In a world where financial management is the backbone of any successful business, knowing and applying innovative methodologies is crucial.
One of these revolutionary methodologies is “Profit First,” an approach devised by Mike Michalowicz that promises to transform the way we manage our finances.
But what makes Profit First so special? In this article, we’ll explore this methodology and how it can help you manage your cash flow more effectively.
What is Profit First?: Profit First is more than a method; it’s a financial philosophy. Traditionally, businesses operate under the formula of revenue minus expenses equals profits.
However, Profit First changes this equation to revenue minus profits equals expenses. This approach incentivizes entrepreneurs to prioritize profits, making sure they pay themselves first before incurring expenses. It’s a radical way to ensure the sustainability and growth of your business.
Profit First Fundamentals
The system is based on four fundamental principles:
- Use of Multiple Accounts: Instead of a single account for everything, Profit First advocates for dividing money into specific accounts for specific purposes with the following 4 allocations and possible percentages, which may vary depending on the business model: profit 10%, owner’s compensation 10%, taxes 15%, and operating expenses 65%.
- Priority of Profit: A predetermined percentage of profit is taken before allocating money to expenses.
- Removal of Temptations: By separating profits and other funds, the temptation to spend more than necessary is reduced.
- Regular Distribution Rhythm: Earnings are distributed into these different funds at regular intervals, which helps maintain financial discipline.