What is Profit First? It’s a cash flow management system that business owners can layer on top of their normal accounting system to help manage their cash more effectively. It takes advantage of existing human behaviors that other systems might ask you to fight—but Profit First actually embraces them.
One of these behaviors is the habit business owners have of checking their bank balances daily. Most people decide whether they can spend money based on what’s in their checking account. So fine—let’s figure out how to make that work.
Profit First also uses principles similar to those found in dieting. We’ve all heard our moms say, “Eat everything on your plate.” So we do that. We fill our plate and eat all of it. The problem is, if you fill one gigantic plate, you’ll likely consume too many calories and gain weight. Dieticians have said, “We can’t fight that behavior, so let’s just use smaller plates.” You still fill the plate, you still feel full, but you end up eating fewer calories.
We do the same thing with business cash management. Most businesses have one giant operating account where all the cash goes. That money is then used for everything, and we end up consuming all of it. Profit First says, “Let’s use those same dieting principles—let’s use smaller plates.”
You create a plate for your profit. You create a plate for your owner's pay—because you should be paying yourself a market rate for the job you do within your business. You also set aside a plate for your tax liability. These are all smaller plates.
Now, all of a sudden, you're left with an operating account that contains only the cash you can actually use to run your business. At this point, some people might say, “Hold on—I can’t run my business on that small amount.” But I bet you can.
This is where another human behavior comes in—think about toothpaste. When you first open a new tube, you use generous amounts without a second thought. But when the tube’s almost empty, we become incredibly resourceful. We roll it up, we squeeze it hard, some people even cut the ends off—all to get every last bit. And during that time, we also use just the right amount—not too much.
The same principle applies to your cash. Once you’ve allocated money to profit, owner’s pay, and taxes, whatever’s left in your operating account is what you run the business with. You’ll find creative ways to make it work—just like with toothpaste.
Meanwhile, those other “plates” are taking care of the areas that usually cause the most stress. How often do you worry, “Am I going to have enough money for taxes at the end of the year?” With Profit First, you don’t have to. You’ve been setting it aside all year long.
Most importantly, you pay yourself first. Too many business owners don’t pay themselves at all—or only a small amount—which leads to frustration. But you’re the most important employee in your business. You need to be compensated accordingly.
That’s the idea behind the Profit First system. We’d love to sit down and chat with you about your specific situation and how Profit First could apply to your business.
