Maximizing Success: Allocating Profits with the Profit First Method
Managing profits is a crucial aspect of any successful business. The Profit First method provides a structured approach to ensure that profits are prioritized and allocated in a way that benefits the business in the long term. Developed by author and entrepreneur Mike Michalowicz, this method emphasizes the importance of setting aside profits first, before allocating funds to expenses. Here’s a step-by-step guide on how to implement the Profit First method in your business.
1. Understand the Profit First Formula
The core idea of the Profit First method is to allocate profits before expenses. This formula looks different than the traditional model of Sales – Expenses = Profit. Instead the formula looks like this:
Sales - Profit = Expenses
This means that profits are considered a non-negotiable expense. By prioritizing profit, a business ensures that it always sets aside a portion of its income for long-term growth and stability.
2. Set Clear Profit Targets
Begin by determining what percentage of your revenue you want to allocate to profits. This will vary business to business as it depends upon the “size” of your business. A common starting point is around 5-10%, but it’s important to set a percentage that is both realistic and sustainable for your specific situation.
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3. Open Separate Bank Accounts
Set up separate bank accounts for different purposes, including profit, owner’s pay, taxes, and operating expenses. This physical separation of funds helps prevent “robbing Peter to pay Paul” scenarios, ensuring that each account serves its designated purpose.
4. Allocate Profits Regularly
On a predetermined schedule (usually twice a month on the 10th and 25th), transfer the predetermined percentage of your revenue into the profit account. This is a crucial step as it enforces the discipline of setting aside profits before any expenses are paid.
5. Determine Owner’s Pay
Decide on a reasonable salary for yourself as the business owner. This should be a set amount that is drawn from the business and deposited into the owner’s pay account. Then pay yourself regularly (just like you would an employee) from that account.
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6. Allocate for Taxes
Calculate your estimated tax liability and set aside a portion of your revenue into a separate tax account. This ensures that when tax season arrives, you have the funds readily available to cover your tax obligations. No more stressing on “how” to pay those taxes at the end of the year.
7. Manage Operating Expenses
With profits, owner’s pay, and taxes accounted for, the remaining funds in your income account are what’s available for operating expenses. This forces you to operate within the constraints of what’s truly available after all essential allocations. Making cash king in your business instead of credit.
8. Regularly Review and Adjust
Monitor your financial statements regularly to ensure that you’re meeting your profit targets and managing expenses effectively. Adjust your allocations as needed to align with changing business circumstances. Knowing your numbers is KEY to making all of this work in your favor.
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9. Celebrate Your Successes
As you start to see consistent profits, take time to celebrate your achievements once a quarter. This reinforces the positive financial habits you’ve developed and boosts morale within your team.
10. Reinvest Profits Wisely
Consider reinvesting a portion of your profits back into the business to fuel growth. This could involve expanding your services, upgrading equipment, or investing in marketing efforts. Just make sure you aren’t spending money to spend money.
By implementing the Profit First method, you create a financial framework that encourages discipline, accountability, and long-term sustainability. Remember, the key is consistency and commitment to prioritizing profits in your business operations. With time, this approach can lead to increased financial stability and greater overall success.
The Green Executive® Profit First Certified Coaches teach aspiring entrepreneurs the ins and outs of the Profit First methodology.
We offer a comprehensive approach that covers all the essentials you need for successful accounting and profit management. Our expertise and experience give us a unique perspective to guide your lawn care, landscape or snow removal business through the Profit First program.
Ready to master the formula for increasing profits? Book a session with Adam Linnemann, click here.