profit First strategy comes into play. But what exactly is this method?
The Profit First approach
"What if you could have profit guaranteed?"
That was the one question Mike Michalowicz had in mind when he came up with the brilliant idea of reversing the traditional profit equation and putting profit as its priority.
Because of his experience of "check-to-check survival" in running his business, Mike realized that a lack of cash reserves creates a heavy burden for every entrepreneur. Thus, he tried to shake things up and created the Profit First system which he shared with the world through his book of the same title, published in 2014.
As of today, over 175,00 businesses have been utilizing this approach and are reaping the rewards of making such a bold change in managing their finances.
How does it work?
The Profit First method is actually quite simple. All you have to do is identify what your profit should be and then put away a percentage of it from every sale you make until you've reached the amount.
Thus instead of following the traditional profit formula, the Profit First equation would look like this,
Sales - Profit = Expenses
Once you know how much profit you should be earning, it'll be easier for you to determine what's worth spending on, what expenses are necessary, and how you must maximize them.
Being intentional with our money
In her interview facilitated by Kusha Kalra, Profit First professional, Najma Khan shared some of the essentials of the method. One of these is the use of the envelope system that allows business owners to divide their funds into the following accounts:
Owner's Pay Account
Operating Expenses Account
Because the funds are organized in such a way, it'll be easier to determine where you can make cuts and make profit work for you.
It'll also allow business owners to stay true to their priorities instead of allocating certain amounts according to what's left in the bank account at the end of the month.
Najma added that this method can actually be applied to our personal finances as well. We can classify our funds into different priorities such as school fees, vacations, holidays, home renovation, etc. This way, we become intentional with our money and give it purpose.
When and how should you start?
There's no better time to start your Profit First journey than now.
While a sudden shift in how you manage your business' finances may seem quite daunting, it's important to reevaluate your business' goals and strategies as early as you can to avoid unwanted surprises. You wouldn't want to find yourself becoming a servant to your own business and look for a way out when you've got no cards left to play. Moreover, this kind of risk is one that's calculated, tested, and proven effective both by companies and individuals.
And once you feel ready to finally take the leap and make a significant change in your business, you can always check out Mike Michalowicz' book or discuss the Profit First approach with your trusted accountant!