The fundamental theory of Profit First states that the accounting equation we’ve all used, Sales – Expenses = Profit, puts our focus as business owners in the wrong place like a bad dive bar in the wrong side of town. When we focus on expenses, profit is always something we’re chasing.
Instead, what if we shake up the mix using Sales – Profit = Expenses? Profit before expenses? Yes, it’s a thing. Logically, the math is the same, but from the standpoint of the entrepreneur’s behavior, it is game changing!
Seeing financial success ahead of time can change a business owner’s mentality and the way business runs for future profit. Yes, you can go on vacation every year, buy that vacation home you’ve wanted, and upgrade to top-shelf liquor for that toast to success!
As business owners, we have habits around running our businesses that overserve us with the wrong strategy, causing accounting headaches. Our perceived business needs tend to expand to meet whatever supply of cash we have available. Business owners tend to make financial decisions based on our bank balance, rather than our financial statements.
Profit First works to improve these habits and allows you to leverage them, instead of them working against you. The system doesn’t try to change your habits (nearly impossible to do) and works with existing habits acting as “guardrails” to keep you safe in your lane.
We’re happy to take the wheel to safely steer you in the right direction or can let you take the wheel on the road to success when you feel comfortable. Download your Profit First cheat sheet and let’s shake up numbers for a toast to success!
We offer a variety of Profit First Professional services to fit your business needs. Schedule your consultation and let’s craft a concoction tailored to your financial freedom together. Cheers!
If you’re more into DIY, check out our Profit First Road Map program. This tool allows you to input expenses and calculates the best areas to improve your profit as you track and manage cash flow on your own.
Tena is a Profit First Certified Master, but she’s no stickler when it comes to teaching her wise accounting ways. Here are the “Cliff’s Notes,” a cheat sheet, for a quick overview of Profit First.
The GAAP (Generally Accepted Accounting Principles) formula for determining a business’s profit is Sales – Expenses = Profit. While it’s logical and accurate, it doesn’t account for human behavior. In this formula, profit is an overthought, a leftover. Profit is rarely there and the business continues on its check to check survival.
Let’s shake it up and try a new concoction! How about we switch the recipe up? Instead of Sales – Expenses = Profit let’s try Sales – Profit = Expenses
The math is the same, but the formula better follows human behavior and habits. With Profit First, you take a predetermined percentage of profit from every sale first, and only the remainder is available for expenses.
Author and historian C. Northcote Parkinson theorized that our demand for a resource increases to meet the supply of it. That is why when we are given two weeks and $1,000 to do a project it takes two weeks and $1,000, and when we are given eight weeks and $10,000 to do the same project it takes eight weeks and $10,000. In essence, we use all of what’s available and overserve ourselves.
Profit First makes Parkinson’s Law an asset. By taking profit first the money available for expenses lessens, and we are forced to find ways to get the same things done for less money.
Most entrepreneurs don’t have the time to read the financial statements necessary to manage the finances of their business. Theoretically, you should review and correlate your Income Statement, Balance Sheet, and Cash Flow Statement monthly (or more frequently), but few entrepreneurs do.
Instead, most entrepreneurs check their account balance and make financial decisions based off of what we see. This results in consuming all that is available (Parkinson’s Law), resulting in dehydrated profits and stress headaches.
Profit First encourages the entrepreneur to continue “bank balance accounting” by first allocating money to profit (and other accounts) so that they see the actual portion of deposits that are available for expenses and automatically adjust to it, resulting in spending responsibly.
Many entrepreneurs try to force themselves to become better at accounting and to become more disciplined in their fiscal management by pure willpower. But just like a muscle, willpower can be drained. And in a moment of financial stress or surprise expenses, the entrepreneur will break their own fiscal rules and spend the money they have.
The Profit First principle does not try to change your habits (nearly impossible to do), but works with your existing habits. By first allocating money to different accounts, and then removing the temptation to “borrow” from yourself, your business will become fiscally strong and you will benefit from regular profit distributions. That’s right, you can now afford to treat that new client to a lobster dinner and top-shelf martini (or two). Celebrate your hard work in leveraging those stubborn habits!
Ready to learn more? Download the Profit First Cheat Sheet, for a quick overview of Profit First and how you can get started.
You won’t find a more genuine, involved, competent, caring CPA than Tena. I trust her with all my confidential financial information.
Tena is the best! She really takes the time with each of her clients! You won’t regret choosing Tena to handle your tax and accounting needs.
Tena has been instrumental in helping us get our business off the ground. As a start-up company, we wear 20 different hats, but the most important one is having control of the financial side of our business.