A Guide to Streamlining Your Finances with Profit First


The Profit First Method is a way to manage your finances and change your business mindset, by placing profit at the heart of their operations. While it may be commonly assumed that all business owners inherently prioritise profit, the truth lies in the nuances of their actions and strategies.

Traditional ways of managing finances treat profit as a mere output derived from the equation of total revenue minus expenses. The revolutionary ‘Profit First’ Method challenges this conventional viewpoint. Within its framework, profit is elevated to input—a non-negotiable entity that holds significance and provides a system that reduces the complexities of the business’ finances.

What is the Profit First Formula? 

Embracing this approach signifies a transformative shift, where profit is no longer an outcome but a foundational business pillar. 

Traditional Financial Formula:

“Sales – Expenses = Profit” 

The Profit First Formula:

“Sales – Profit = Expenses”   

This shows expenses aren’t inevitable fixtures that must be accepted without question.

With the implementation of the Profit First Method, a remarkable shift occurs in how we perceive and handle expenses within a business. 

Understanding Profit First Formula 

Here’s how the Profit First methodology works: 

Let’s assume your monthly sales amount to $20,000. Under the Profit First Method, you would designate a predefined percentage, say 20%, and set it aside in a separate account dedicated to profit. This leaves you with $16,000, which can be allocated towards covering expenses and reinvestment.

By adopting the Profit First Method, businesses have successfully prioritised profitability despite the complexities of startup costs and expenses. With this innovative mindset, the expense budgets reflect the remaining cash flow after ensuring the business’s profit allocation.

Streamline Your Business With The Profit First Method Of Cash Management

Profit First dares us to question the status quo and prompts us to contemplate: 

How can I manage my business in a manner that is both profitable and prudent without adding to the list of expenses?

How Does Profit First Work?  

Indeed, the brilliance of Profit First lies in its simplicity, making it accessible and easy for entrepreneurs to implement and benefit from right away. 

Here’s a concise breakdown of the three fundamental steps to embrace the Profit First method:

Set Up New Bank Accounts

To kickstart the Profit First journey, you create dedicated bank accounts for specific purposes. These accounts form the foundation of the Profit First system, and they are designed to streamline your financial management. Typically, the essential accounts are:

  • Income Account: This is where all your revenue flows initially.
  • GST Account: This is money collected on behalf of the government, by removing GST first it shows how much money is the business’ to use.
  • Profit Account: A separate account exclusively reserved for your profit allocation.
  • Expense Account: The funds needed to cover your business expenses are transferred here.
  • Tax Account: This account holds a portion of your income to cover taxes.
  • Owner’s Compensation Account: The account for your compensation as the business owner.

Decide Percentage Allocation

The next step involves determining the percentages of your income you will allocate to each account. The percentage allocation depends on your unique business situation, financial goals, and growth objectives. Careful consideration of your expenses, taxes, and desired profit margin is essential to strike the right balance.

Transfer Payments Accordingly

Once you have decided on the percentage allocation, it’s time to take action. As income flows into your business, you must promptly transfer the designated amounts to their respective accounts. For example, if you’ve decided to allocate 20% of your income to profit, as soon as money enters your Income Account, 20% should be promptly moved to the Profit Account.

Reinvest Wisely: Balance Business Growth and Self-Care

“Shouldn’t I Reinvest In My Business First?” This is a common question that arises, especially in the early years of a business, where reinvestment appears as a crucial strategy for growth. Indeed, during the initial stages, it is customary to reinvest a portion of the profit back into the business. However, it’s essential to discern the most prudent use of those funds. 

Profit First encourages a thoughtful approach to reinvestments. While you may decide to channel some of the profits towards projects that foster business growth, it’s essential to refrain from using it for day-to-day operations. One critical aspect of this reinvestment strategy recognises you are your business’s greatest asset. Thus, sometimes, the most significant investment is in your growth, development, and well-being. 

Setting aside a dedicated percentage of profit for personal growth and well-being grants you the freedom to invest in yourself without exhausting yourself by grinding harder solely to afford self-care. However, it’s crucial to remember that reinvestment can become an obstacle when not executed wisely. 

While investing in business growth is essential, it should be done strategically and with solid foundations. Reckless spending on unnecessary “bells and whistles” can lead to instability and hinder the growth you seek. 

Strengthening Your Business Foundation

Before impulsively purchasing another new widget to pursue business growth, take a moment to reflect and ask yourself a crucial question: “Will this move me closer to the next level?” Sometimes, it’s wiser to prioritise strengthening the foundation of your business before diving into new investments.

Here are some practical steps to consider:

  • Cancel Unused Memberships: Identify memberships you don’t use frequently or no longer align with your business goals.
  • Optimise Office Space: If you have excess office space, consider leasing it to other businesses.
  • Utilise Contractors: Consider hiring contractors instead of full-time employees for specific roles and tasks. 
  • Reassess Credit Card Fees: Scrutinise recurring credit card fees, especially those related to software-as-a-service (SaaS) subscriptions. Eliminate unnecessary fees that don’t significantly contribute to your business’s efficiency or growth.
  • Cap and Prioritise Expenses: Evaluate your expenses and identify areas where you can set limits without compromising essential operations. 

By rethinking your debts and adopting a proactive approach to managing your business expenses, you position your enterprise on a more solid footing, setting the stage for sustainable growth and long-term success.

Balancing Owner’s Pay and Profit

As you delve into the Profit First model, determining your Owner’s Pay account amount emerges as the next critical step. Yet, for new entrepreneurs, establishing a fair wage can prove to be a challenging task.

There are numerous factors to consider, making the process complex and multifaceted:

  • Acquiring New Customers: The costs of developing new customers should be considered when deciding on your Owner’s Pay. These expenses play a pivotal role in your business’s growth and success.
  • Cost of Delivering Products or Services: The expenses associated with delivering your products or services to customers are essential to incorporate into your Owner’s Pay calculations.
  • Outsourcing Fees and Staff Wages: If you rely on outsourcing or have employees, their wages or fees must be considered to arrive at a justifiable Owner’s Pay amount.
  • Physical Costs: Consider costs such as rent for business premises, transportation, and marketing expenditures when determining a fair wage for yourself.
  • Personal Investment of Time and Energy: Acknowledging the time, effort, and dedication you invest personally into your work is crucial for setting a sustainable Owner’s Pay.

Amidst these considerations, entrepreneurs may find it tempting to undervalue themselves to free up funds for other expenses. However, it’s essential to recognise the significance of fair compensation for your efforts. 

Unlock Your Profit Potential with Additional Business Concepts 

At Additional Business Concepts, we believe in the power of a mindset shift to transform your business’s profitability. Our guidance and proven accounting systems are tailored to elevate your business to new heights of success.

With the support of our dedicated team of Profit First Certified Professionals, you can maximise your income and unlock the true potential of your business. We provide you with the financial understanding and strategic insights needed to navigate the complexities of entrepreneurship, propelling your venture towards sustainable growth and prosperity.

Leap towards a brighter financial future and seize the opportunity to experience freedom. Contact us today, and let’s ignite your profitability! Join us on this transformative journey and embrace the limitless possibilities that await your business. 

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