The profit First Strategy
Some business owners want to grow so that they can make more money. What if we can show you a way to simply make more money now?
Traditional accounting principles would tell you
Sales - Expenses = Profit
Let's not forget taxes and that fact that you want to get paid.
After all expenses are paid, how much do you have left as profit? How much do you pay yourself each month? What percent of sales will be distributed to you as owner's compensation? Would you like to pay yourself more?
What if you started taking your profit first?
Sales - Profit = Expenses
Questions to consider…
What percent of sales do you want to keep as profit?
How much do you want or need to pay yourself each month?
What percent of sales do you normally pay in taxes? Wouldn't it be great if when tax season rolls around you already have enough money saved and are prepared to pay your taxes?
Are all of the expenses that you are currently paying necessary to operate your business? Are there some expenses that you can eliminate? Figure out the things that contribute to making a profit and dump the things that don't.
Now that you have given the above questions some thought, evaluate the following categories and determine what percent of sales you desire to allocate to each category.
Open a separate checking account for each category and another checking account to deposit all income.
Have all of your income deposited into your "Income" account.
Twice per month allocate funds to the other accounts based upon the percentage allocations that you determined.
This process will allow you to be intentional about your spending.
Let's walk through an example.
The owner of My Business wants to pay himself 50% of all sales as owner's compensation. He is estimating his tax liability to be around 15% of sales. It would be great if 10% of sales could be accumulated and set to the side as profit. This would leave 25% available to cover operating expenses.
As of the 10th of the month, Mr. Business Owner has earned $5000 in revenue.
$500 is immediately transferred to the “Profit” account
$2500 is immediately transferred to the “Owner's Compensation” account
$750 is immediately transferred to the “Taxes” account
$1250 is immediately transferred to the “Operating Expenses” account
What if the operating expenses are expected to be more than $1250? Will Mr. Business Owner
A. transfer money from another account so that he has enough money to pay his operating expenses?
B. meet with his accountant to determine ways to prioritize his spending and eliminate any unnecessary expenses, sticking to his budget?
C. use his operating account to pay $1250 worth of expenses and use his credit card for the remaining expenses?
If you answered B, you are correct. By implementing the profit first strategy, you are working towards building a cash strong business. The goal is to only spend what you currently have allocated and available in cash.
These are the basics of the profit first strategy. Sound like an interesting concept? Interested in implementing the profit first strategy in your business? Don’t want to get bogged down with numbers and would like assistance implementing this strategy? Schedule a call.