To implement the Profit First system with a new client, we have 4 initial meetings to get everything straight and everyone on the same page. We’ll go through our entire implementation process over the course of 4 blog posts. You’ll know how to implement Profit First for yourself.
Profit First is only as good as the bookkeeping history. To make the best financial decisions, you need accurate data. That same data is also used to set up and manage the Profit First system.
Make sure all the numbers are accurate and updated. You’ll need a system in place to make sure your data stays that way. For details on bookkeeping read our blog series here.
Now it’s time to look at your numbers to make some projections. You need to make your best estimate on all your incoming and outgoing cash. Your revenue and expenses. Look at a Profit and Loss statement by month. Not yearly, but monthly. This way you can see trends and anomalies. Think through any future expenses or investments to set a fairly accurate budget to work with.
Let’s now move beyond expected expenses to think about your business goals and wish list. What are you trying to achieve? What are your plans for growth? Then it’s almost like reverse engineering from your dreams to know how much you’ll need in each category to achieve them.
Be very detailed and thorough as this lays the foundation for your whole cash management system.
Core Profit First Principles
With your goals in mind we’ll review the four core Profit First principles. You want to see how they will work specifically for you. Be thoughtful and realistic with yourself.
Studies show that if people want to lose weight, an easy trick to help is to simply use a smaller plate.
Your one business bank account is a large plate with a pile of cash waiting to be spent. The principle is to spread that pile to multiple bank accounts – smaller plates. This gives your cash purpose. This means you will literally open multiple bank accounts and most of them should be at the same bank and connected. This makes your allocations easy and instant. No waiting on transfers.
Some of the top core accounts you should have are INCOME, TAX, PROFIT, OWNER’S PAY and OPEX (Operating Expenses).
Other accounts to consider depending on your specific business needs are TEAM MEMBERS PAY, if you have w-2 employees, EQUIPMENT or something of the sort if there’s something that is a significant and consistent part of your expenses.
Eat Veggies First
If you eat your vegetables first, you’ll have less room for less healthy or completely unhealthy food choices.
With this cash-flow management system, the order you allocate your money is important.
First, put the cash in the PROFIT account. You take the profit first. Then OWNER’S PAY, which is your livable wage if you work in the daily operations of your business. Then TAX. We have to pay taxes, so you might as well set money aside for it from your business finances, so you don’t have to dip into your personal money for it.
This core principle is about not putting yourself in a place to be tempted in the first place. From a cash-flow management standpoint, your PROFIT account and your TAX account are going to build up a healthy cash balance. So in order to avoid the temptation of stealing from yourself, Profit First suggests moving these two accounts to a separate banking institution and setting it up so that those accounts are super inconvenient to access.
Eat Smaller Meals More Frequently (The 10/25 Rhythm)
A bear hibernates and then eats large meals less frequently. The horse grazes. A comparison shows that the bear is powerful, but large and round while the horse, on the other hand, is shredded!
This principle is the heart beat of the entire system. You will do your allocations, accounting, paying bills, all things money twice a month or once a week at the most. We call it the 10/25 rhythm because we suggest doing it on the 10th and 25th of each month. These are the only days you should worry about your money so it doesn’t become all consuming. You are just looking back on everything that happened between the last allocation day and this one.
One thing you should consider when deciding on what days are best for you is if you run payroll or have any other set obligations that they work with that timing.
The next meeting with our new clients we introduce them to the spreadsheet. We take this information and play with the numbers to come up with your plan. We’ll learn all about it in the next How to Implement Profit First post.
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