In this TriPod Unicycle Session, Ross and Tara Johnson of North Bay Bookkeeping explore the Profit First accounting method – what it is, why you need it, and how it works.
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Conventional accounting uses the logical (albeit, flawed) formula: Sales – Expenses = Profit.
The problem is, businesses are run by humans, and humans aren’t always logical. Serial entrepreneur Mike Michalowicz has developed a behavioral approach to accounting to flip the formula: Sales – Profit = Expenses.
Just as the most effective weight loss strategy is to limit portions by using smaller plates, Michalowicz shows that by taking profit first and apportioning only what remains for expenses, entrepreneurs will transform their businesses from cash-eating monsters to profitable cash cows.
In this Unicycle Session, Ross is joined by Tara Johnson of North Bay Bookkeeping – she’s a Certified Profit First Professional, Certified Pro Advisor for Quickbooks, and she’s worked with Ross first-hand to implement Profit First at Tricycle Creative.
What Is Profit First?
Profit First is best described as a simple management methodology system based on the envelope system. You may remember seeing your parents or grandparents using this system where they would use envelopes to separate their income into specific envelopes for their expenses such as the mortgage, insurance, groceries, utilities.
How to set up your Profit First system?
There are five foundational accounts: Profit, Tax, Income, Owner’s Compensation, and OpEx (operating expenses). Depending on the priorities of the business, additional accounts may be opened. The main concept of Profit First is to properly prioritize income to manage your expenses and pay yourself! There are certified Profit First experts that you can work with (such as Tara).
Why Profit First is impactful for the most valuable employee: YOU, the business owner
One of the most fundamental parts of Profit First is in the name. Profit First. It emphasizes the importance of business owners paying themselves. When business owners don’t prioritize their pay, resentment can begin to root itself into your business. You are the most valuable employee. You’re on call 24/7. No one would sanely accept a job that is 24/7 without days off or vacations for free! Reward yourself for the work you are doing.
Biggest challenges that come with implementing Profit First
There are 3 main things to get ready for when you switch to Profit First.
- To get your rollout plan for Profit First, it needs to be based on good numbers. If your books are currently a mess, they will need to get cleaned up first. Basing a plan on messy numbers gives you a messy plan.
- You’ll have to get the right bank for you. The modern-day envelopes are checking accounts and you have to be willing to do this to separate your money very literally, not just in a spread. Capital One is a good bank usually because you can open up to 6 accounts for free and you need at least five. Tara uses BB&T with a banker that understands Profit First (some banks won’t allow you to open multiple bank accounts).
- Don’t start too big and with huge expectations. You may not, right off the bat, be able to put 15% of your revenue into profit, 10% into tax, and 35% into owners comp. Hitting those target allocation percentages is the goal usually with small businesses. If you weren’t profitable to begin with you won’t be profitable as soon as you begin Profit First.
Who should use Profit First?
Tara believes everybody should use Profit First. Any company could benefit from this system and that’s because the program isn’t based on a particular dollar amount. There are certified Profit First experts that have the background to handle huge companies with 200 million dollars in revenue. If you are wanting to optimize and give purpose to every cent of revenue, then Profit First is for you.