Profit First is Simple in Concept but Rich in Application
“Don’t worry, the IRS doesn’t expect you to make a profit when you first start out.” I have said this to so many clients and prospective clients in my practice, and I’m sure many other accountants have too. And while it may be true for tax returns, saying so is just one more way entrepreneurs are left with the expectation that they should not have a profit–money for themselves. Entrepreneurs expect to live in poverty.
That expectation is wrong. Being in business should not just be another way of waiting for your ship to come in. It should not be just another lottery drawing. But almost everyone who thinks about starting a business does so with that expectation being part of the sub-text of their business lives. Actually, of their life, period.
So, what’s the difference about Profit First? Simple. You have a profit from the first time you deposit a check from a sale.
Notice I didn’t say, “You get rich from the first time you deposit a check from a sale.” In fact that profit may be only a few dollars, maybe 1% of the amount of the sale. But it is allocated and separated and clearly shows that your business has started paying you something. It’s an ongoing reminder like when the retailer frames his “first dollar” and mounts it on the wall.
What is the Profit First system? You set up five bank accounts: Income, Owner’s Pay, Profit, Taxes, Operations. All your receipts (cash, credit cards, checks) go into the Income account. On a regular schedule you transfer the money out of Income and into the other four accounts. Also on a schedule, you pay your bills from the operations account, and you “store” money in the other three for distribution when called for.
OK, that’s the simple part. What’s the “rich in application” part?
No matter how complex or large your business gets, the principles of Profit First apply. Those principles are based on behavior and psychology and common sense. They are not based on the Generally Accepted Accounting Principles which your accountant may have mentioned to you.
And, more importantly, the system is scalable to the position your business is in at any given time. I heard a podcast recently with a guest who is a Profit First user whose retail business has annual Total Revenue of $3.5 million. So if you are just trying to have your first six-figure year, don’t complain that it’s too complicated.
As your business grows you move from the basic system of bank accounts, to more accounts earmarked for separate purposes. When you start out, you probably don’t have those purposes yet, so don’t worry about them. When you start to think that a new bank account would make some segment of your business finance easier, then open it up and start allocating to it.
Unlike any other system I have seen, Profit First allows you to be in control. Not your accountant or your banker, but you. You can see from the account balances in your system exactly what you have, where it comes from and where it is going.
OK, that’s sort of simple too. But the richness lies in the ability to tailor your system for your needs, rather than trying to learn a very complicated subject called accounting.
But (there’s always a “but”) what about taxes and applying for a loan, or other cases where someone wants details in the old fashioned financial statement way? I’ve got good news–Profit First has an answer for that.
You see, this system does not replace accounting. It can’t. You’ve probably seen books or webinars titled something like “Accounting for non-accountants.” If you’ve spent time reading or attending such events they always turn out out to be an attempt by an accountant to get you to wrap your head around his or her specialty–accounting. It’s like reading a book entitled “Brain surgery for non surgeons,” and taking care of your health based on that book. (For any brain surgeons reading this, I am not saying that accounting is as complicated as brain surgery. However, if you’d like to jump into the 70,000 pages of the US tax code, which is only a special segment of accounting, your opinion may change.)
Profit First is a system that allows you to immediately understand from the display of your bank account balances how your business is doing. The operative words in that last sentence are “you. . .immediately understand.” No one else has to interpret or explain or otherwise act as an intermediary for you. Instead, your Profit First Professional can act as your intermediary into the world of taxes, banking and financial statements so that those people can understand how your business is doing.
With this system, you are the first to know how things are.
To get a taste of the system, I invite you to read the book Profit First, by Mike Michalowicz. Mike’s goal is to eliminate entrepreneurial poverty, and the book is his opening salvo in that battle. For a sample, go online to www.bit.do/taxwright and register your name for my email newsletter. In return, you’ll get a downloadable copy of the core chapters of the book.
While you are considering, check this out. See for yourself how this goes. Right now, go to your bank and open a savings account and name it “Profit.” Every time you make a deposit over the next 90 days, put 1% of that deposit into the Profit account. Don’t check the balance. Don’t touch it. Don’t use it to expand your business. Do everything else exactly as you have been doing. At the end of the 90 days, take a look at its balance. That money is yours. Take it out and spend it for you and your family. That’s what profits are for. That’s why you got into business. And if that doesn’t convince you to implement the complete system, I’ll be a monkey’s uncle.