profit first formula

5 Things You Must Know About the Profit First Formula

AKA The Real Reason Your Cash Flow Sucks & You Feel Like You’re Living Check to Check

Let’s talk about an incredibly important topic: PROFIT.

Let’s dig into this here and talk about why you should put profit first and the profit first formula to help your business grow.

It’s a critically important topic because 83% of small businesses operate check to check. 

When you operate check to check,  it creates lots of chaos and stress both for your business and you, the business owner and CEO.

That stress spirals down to impact your employees, your contractors, your clients, and your family.

Being in a state of feast or famine, is a huge drain on your energy, time and focus.

It puts you in a reactive sales position where you will sell anything to anyone because you need money now. 

It doesn’t give you the resources to slow down and grow your business intentionally.

Three big profit myths that I hear are:

…you have to be further along to make profit

…the path to more profit is through more sales

…running a profitable business is hard.

All of these things are untrue.

As a matter of fact, you can start to profit with your first sale.

If you’re not profitable, then throwing more revenue at your business is just going to give you unprofitable revenue.

Generating healthy and sustainable profit isn’t hard. It’s a habit.

I’m SO passionate about helping business owners create more wealth for themselves and others, that I’ve been busy working toward becoming a Profit First Certified Professional — as in the book Profit First.

Today, I want to share with you some of the magic that is the Profit First Formula.

The Profit First Process is based on a few key concepts that you want to master.

As a matter of fact, there are 5 things you must know about Profit First.

The Profit First Formula:
AKA The Real Reason Your Cash Flow Sucks & You Feel Like You’re Living Check to Check

The GAAP (Generally Accepted Accounting Principles) formula for determining a business’s profit is Sales – Expenses = Profit. 

It is simple, logical, and clear. 

Unfortunately, it’s a lie. 

The formula, while logically accurate, does not account for human behavior. 

In the GAAP formula profit is a leftover, a final consideration, something that is hopefully a nice surprise at the end of the year. 

Alas, the profit is rarely there and the business continues on its check to check survival. 

Sales – Expenses = Profit

Sales – Profit = Expenses

With Profit First, you flip the formula to Sales – Profit = Expenses. 

Logically the math is the same, but from the standpoint of the small business owner’s behavior, it is radically different. 

With Profit First, you take a predetermined percentage of profit from every sale first, and only the remainder is available for expenses.

Parkinson’s Law

Author and historian C. Northcote Parkinson theorized that our demand for a resource increases to meet the supply of it. 

Or our work/resource expands to the time we give it. 

That is why when we are given two weeks to do a project it takes two weeks, and when we are given eight weeks to do the same project it takes eight weeks. 

That is why when given $1,000 to complete our work we get it done with $1,000 and when given $10,000 to complete the same work, it takes $10,000. 

Profit First makes Parkinson’s Law an asset. 

By taking profit first the money available for expenses lessens, and we are forced to find ways to get the same things done for less money.

A History Of Success

Admittedly, the Profit First formula is nothing new.  

It is the application of the time-tested and world’s greatest financial mechanism, “pay yourself first,” applied to small business ownership. 

Just as wealthy people know to pay themselves first and then use the remainder for expenses, Profit First teaches us to take our profit first and then use the remainder to run the business.

The 401K retirement plan has been the greatest savings mechanism in US history because of this powerful “pay yourself first” premise.  

Profit First is already proving to be the greatest profit-generating mechanism in the history of business because of this same powerful principle. 

So, while Profit First is nothing new, it is truly unique. And it is truly effective.

Bank Balance Accounting

Most small business owners have all the reasons to not check their financial statements — they don’t understand them, it’s best not to look, they think “ I was never taught how”.

Most small business owners have never thought about the relationship they want to have with their money or how to cultivate that relationship. 

How many times have you peeped your checking account through a half squinted eye and felt like a total failure when you saw a “low number” in that account? 

Or maybe you were pleasantly surprised because you had some money you could go spend.

This is called Bank Balance Accounting and it’s most likely keeping you in a vicious cycle of scarcity and survival.

Profit First encourages the small business owner to continue “bank balance accounting” by first allocating money to profit (and other accounts) so that the small business owner sees the actual portion of deposits that are available for expenses and they automatically adjust their spending accordingly.

Don’t Change Habits, Leverage Them

Many small business owners try to force themselves to become better at accounting and to become more disciplined in their fiscal management by pure willpower. 

But just like a muscle, willpower can be drained. 

And in a moment of financial stress or bigger than expected expenses the small business owner will break their own fiscal rules and spend the money they have. 

The Profit First principle does not try to change your habits (that is nearly impossible to do),

Profit First works with your existing habits. 

By first allocating money to different accounts, and then removing the temptation to “borrow” from yourself, your business will become fiscally strong and you will benefit from regular profit distributions.

Now that you know the basics of profit first you can decide if this is something you want to implement in your business.

If you ARE seriously considering implementing Profit First so you can have consistent and stable cash flow, more than enough money to pay your bills, AND provide for your family, and have the peace of mind that most business owners don’t have, reach out to learn more about Profit First Planning and Coaching.

Together we can decide if Profit First is the best thing for you to focus on right now.