Profit first basics
So you’ve read or maybe listened to Profit First, by Mike Michalowicz. Or you’ve heard about it, but you aren’t much of a reader and you’re looking for the cliff notes version.
The main idea is to take your profit first, instead of waiting until year end when you file taxes and your accountant tells you what your profit was. You basically budget your profit into your business and work backwards from there. Profit First is essentially the envelope method of budgeting, but for business, and using bank accounts instead of envelopes—because you can’t run a business with cash this day in age.
The 5 envelopes (bank accounts)
You will start by opening 5 bank accounts for your business:
Profit - this is where you will transfer and keep your profit
Owner’s Pay - this is where you will transfer the money you pay yourself
Taxes - you guessed it, this is where you’ll transfer the money for the tax man.
Operating Expenses (Opex) - this is your main bank account, where you will pay your bills from.
Income - this is the account you will deposit all your revenue into.
Now you’re probably wondering how you do the dang thing. Let’s start with your first deposit, or customer payment. Your customer pays you $5000 for the awesome job you did building a website. You deposit that $5k into the Income account.
Now you have to figure out how to allocate it out to the rest of the accounts. For the purpose of this post, we are going to use some arbitrary percentages for allocating, but we will dive into allocations in more detail in another post.
These are our allocation percentages:
Profit - 5%
Taxes - 15%
Owner’s Pay - 65%
Opex - 15%
You will take that $5,000 deposit—now sitting in your Income Account—and allocate it to the remaining accounts according to these percentages Afterward, your income account will be zero, and you’ll be building your profit account, paying yourself, setting aside money for taxes, and allocating money to pay the bills for your business
This is an extremely simplified example, especially since every business is different, has different overhead, and different spending, but working this way builds a habit of paying yourself and setting aside a profit. And operating your business with what is left. It creates a frugal business owner, but a prepared one. You won’t be worrying about paying your tax bill at year end, and you will have a quarterly bonus (profit).