You might have heard the term “profit first accounting” buzzing around Southern Oregon business circles as of late.
The philosophy was made popular by Mike Michalowicz and his book, Profit First. His theories have blossomed into reality for many business owners.
Today, I thought I’d cover some of the core principles that might spark new accounting ideas for the future.
A gentle reminder here that the goal, in sharing this information with you, is to help your Southern Oregon business grow in terms of profitability. Profit is the lifeblood of any organization. We’ve all seen the newsfeed gurus flashing all of their revenue numbers around in their sponsored posts … but show me a business with PROFIT at its center, and I’ll show you something worth modeling.
And this doesn’t have to be “the only way”, but these are effective principles, and a useful methodology for implementation.
For a deeper dive, obviously, grab the book, and let’s talk more about putting it into practice.
But here’s a start.
The “Profit First” Framework for Southern Oregon Businesses
“Money is a terrible master but an excellent servant.” -P.T. Barnum
Life is all about prioritization. Businesses are no different.
Where does profit fall in your list of priorities? Obviously, in the realm of cash flow, you are sparsing out revenue to various functions within your business: COGS, payroll, etc.
But the profit first mentality says to do just that — prioritize profit as the number one item on your list. AND THEN move onto other areas of your business that need cash flow. This is the “pay yourself first” perspective — many utilize this tactic to propel their personal finances in a favorable direction. But in a business sense, this concept requires a few shifts.
1. The Bank Accounts
Setting up your bank accounts accordingly is crucial for profit first to succeed. The order is as follows:
- Profit: Savings Account
- Owner’s Pay: Savings Account
- Tax: Savings Account
- Operating: Transaction Account
- Revenue: Transaction Account
This is something you and your accounting team can set up in a few days’ time, and will help keep all your profitable ducks in a row.
2. Instant Assessment
The Instant Assessment Table (Figure 2 in the PDF from the author’s website) is for you, as the business owner, to fill out on a weekly basis for the sake of allocation and accuracy.
According to the now-set-up bank accounts, you and your team have the responsibility to record and report all revenue appropriately. Because the table is based on US tax laws, percentages may fluctuate depending on changes from year-to-year. This is a key component in how I can help you with profit first principles. If your team ventures down this profit first path, please give me a call!
3. Transfer Funds
Every two weeks, you will transfer revenue funds to the appropriate bank account. Again, I can’t stress accountability enough — have someone team up with you in this endeavor to make sure monies are distributed properly.
You want the following goals to apply for each respective bank account:
- Profit: Accrue Profit
- Owner’s Pay: Pay Your Wages
- Tax: Pay Your Taxes
- Operating: Day-to-Day Expenses
- Revenue: Income Deposits Only
There is nothing new under the sun. But the “profit first” mentality is a good step for your business if you have no current system for cash-flow management. And it’s always good practice to switch things up if current methods aren’t getting the job done. Maybe try it out for a month or two, and if you don’t like the results … go back to what you were doing before.
If you have questions on any of the above, as it relates to “profit first”, please reach out and let me know.
I’d also love to hear of any other cash management tools or philosophies your business lives by. Think your system works and hasn’t been done before on a grander scale? My advice is that you write a book about it…
You might just land on the bestseller list.
I’m just grateful for our chance to serve you and your business — and we are dedicated to every part of its success, ESPECIALLY to its profit.
Feel free to forward this article to a business associate or client you know who could benefit from our assistance. While these particular articles usually relate to business strategy, as you know, we specialize in tax preparation and planning for families and business owners.