Did you know that most company founders take no salary or profits in the first few years of owning a business? This is a choice they make so they can focus all their earnings on growing the business to a point where they won’t have to worry about their business going under.
But is this the right way to do things? According to the Profit First method by Mike Michalowicz, it’s not. If you are unsure how to use the Profit First method in your business, keep reading.
What Is the Profit First Method?
In the Profit First method, Mike Michalowicz recommends that entrepreneurs start taking out profits immediately, from the first month of doing business. Every sale that you have in your business, take a percentage of it as profits, without another thought.
Traditionally, what entrepreneurs do is that they deduct all expenses and then take the remaining as profits for themselves. But if you take the profits out first, you can spend more time running your business rather than working on your profit margin.
This is how you can perceive this idea visually.
Traditional method: Sales minus Expenses equals Profits
Profit First method: Sales minus Profits equals Expenses
It turns the whole equation upside down, doesn’t it? Many entrepreneurs have a hard time wrapping their heads around this method in the beginning, but you will soon realize all the benefits of using the Profit First method.
Why Profit First?
Usually, entrepreneurs make do with whatever profits are left over; after all their expenses are paid. In the beginning years, this can mean no profits at all, or even a deficit that they have to supplement out of their savings or pocket. No wonder so many entrepreneurs end up being time-poor, financially destitute, and regret quitting their job to go into business.
Also, a big benefit of taking profits first is that you will have less money to spend. This means you will either have to be frugal with your expenses or think creatively about how to make things happen in your business.
You won’t willy-nilly spend all your profits to cover unnecessary or unwanted expenses. This can make you a better entrepreneur overall.
When you have a limited amount of money available to do what you need to do, you are going to start hustling harder, thinking innovatively, and creating new methods that don’t require as much capital. And that’s what can push you over the edge into success rather than bankruptcy.
Also, don’t forget the power of psychology in business success.
Imagine this: you start taking profits from your business from the very first month. Can you see how beneficial it would be to you psychologically if you were making profits in your business from the very start?
It can change your entire perspective on how your business is going. When well-meaning folks ask you how business is going, you don’t have to hang your head and hope that things will pick up.
They have already picked up. You are already making profits! You can proudly tell everyone around you this, without any pretension or deceit.
You might not be able to grow your business as fast as you would like, because you are taking out profits already. But you are building a business that’s more sustainable and can handle the ups and downs of the market and economy better.
It’s also healthier for you physically and mentally to use the Profit First method because you are not going to work yourself into the ground for no profits at all, feeling like you are on a hamster wheel that goes nowhere.
How Can You Start Using the Profit First Method?
The real magic of the Profit First method happens when you take a percentage of your profits first, without allocating it towards expenses or anything else like that. This allocation or percentage can be whatever you decide for yourself.
It can be as high as 50% or as low as 15%. But without fail, every month, take a percentage of your profits and put it away. You can use some of it to give yourself a salary if you wish.
And the rest goes into a ‘rainy day fund’. It’s easy to set up the Profit First method because you can set up automatic bank transfers that move any incoming profits into buckets right away.
These are the various buckets recommended:
- Profit – Savings Account
- Tax – Savings Account
- Owner’s Pay – Savings Account
- Revenue – Transaction Account
- Operating – Transaction Account
Now that you are dealing with this major mindset shift, it might take time to get used to such unusual bookkeeping methods. But once you see how healthy you and your business are after using this method, you will be a believer.
The thing that will help you the most is figuring out what you wish to do with the profits that you are putting away. What do you think your business needs most? How can those funds be used best?
If you aren’t sure of what to do with these various buckets or how to set them up, then dealing with an accounting firm that follows the Profit First method is a great idea. They can set everything up for you and will be able to help you grow your business even as you take profits first.
Get Help in Using the Profit First Method
There are very few accounting firms that believe in and use the Profit First method. But Bennett Financials is different. We work hard to help you keep more of the money that you earn from your business.
With strategic tax planning, Profit First bookkeeping methods, and other tactics, we will help you grow faster than ever before. Schedule a free consultation today.