As I mentioned before, I am a part of the Pure Bookkeeping Network which is filled with bookkeepers from all over North America who have graciously offered so much insight and helped make my business what it is today.
When I first joined the group and started attending the weekly calls, one book that came up over and over again as a must read was Profit First by Mike Michalowicz. I confess, it took me awhile to understand what the hype was all about, but after receiving it for Christmas, I promptly read it in 3 days and set about using the skills and processes it prescribed. Several months after putting it's steps into practice, I can honestly say it was the best decision that I’ve made to grow my business.
What is Profit First?
At it's core, Profit First is a book on how to, well, make a profit. The premise of Profit First is fairly simple; instead of following the traditional business equation of "income - expenses = profit," you flip it and look at it as "sales - profit = expenses." It's essentially a way of budgeting that guarantees that you as the business owner make profit and this is done through not only increasing your income, but also ensuring that you don't spend too much on expenses.
The Method
While the formula was not a hard concept to understand, it was actually a bit challenging to implement. The first step was to find a bank that would let me open five (yes, five) bank accounts and not charge me if one or more of those accounts had a $0 balance at various points throughout the month. Once I found an institution that met both of that criteria, I spent probably two hours at the bank getting all of the paperwork done and all of the accounts opened.
The five accounts are:
- Income - This is where you deposit all of your cash or checks for the goods and/or services your sold
- OPEX - This is for your operating expenses
- Owner's Comp - This is the account that you as the business owner pay yourself from
- Profit - This is for money set aside to give to yourself as a bonus on top of your salary.
- Tax - This is for money to pay the government
After you open the accounts, this is when the fun begins! Once you have all of your accounts open, you figure out what you want your Target Allocation Percentages (TAPS) to be or how much money you want to distribute to each account after you get paid.
For example, let's say my TAPS are as follows: OPEX = 45%, Owner's Comp = 35%, Profit = 5% and Tax = 15%. If I were to get a check for $1,000, here is what the breakdown would look like:
- OPEX = $450
- Owner's Comp = $350
- Profit = $50
- Tax = $150
Don’t worry if you’re having trouble figuring out what your TAPs should be; there is a handy table in the book that gives you a breakdown on what your TAPs should look like based on how much revenue your business brings in each year.
Once you have your accounts set up, it’s then a matter of making sure that your funds get transferred correctly. In my case, I go on my bank’s website twice a month, usually around the 15th and 30th, and transfer funds from the income account using my TAPs. Once I have enough funds in each account, I pay myself and transfer the profit and tax account balances to another bank I have where they can earn more interest.
Some people might argue that their actual spending looks nothing like their calculated TAPS. That's okay and probably very normal, especially for an established business! Profit First suggests, and I would agree, that If your Current Allocation Percentages (CAPs), or what you’re actually spending, are drastically different than your TAPs, you should consider it a wake-up call instead of writing off this method entirely. It can still work for you! Treat the TAPs as a goal that you want to achieve while you’re practicing this new process. It might take time and many steps to get there but you can do it.
The Best Part
The thing I liked most about the Profit First is that having all of these accounts, or more accurately, having money in these accounts gives me the "permission" I need to spend. As someone who doesn’t like to spend money unnecessarily, I felt better knowing that I could spend more money and I wasn’t being wasteful. For example, if I have money left over in the OPEX account after making sure all of my monthly bills are paid, then I know I can afford to buy additional items. Last month this actually happened, so I decided I wanted to invest in a really nice scanner for my clients books and my own. While I initially hesitated on making the purchase, I was reminded that I had plenty of money in my OPEX account to cover the cost of the scanner. So far it's been a really great purchase and worth every penny. Had I not had the funds set aside for operating expenses, I definitely would not have purchased it.
I also like that not only am I intentionally getting paid (October is the fifth month in a row that I've paid myself), but I am also setting aside money that I can take as a bonus or a reward for my hard work when the time comes. Not only do I feel reassured by seeing my savings go up, but I have the security of knowing that my personal paycheck is part of my business’ success.
In Conclusion
I would highly recommend Profit First to other business owners. This process has been a game changer. Having this in place now gives me assurance that as my business grows, I will always be able to pay myself and keep my expenses under control, but still utilize the money to make wise purchases that will help my business.
To learn more about this revolutionary concept, I highly recommend you read Profit First by Mike Michalowicz.
