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Profit first

I have come across an interesting book call Profit First written by Mike Michalowicz which suggests changing the accounting formula.

The standard accounting formula is sales less costs equals profit. But, the trouble with this formula is that it puts you (the owner) last behind everyone else…you get what’s left over after:

  • Employees
  • Suppliers
  • Landlord
  • Bank fees
  • Loan interest
  • Taxes

How about putting you and your family first for a change?

You can do this by changing the formula to; sales less profit equals costs. This approach forces you to run a business that makes the profit you want.

The system works by making financial management simple by using multiple bank accounts rather than producing management accounts and running your business on them.

Once you have the accounts set up you pay money into them on a regular basis. The bank accounts you need are:

  • Income
  • Profit
  • Owner’s pay
  • Taxes
  • Operating expenses

All receipts go into the Income bank account but on the 10th and 25th you transfer money to the other accounts using “allocation percentages”.

The profit and taxes accounts should be savings accounts which do not allow instant access. This means you will not be tempted to “borrow” money from the business or overspend.

Twice a month you should pay bills and at the end of the month pay yourself and employees. One of the first things to do is review all your costs and cancel any recurring amounts/contracts you don’t really need.

Every quarter you should take 50% of the profit for yourself. This money is for you and NOT to be re-invested back into the company, the 50% left in the company is for re-investment.

At the end of the year you can review all your percentages.

If you’d like to explore Profit First let me know.

Image from Flickr by Andrechinn.

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