What is Profit First?

by | Jan 25, 2022

Profit First is a money management system and book created by Mike Michalowicz. Before we get into the details of what it is, I think we should set the stage with why you should care.

Most businesses fail within the first few years; that’s a lot of time, money, and work down the drain. No one wants to believe that could happen to them, but that’s simply not true. You’ve got to make… and keep a profit if you’re going to stay in business.

I’m guessing you didn’t get into business because you love accounting. You’re a hard worker who is good at something that people need, and you have a dream of financial freedom.

The problem is, you can be very busy working hard and not make a profit. If you’ve ever caught yourself thinking, “if I can tough it out now, the payoff will come later,” you’re not alone. But you deserve better.

As entrepreneurs, we think sales will fix all of our money problems. But experience has shown me that’s not necessarily true either. You can have 5 million in sales a year and still be broke. If you don’t have a good grip on your cash flow, your money will leave just as fast as it came (or faster!) Profit First can fix all of that and a lot more.

What is Profit First?

The easiest way to describe it is it’s like Dave Ramey’s envelope system but with bank accounts. Instead of one checking account that all of your money flow’s in and out of, you allocate funds to several bank accounts so that you have a clear picture of your cash flow and prioritize Profit.

Why Profit First works.

Here’s a quick analogy, let’s say you have a package of Oreo’s; how many should you eat? A couple, maybe. But if you’re holding the entire package, chances are you’re going to eat a lot more than that.

What if you only had a plate with three Oreo’s on it. How many are you going to eat? Probably, three.

It works the same with our finances.

Profit First helps you stay profitable by setting a predetermined percentage aside and running your business on what’s left.

The traditional way of running business finances: Revenue – Expenses = Profit

The Profit First way of running business finances: Revenue – Profit = Expenses

How Profit First works.

The Profit First system is made up of five bank accounts:

  • Income account
  • Profit account
  • Operating Expense account
  • Tax account
  • Owner’s Pay account

When you make a sale, all of that money is deposited into your “Income” account. A couple of times per month, you drain the “Income” account and allocate specific percentages of those funds into the other accounts.

This system is helpful because as soon as you log into your bank:

  • You’ll know how many weeks of owner’s pay you have before you run out.
  • You’ll know you have money set aside for taxes.
  • You’ll know you have a profit set aside.
  • You’ll know how much money you have to run your business on.

If you want to buy something for your business and don’t have the money sitting in your “Operating Expenses” account, you can’t afford it.

The book, Profit First, makes some recommendations on the percentages, but those numbers should be tailored for every business. If you need help figuring out how much cash should go into each account, I can help. As a Profit First Certified Master, I’ll make sure you set this up correctly and have a game plan for future adjustments.