What Does It Mean When an Accountant Says “Profit First”?
‘Profit First’ was developed by Mike Michalowicz to help small business owners maximize their profits and grow successful businesses. This financial rescue system puts profit ahead of expenses. It changes up traditional accounting rules to ensure that your business maintains predictable profits. This system shows you how to allocate certain percentages of the revenue you have coming into best benefit you. Essentially you are prioritizing your pay as owner followed by your taxes, and other operating expenses.
The Profit First Method
The ‘Profit First’ method is a way of applying Parkinson’s Law regarding time management to your finances. Parkinson’s Law states that: “Work expands so as to fill the time available for its completion.” We can create realistic deadlines instead of setting open-ended goals. If we set aside just enough time to finish a task before moving on to the next one, there is less idle time. We can apply this same idea to managing money as well. You have to be smart when deciding how to use your money so your business can be more productive.
‘Profit First’ helps you manage your accounts and expenses to create the best plan for success, growth, and sustainability. When you set aside funds for a certain purpose, you’re likely going to end up using most of it for that purpose. After you have collected your profit from the sales totals, you have the remainder to use for other expenses. Being more practical when planning how to budget your money, you won’t overspend as much. Allow for exactly what you need to spend on something without leaving a lot of extra cushion. You will have to limit yourself to what you realistically need to cover each expense and you won’t break your budget.
Helping your Stay Ahead
‘Profit First’ helps you figure out exactly how to stay ahead. When you hear a finance professional talking about ‘Profit First,’ they’re referring to an accounting system focused on maximizing your profits. Expenses can end up taking up all of your revenue if you aren’t careful. Planning and money management are key to running a successful business. You have to learn to pay yourself first if you want a business that supports your lifestyle. You shouldn’t have to work so hard that your lifestyle has to support your business.
You have to learn not to use all of your resources on the business. You will have to learn to cut spending whenever possible and appropriate your incoming funds wisely to maximize your gains. You might want to buy a new piece of equipment for the business or reinvest but you still have to focus on keeping the business profitable. Your accountant can help you set realistic priorities and goals to help determine when profits are high enough to spend some money on new ideas.
Businesses require good organization and financial planning to be successful. Accounting skills can be difficult for many to grasp. ‘Profit First’ is used to create the ultimate strategy to success for any business. It’s challenging to keep track of everything going on within your business and focus on finding ways to boost revenue at the same time. This tool can help small business owners realize their dreams.