What Is the Profit First Method?

Fast-growing businesses don’t always survive. Some business owners pursue new customers at the expense of profits.

These company owners fail to look at their financials. Suddenly, they get hit with taxes and surprise expenses. They feel baffled as they can’t pay those expenses despite high revenue.

The Profit First Method solves this problem. Businesses around the world have embraced the Profit First Method to increase profits. 

It’s time to stop feeling behind with your finances. We’ll explore how this approach can get your money in order.

What Is the Profit First Method?

The Profit First Method revolves around Mike Michalowicz’s bestselling book, Profit First. The book teaches readers how to turn unprofitable businesses into money-making machines.

Businesses take a percentage of sales and store them in profit first accounts. This money transfer takes place before calculating any expenses. 

Traditionally, businesses treat profits like scraps. Profits are whatever’s left after deducting expenses from income.

Without an emphasis on profits, you can end up in the red. Considering profitability at the end often leads to excess spending.

The Profit First Formula turns expenses into scraps. You immediately take revenue and put it into a profit first account.

You can spend leftover cash, but you are not obligated to do so. You can spend some of this money and put the excess into another profit first account.

Not only do you profit from the Profit First model, but you also get extra profits by lowering expenses. Businesses with waning expenses and rising profits can take more revenue first.

You may take 5% of your revenue for profits before spending a penny. In a year, you may increase it to 10%.

The Profit First Accounts

In his book, Michalowicz discusses five Profit First accounts. Putting funds into these accounts gives you further clarity on your money management.

  • Income
  • Owner’s Compensation
  • Operating Expenses
  • Profit
  • Tax

Set Target Allocation Percentages (TAPS) for each account. These percentages dictate how to disperse money across these accounts. 

You may not hit your TAPS right away. However, these target allocations serve as a goal. You can track current allocation to gauge your process towards TAPS numbers.

All money from sales gets sent to your income account. Then, you distribute the proceeds based on your TAPS.

You can make modifications as you go. If tax season is approaching, you may put more funds into your taxes account. Businesses with a 1-year tax buffer may cut back on contributions to the tax account.

Paying yourself first eliminates a common problem for small businesses. They pay staff and invest in their business. However, they have little left for themselves.

These business owners struggle to make mortgage payments and afford living expenses. A business lets you help others. However, you shouldn’t kick your priorities and financial health to the curb.

Planning for the Tax Season

Taxes vary across each state and country. Business owners can estimate their tax bills on each sale. These estimates help you save funds for tax season.

Reviewing previous tax statements can help you arrive at a percentage. If 15% of your revenue goes towards taxes, put those proceeds in your Profit First Tax Account.

You won’t feel caught by surprise during tax season. You’ll have the funds ready to go. 

Businesses can lower their taxes by documenting every expense. Some business expenses are tax-deductible.

The money won’t grow by sitting in your bank account. However, you ensure a less stressful tax season. 

Putting money meant for taxes into the stock market is risky. Stock prices are volatile, and you can lose some of your investment.

You can put the proceeds in Treasury bonds that expire right in time for tax season. Some appreciation is better than whatever the bank will give you. 

Can Anyone Use the Profit First Formula?

Profit First helps business owners pay themselves first. They suddenly focus on profits and properly allocate their money. 

The Profit First Method isn’t exclusive to large corporations. Service providers such as lawyers, realtors, and consultants can use this approach.

You can allocate client revenue to each of your Profit First accounts. You can identify your TAPS and work towards them.

Employees can also use the Profit First Model. They can tweak some of the accounts to fit their needs.

For instance, employees won’t have operating expenses unless they start a side business. However, employees have personal expenses.

You can replace operational expenses with personal expenses. You can also create an account for investments. 

Investing a percentage of each paycheck helps you build wealth over time. 

The Profit First Model puts profits first. It turns expenses into scraps and forces you to manage costs after taking profits. Anyone can benefit from this model.

Implementing Profit First

Profit First requires tracking your income and expenses. You can track your progress on spreadsheets.

Establishing TAPS will inspire you to cut down on expenses. Increasing revenue makes it easier to achieve TAPS. However, rising costs can negate the positive impact of a growing top-line.

Create five accounts (two savings and three checking) for your Profit First accounts. 

Profit and tax accounts are savings accounts. The other three are checking accounts.

Get Help with Your Tax Planning

The Profit First Method helps businesses and individuals plan their finances. By paying yourself first, you become more conscious of expenses.

You’ll have less money to spare, leading to smarter money management decisions.

The Profit First Method is one way to prepare for the upcoming tax season. Our professionals can further assist you on your journey. 

Get in touch with us today to see how we can help with implementing Profit First Principles in your business.