The Profit First Approach: Strategies to Boost Your Business Earnings

Having trouble making your business profitable?

I found a game-changer with the Profit First system, which completely transformed how I manage my finances and view profit. I’m AJ, and I recently sold my business for several million dollars. A significant part of that success was due to the Profit First system. Stick around, and I’ll share some useful tips and adjustments that made a big difference for me. Let’s dive in!

The Profit First system is a financial management approach that flips the traditional profit formula. Instead of treating profit as an afterthought, this system prioritizes it right from the start by setting aside a percentage of income as profit first. This means that from the get-go, you allocate funds for profit, taxes, and your compensation. The remaining money forms your budget for expenses like rent, wages, materials, and utilities.

Though it might feel strange at first, prioritizing profit makes you more aware of your spending. More importantly, it underscores the value of investing in your peace of mind and quality of life. This approach can be life-changing, especially if you’re not used to rewarding yourself.

You’re probably wondering how to set aside profit if you feel like you don’t have any. We’ll get to that.

Here’s how I would implement the Profit First system if I were starting over:

Start by assessing your expenses in your accounting software and categorize them. This assessment becomes your baseline for the Profit First journey, known as your CAPS (current allocated percentages).

Your goal is to achieve TAPs (target allocated percentages), which are ideal percentages for your expenses when your business is running efficiently. For taxes, it’s wise to overestimate; I usually earmarked 20% instead of 15% to avoid any surprises.

Next, set up multiple bank accounts for different categories: Revenue, Owners Pay, Taxes, Operating Expenses, Employee Salaries, and Profit. When you receive income, deposit it into your revenue account and then distribute it among the other accounts according to your TAPs. You don’t need to do this daily; once a week or bi-monthly should suffice.

For example, with $1,000 coming into your revenue account, divide it based on your TAPs. If your expenses exceed your budget, you’ll need to cut costs. Unlike the original system, I separated employee salaries from operating expenses to clearly see where I could cut costs.

Every quarter, review your allocations and adjust your TAPs, even slightly. The aim is to run your business efficiently enough to increase what you pay yourself each quarter. The Profit First system is flexible and should adapt to your changing business needs.

You should also add accounts as necessary. For instance, we added an account for Marketing Expenses with a TAP of 5% of gross revenue. Make the system work for you!

At the end of each quarter, you should have some money in your profit account. Take 50% of it as a distribution; you’ve earned it! Also, consider putting your profits in a high-yield savings account or, if you’re more advanced, a T-Bill ETF.

Remember, the goal is not to deprive your business but to make it more efficient and sustainable. Profit First instills financial discipline and fosters a healthier relationship with your finances. It’s a journey from financial uncertainty to stability, but mastering the Profit First system will put you on the right path.

Feel free to share any thoughts or questions!