Prioritising Profit and the Benefits for your Business
The idea of paying yourself first and not only keeping your business alive, but enabling it to grow, does sound a little unbelievable. But it isn’t a fantasy – it is a valid and workable way to encourage healthy business growth.
What is Profit First?
Profit First is a money management system. It works on the idea that modern businesses need to look into a more contemporary way of doing business, because the old-school methods aren’t working. Traditionally a business will manage money on the following foundation:
Income – Expenses = Profit
According to Profit First, if you have less money to work with then necessity forces you to reduce your costs.
The Profit First model instead works on this foundation:
Income – Profit = Expenses
Removing your profit, wages and taxes first, before paying any day to day expenses. The business should always take a profit regardless of the size of the income.
Profit First focuses on:
- Paying wages, tax, and profit
- Paying expenses with what is left
- Reducing expenses
- Implementing strategies to increase profit margins
Profit First works by establishing five separate bank accounts:
- The Income account is where all of your money is deposited into. You then use this account to do your regular % distributions to the other accounts.
- The Profit account has a % of your income transferred. At the end of the quarter you then take a Profit Distribution.
- The Tax account is for paying your tax. Again, a predetermined % of your income is transferred. This money is for your personal company taxes.
- The Owners Pay account is where your wage is paid from. This money is also to pay towards your Superannuation.
- Operating Expenses account is the final account to transfer your % into. This is the only account you can work with to pay for everything else.
What are the Profit First benefits?
Profit First works for many businesses. Your primary focus needs to be on reducing expenses or removing them altogether.
It can reduce stress by giving you peace of mind that your wage is coming in, tax and super will get paid, and there is a healthy profit growing in the bank.
Can any business follow Profit First?
Any business, regardless of size, can follow Profit First – you just need to be willing to commit to the mindset and work at reducing or removing expenses.
More and more businesses of all sizes and in all industries are converting to this way of managing their money, and are happily finding that it works for them.
It can be a good way to work from the very start of your business, but can be implemented at any stage.
Tracy Sellers is a Registered BAS Agent, Certified Bookkeeper and Profit First Professional. She is the owner of Ironbark Industries Bookkeeping www.ironbarkindustriesbookkeeping.com and can be contacted on 0412 853 898.