Are you struggling with cash flow issues?
Is there no money in the bank at the end of the year? (even though your financial statements say there should be)
Do you have unpredictable and fluctuating margins?
If you’ve answered YES to one or more of these questions, your small business may be headed for some “Bad Weather.”
Recession, economic downturn, a dishonest partnership, or industry shakeout are just some of the events that can put your business to the test.
After the pandemic lockdown, my business and many of my clients’ businesses ground to a halt.
And we weren’t prepared for it.
I decided then and there that I wasn’t going to be caught in this situation again. I began looking for solutions to build more resiliency and profit into our businesses.
That’s when I discovered the Profit First system.
It’s brilliant in its simplicity, and effective because it works with human psychology rather than against it. It sets you up for success by helping you to master financial discipline and structures your business to run efficiently.
No matter how new or established your business is, you should not wait for the “Bad Weather” to implement Profit First. You can’t anticipate every hurdle your small business will encounter, but you can be prepared.
What is the key to being consistently profitable?
Profit First is a simple yet very effective approach to finances that works with human psychology to create profitable, sustainable businesses.
THE PROFIT FIRST FORMULA
The GAAP (Generally Accepted Accounting Principles) formula for determining a business’s profit is
Sales – Expenses = Profit.
It is simple, logical and straightforward.
The problem is it doesn’t account for human behaviour. In the GAAP formula, profit is a leftover, an afterthought, something that is hopefully a pleasant surprise at the end of the year.
But profit is not a guarantee. We need to be intentional about profit if we want to get out of survival mode.
One way to do this is with the Profit First method.
With Profit First, you flip the formula to
Sales – Profit = Expenses.
Logically the math is the same, but from the perspective of the entrepreneur’s behaviour, it is radically different. With Profit First, you take a predetermined percentage of profit from every sale first, and only the remainder is available for expenses.
It’s a simple shift in perspective that leads to powerful results.
DON’T CHANGE HABITS; LEVERAGE THEM
Through pure willpower, many small business entrepreneurs try to force themselves to improve their bookkeeping skills and become more disciplined in their fiscal management.
But often the moment you face financial stress or bigger than expected expenses, you break your own money rules and start spending what you had saved.
The Profit First principle does not try to change your habits, it works with your existing habits.
For example, you may be like many business owners who check their bank balance (rather than their cash flow statement) to see if they have enough money to spend on a conference, a new work truck, or hire a new team member.
Profit First doesn’t ask you to change that habit. Instead, your incoming cash is allocated to different accounts, removing the temptation to “borrow” from yourself.
This means you will always have enough money to pay suppliers, staff, and taxes. You will always have money set aside as profit. Your business will become fiscally strong, and you will benefit from regular profit distributions.
The Psychology: Parkinson’s Law
When profit comes at the end of the equation, we are making do with what’s left over. There’s a little theory called Parkinson’s Law which tells us that work continually expands to fill however much time we have available to complete it.
If there are 6 months available to complete a project, we will spend 6 months working on it. Give us only 1 month, however, and we’ll get exactly the same amount of work done in ⅙ of the time.
Sometimes, taking less time improves the results–we are more focused and motivated. With a finite amount of time to complete the project, we defy our expectations and get the work done. We achieve the seemingly impossible.
Profits and expenses work under the same principle. When profit is at the end of the equation, all the money we have coming in is up for grabs.
Now replace “time” with “money” in Parkinson’s law. If we have X amount of money available, our expenses will increase, gobbling up all that money.
If we have less money available to spend, we will find a way to do the same thing for less.
The problem with viewing profit last (the GAAP formula) is that your expenses are free to expand and consume that space – money!
When the amount of money available for expenses is reduced and finite (the Profit First formula). We get the job done with the funds available.
And it’s not a magic trick. It will not come at the expense of the quality of our services or the products we produce. Instead, it forces us to stick to what is actually available – this much money, no more. We hustle a little harder, think a little deeper, and come up with innovative and creative ways to do things or create new methods that don’t require as much capital to spend on expenses.
We surprise ourselves.
We can help you SURPRISE yourself and steer you away from the “Bad Weather.”
Just like going to the gym and trying to lose weight, we all know what to do and how to do it, but personal trainers oversee the best workouts. As a Profit First Professional, Bookminders Services is your financial trainer.
Are you ready to get your Profit First Blueprint? Get a lightning-quick analysis of your company’s profit so you can instantly destroy debt and begin amassing capital. Painlessly go from ZERO to 20% profit allocation in your business and break free from the survival trap and begin to accumulate wealth.
Although this article offers business advice, this content is for general informational purposes only—it is not intended to replace the guidance of a licensed legal or financial professional. Information created by third parties that we may link out to or feature on our site is not endorsed by us and remains the responsibility of such third parties. Bookminders Services Inc. assumes no responsibility for errors or omissions in the content.