PROFIT FIRST: What is it?

Profit First proponents tell us that for nearly 50 years, we’ve all been doing it wrong! If you’re a business owner, like me, then you’ll have been adhering to something known as “GAAP” (Generally Accepted Accounting Principles)

Whether or not you knew about it, it is wrong. Why? Because of this:

Sales – Expenses = Profit

A huge majority of you will realise that, whilst this formula makes sense, it is flawed.

Does this sound like you?
You log in to check your bank balance, see you have some money spare…but you have all those bills to pay. So, you pay them all only find a few pounds left in the account, profit is a leftover, an afterthought…

Another problem is that sometimes we check the bank balance and see there is no money! We panic, then focus on selling our product or service and collecting our debts, trying as hard as we can to bring in money.

This is called bank balance accounting and this makes us very reactionary. You then question why you’re running a business in the first place! Until NOW!

If you paid any attention in maths at school, (I didn’t), you’ll know about how equations work and that altering the ‘layout’ of the equation will give you the same result:

Sales – Profit = Expenses

By simply flipping the formula, putting your profit before expenses, the bottom line is no longer a leftover. Profit becomes a daily habit, and something that your business will realise in each and every transaction.

It may not look like a big change, but it fundamentally alters the way you’ll manage the cash flow (and the rest) of your business. You make your sales, set aside your profit first, and then the remainder goes to paying your business expenses.

Not only will your business start to pay you for a change, but it will start to show you what expenses are necessary and those that can be cut back!

Here at Back to Black, while we are not members of Mike Michalowicz’s ‘Profit First Professionals’, we can see some of the benefit of this approach. If you can too and wish to discuss adopting some of the Profit First principles, get in touch today for a chat.