So you may have read the book, or a few blogs, or attended one of our webinars… and you’re ready to give this whole Profit First thing a crack. But you’re wondering, “how do I apply Profit first to my business?”
Where do you start? How do you apply Profit First to YOUR business?
Firstly we’d recommend that you discuss your implementation with a Profit First Professional. This way, percentage allocations can be assessed alongside your current position, your business type and structure, short and long term goals, as well as current debts.
But if you want to try it yourself first, here’s where you start.
Set your goals
The first step in applying Profit First to your business is understanding your personal goals for your business, and yourself personally.
Outlining the monetary goals and current financial standing gives you a clear idea of where you’re at and what you’re aiming for.
Your goal may be to expand from 2 locations into 5 locations.
- What is the cost required to achieve that goal?
- Are you clear on the projected income of the expansion, break-even point etc?
- How long will it truly take you to be in a position to expand without financial pain?
Your goal might be to retire with $10M in the bank in 10 years time.
- What is the salary you need to achieve that goal?
Your goal might be to step back from the business and let a team run it.
- What is the cost to do that?
You can then use the Profit First percentages method to work backwards and determine the revenue you require to achieve those goals. Then you can build out a plan to achieve those revenue goals in alignment with your Profit First approach. More on this later.
The goal here really is to not just to say “I need to make $5M this year, and $8M the next,” but to also know how you will achieve that knowing that only 30% of revenue (for example) is available to cover expenses.
We see all the time businesses that can scale their revenue and business really well, but their expenses scale right with them, often leaving the business owner in just as much financial mess. We don’t want that to happen to you! And that’s exactly where Profit First can help you build a profitable and sustainable business – from day one of implementation!
Determine your percentages and bridge the gap
Profit First works off a percentage model whereby Gross Revenue is divided into the following areas:
- Materials & Subs (if you run a business that is “job” related then Materials and Subs need to come off gross revenue i.e. contractors, product etc.)
- Owners Pay
- Operating Expenses (OpEx)
In the book the general percentages rule is:
- GST 10% of Gross Revenue*
- Materials & Subs 20-30% of Gross Revenue
- Owners Pay 50% of Real Revenue**
- 5% Profit of Real Revenue
- 15% Tax of Real Revenue
- 30% Operating Expenses of Real Revenue
*Gross Revenue is the total of all income coming into your business.
**Real Revenue is Gross Revenue minus GST and Materials/Subs.
This percentage structure can vary greatly on your business type, structure, service/product and current debt situation. This is why we recommend consulting with a Certified Profit First Professional to get personalised advice in setting your Profit First percentages.
To kick-start this new money management habit, many business owners find it easier to start with 1% profit and work up from there (usually while they decrease expenses).
Tax percentage does not include GST for Australian businesses. GST comes off gross revenue first before percentage distribution. Therefore $1000 income, 10% aside to GST and remaining amount split between all other accounts inc Tax. The Tax account is used to cover business and personal tax. You can opt to transfer the 10% GST to the Tax account if you do not want a separate GST bank account.
An easy way to determine Profit First percentages to work from is by using the calculator in our Free Preparing For Profit First guide.
In this guide, there is a calculator worksheet in which you can input your current financial situation and your financial goals. The calculator will automatically calculate where your percentages are sitting at now and show you the revenue required to reach your financial goals using the Profit First method.
Knowing the gap between where your money is being spent now vs where it needs to be to reach your desired financial goals helps solidify exactly how you can attain your financial goals. This is the starting piece to setting up a plan to improve your business’ money habits so that you can grow a sustainable and profitable business.
Seeing the money gap and also your current percentages of revenue spend can be eye-opening in terms of what you need to change in your business. The big issues we commonly see are:
- Expenses are too high
- Debts aren’t being accounted for
- Pricing is not profitable
- Owners aren’t being paid
This is why in our Preparing For Profit First guide we include additional worksheets that help you work through these issues if they’re showing up in your business.
Create your accounts and establish the routine
The next phase of applying Profit First to your business is to start implementing the change in money management habits.
Setting up Profit First accounts
It starts with opening up bank accounts in addition to the main account where revenue is received. These additional accounts are for:
- Operating Expenses
- Materials & Subs
- Owner’s Pay
The idea being that on a regular basis, revenue received is divided up according to your Profit First percentages and paid to their relevant accounts.
Monthly Gross Revenue = $225,000
GST (10%) = $22,500
Materials & Subs (20%) = $45,000
Monthly Real Revenue = $157,500
Owners Pay (50%) = $78,750
Profit (5%) = $7,875
Tax (15%) = $23,625
Expenses (30%) = $47,250
The purpose of each account
Funds paid to the Tax account stays in that account until taxes need to be paid each quarter.
Funds paid to the Profit account stay in the profit account for the quarter. At the end of the quarter the profits are NOT to be reinvested in the business but distributed to suit one of three purposes:
- Pay off debt. If you have debt, up to 99% of the Profit Account can be allocated to the debt to help pay it down (minimum repayments come from OpEx account) and the remaining 1% to the owner.
- Create a buffer. If you have no debt, then 50% of the profit at quarter-end is to be moved to a Profit vault account (in another bank) to create a 3-6 months buffer for if worst-case scenario no revenue was to come in, the buffer can cover the cashflow dip including owner’s pay etc. The remaining 50% to go to the owner.
- Owner distribution. If you have no debt and a buffer has already been established, then the profit is distributed to the owner. Therefore it is important to understand tax implications and include your accountant or speak to a Profit First Professional Accountant.
Funds paid to the expenses account are used to pay your overheads, including staff wages & annual overheads.
The Owner’s Pay account should be a business account. That way if you have a company structure the gross wage percentage goes into that account and you can transfer the nett wage into your personal account. This Owner’s Pay account can also hold superannuation.
Funds paid to the owner, remain paid to the owner and not reinvested back into the business as capital.
Set your routine
In the Profit First book, it is suggested that dividing up the revenue into the four accounts happens on the 10th and 25th of the month. You can, of course, set a monthly, fortnightly or weekly schedule that suits your needs and business cash flow.
The key here is consistency. Set your schedule and percentages – and stick to them!
Get Started with Profit First
The Profit First method works for so many different business models, and any stage of business. To get your business prepared for implementing Profit First, download our free guide to Preparing Your Business For Profit First.
This free guide will step you through the initial 5 phases of reviewing your business in preparation for implementing Profit First. It also offers a free Profit First percentage calculator to show your money management now, and the gap to achieve a sustainable and profitable business.
For 1:1 assistance and implementation of Profit First in your business, connect with a Profit First Professional near you.