Profit First or Pay Yourself Last?
- By Sara Brennan
- June 10, 2020
I was introduced to certified Profit First coach Michele Williams through the A Well-Designed Business® podcast.
Since listening to her episodes (137, 180, 395), I have done one-on-one coaching with her and read the book Profit First by Mike Michalowicz, based on Michele’s recommendation.
After reading the book, I adopted the Profit First financial system for my business and have experienced the power of knowing and understanding your finances.
I have to say, I’m addicted! Although the Profit First concept is simple, it is impactful and extremely effective in making sure you are running a profitable business. It forces you to pay yourself first and look at expenses second.
Profit First made me get really clear with my goals.
Oftentimes we are looking at the software and tools that can make our lives easier without a full understanding of if we can actually afford these things.
Profit First make me check in on my business financials on a regular basis and it helped me to get my business expenses down so there was more room for profitability.
I used to spend, spend, spend and then whatever was left at the end of it all was what was considered profit.
What I like about Profit First is that flips this concept on its head and says that you should set aside, save, pay yourself, THEN spend. A simple mindset shift, but so powerful!
To give you an example of how this process has worked, I will share my experience with you.
I sit down and review my books at the end of every month. I am checking my statements more frequently, but I’m doing a deep dive on a minimum of a monthly basis.
From here, I am taking all of the money that has come into my business and I’m divvying it up into five checking accounts: Income, Taxes, Operation Expenses, Owners Compensation and Profit.
Based on where you are in your income level, you will divvy your dollars based on set percentages that the book provides you.
I’ll play out a scenario you can see how this has worked for me.
I may get a check from a client for $10,000. I may know that $6,500 of that goes towards the product I’m about to order.
So the $10,000 came into my “Income” account and I will immediately transfer $6,500 of that to my “Op Ex” account so that money is there when I need to make those payments.
This money should never be used to pay employees or other bills. This money was essentially never mine to spend—it goes towards the “Cost of Goods Sold”.
Then, I will take the remaining $3,500 and divvy it up based on the specific percentages set by Profit First into my other checking accounts.
Doing this ensures that I have the funds I need allocated to the correct places when I need them.
This book and method of finances allowed me to have more than enough money to pay my taxes this year.
This was amazing because there was no “surprise, you owe a TON of money to the IRS!” moment because I knew and had saved up exactly what I owed.
This book also allowed me to save money into a specific “Profit” account that can be used for anything I want, which is pretty cool.
You can choose to share your profits with employees, do charitable things with them, use towards marketing or use them towards new gadgets and gear that will help your business become more efficient.
The point is the money is there and yours because you are dedicated to making your business profitable.
As I mentioned before, Michele Williams is a certified Profit First coach, so she was a guiding light for me as I was setting up this system for my business. She helped me to set yearly/quarterly and monthly goals that realistically supported the growth of my business.
I would highly recommend that you get someone to start you off on the right foot if you are looking to adopt this system for your business – its worth knowing and understanding how your finances work!
Why talk about Profit First so much right now?
Well, the last few months have been very challenging for small business owners around the world.
So many don’t have their finances in order and are living month-to-month or even day-to-day. It becomes devastating when something happens and you can no longer work.
If you have not planned for times like this, you may find yourself in a bit of trouble.
Having several months pay set aside in my different accounts allowed me to push through the uncertainty of COVID-19 and continue to run and operate my business.
Knowing you’re doing the right things with the hard earned money you and your team bring in is the absolute best peace of mind you can ask for as a business owner.
I hope this post helps to guide you to take a good look at the way you are running your business finances.
If anything, I hope this post allows you to ask yourself to reevaluate and ensure things are where they should be.
If you’re someone who pays yourself what is leftover, please know there is a better way.
I highly recommend you consider reading the book Profit First and find a great financial coach, accountant and bookkeeper to make sure everything is in alignment.
Most of us run our business for profit—it’s a lot of work and it’s usually not a hobby. Make sure your financials are where you want them to be and know it’s never too late to turn things around.
I hope you are staying well, safe and healthy during these unprecedented times. I think of all of you, my fellow design colleagues and design entrepreneurs, often and wish you all the best.
Continue to show up every day and be excellent. Talk to you soon.
Farha(1 December 2020)
Yes, Profit First has been a game-changer for my business as well. It has made me more confident and knowledgeable about my finances. I work with a financial coach who is certified in Profit First.
I have become smarter about my finances. An excellent change in myself.