It's the end of another month, and you're staring at your bank account with that familiar knot in your stomach. You had a good month. Sales were strong, customers were happy. But somehow, there's barely any money left over.
So, what’s the problem?
The traditional way of thinking about profit is fundamentally flawed. What if everything you've been taught about business profitability is backwards?
At Patrick Accounting, we've helped hundreds of small business owners transform their financial results using a revolutionary approach called Profit First. This system guarantees you take home profit every single month, reduces financial stress, and helps you build the thriving business you've always wanted.
We'll show you exactly how this system works, why it's so effective, and how you can start implementing it today.
Why the Traditional Profit Formula Is Broken and Keeping You Stressed
For as long as business has existed, we've been taught the same basic formula:
Sales - Expenses = Profit
This seems logical, right? You make money, you pay your bills, and whatever's left over is your profit. The problem is that there's almost never anything left over.
Why the Traditional Profit Formula Fails
- Expenses always expand to fill available revenue. This is Parkinson's Law applied to business finances. When you have $10,000 in revenue, you somehow find $10,000 worth of expenses. When you have $50,000 in revenue, you find $50,000 worth of expenses.
- Profit becomes an afterthought. When profit is what's "left over," it's the first thing to disappear when unexpected expenses arise (and they always do).
- You're constantly stressed about money. Without guaranteed profit, you're always wondering if you'll have enough to pay yourself, cover taxes, or handle emergencies.
- You can't plan for growth. How can you invest in your business's future when you don't know if there will be any profit this month?
This traditional approach keeps business owners trapped in a cycle of financial anxiety, even when their businesses are technically "successful."
What Is Profit First? The System That Flips Everything Upside Down
Profit First, created by entrepreneur and author Mike Michalowicz, completely reverses the traditional profit formula:
Sales - Profit = Expenses
Instead of hoping there's profit left over after expenses, you take your profit first and force your business to operate on what remains.
The Core Philosophy
The Profit First system is built on a simple but powerful idea: Profit is not an event, it's a habit. By taking profit first, you:
- Help ensure consistent profit allocation every single month
- Force efficiency by operating with constrained resources
- Reduce financial stress by knowing your profit is already secured
- Build cash reserves for taxes, emergencies, and growth opportunities
How the Profit First System Actually Works
The Profit First system uses a simple allocation method that automatically distributes your revenue into different "buckets" based on predetermined percentages.
Every time money comes into your business, you immediately allocate it according to your Target Allocation Percentages (TAPs):
- Income (money received when paid for your products and services)
- Profit (yep, profit)
- Owner’s pay (for your paycheck)
- Operating expenses (for expenses related to running your business)
- Taxes (for your taxes)
Example: A $10,000 Month
Let's say your business brings in $10,000 this month, and your allocation percentages are:
- Income: $10,000
- Profit: 10% = $1,000
- Owner's Pay: 20% = $2,000
- Taxes: 20% = $2,000
- Operating Expenses: 50% = $5,000
Before you pay a single bill, you've already secured $1,000 in profit, $2,000 for your own paycheck, and $2,000 for taxes. Your business must operate on the remaining $5,000—no exceptions.
The Five Bank Accounts That Make Profit First Work
The Profit First system requires you to set up five separate bank accounts. This isn't just bookkeeping. It's behavioral psychology in action.
Account #1: Income Account
This is where all revenue initially lands. Think of it as a distribution hub. Money doesn't stay here long. Twice a month, you'll distribute funds from this account to the other four accounts based on your allocation percentages.
Account #2: Profit Account
This money is untouchable. It's your reward for running a successful business. Most business owners are shocked to discover they can build substantial profit reserves in just a few months using this system.
Account #3: Owner's Pay Account
This is your paycheck—the money you need to live on. By separating this from business operations, you're paying yourself consistently, not just taking random distributions when cash flow allows.
Account #4: Tax Account
No more tax surprises. By consistently setting aside money for taxes, you'll never again experience the panic of a large tax bill you can't afford. This account makes tax payments manageable and predictable.
Account #5: Operating Expenses Account
This is where you pay all business expenses. Rent, supplies, marketing, payroll—everything. And you can only spend what's in this account. If the money isn't there, you either find a more efficient way to operate or wait until the next allocation.
Why Profit First Works: The Psychology Behind the System
The Profit First system succeeds because it works with human psychology, not against it.
Bank Balance Accounting
Most business owners practice "bank balance accounting." They check their account balance to see if they can afford something. Profit First leverages this natural behavior by ensuring the money you see is actually available for expenses.
Parkinson's Law
Parkinson's Law states that work expands to fill the time allotted for it. In business, expenses expand to fill the revenue available. By constraining your operating expense account, Profit First forces you to find more efficient ways to run your business.
The Envelope System for Business
Just like the personal finance envelope system, separate accounts create mental boundaries that are much stronger than spreadsheet categories. When the operating expense account is low, you naturally become more resourceful and efficient.
Instant Gratification
Unlike traditional profit strategies that require waiting until year-end to see results, Profit First delivers immediate gratification. You see profit accumulating every month, which motivates you to stick with the system.
Real Results: Benefits of Taking Profit First
At Patrick Accounting, we've implemented the Profit First system with dozens of clients, and the results are consistently impressive:
- Immediate Stress Relief: Clients report feeling dramatically less stressed about money within the first month. Knowing that profit and taxes are already set aside eliminates the constant worry about cash flow.
- Improved Efficiency: Businesses become leaner and more efficient when forced to operate within constrained budgets. Clients discover they can accomplish the same results with fewer resources.
- Consistent Profitability: Even struggling businesses can typically achieve consistent profitability. Many clients are profitable for the first time in years.
- Better Decision Making: With clear financial boundaries, business owners make better spending decisions. The question shifts from "Can we afford this?" to "Is this the best use of our limited operating budget?"
- Tax Preparedness: No more scrambling to pay tax bills. Clients consistently have money set aside for quarterly payments and annual tax obligations.
Note: These results are based on our experience with clients who fully implement the system. Individual results may vary depending on business circumstances and commitment to the process.
Getting Started: Your First Steps to Profitable Growth
Ready to transform your business with Profit First? Here's how to begin:
Step 1: Assess Your Current Situation
Calculate what your allocation percentages would be if you implemented Profit First today. Don't worry if the numbers seem impossible. You'll start with smaller percentages and gradually increase them.
Step 2: Open Your Bank Accounts
Set up the five required accounts at your bank. Some business owners prefer to use different banks for different accounts to create even stronger barriers.
Step 3: Start Small
Begin with conservative allocation percentages. Even 1% for profit is better than zero. The goal is to build the habit, not achieve perfect percentages immediately.
Step 4: Implement the Rhythm
Allocate funds twice monthly on set dates. Consistency is crucial for building the habit and seeing results.
Step 5: Get Professional Support
Working with a certified Profit First accounting firm (like Patrick Accounting) can dramatically improve your success with the system. A Profit First accountant can help you set appropriate percentages, avoid common mistakes, and optimize the system for your specific business.
Take Your Profit First, Transform Your Business
The Profit First system isn't just about making more money. It's about fundamentally changing your relationship with business finances. Instead of constantly worrying about cash flow, you'll have confidence knowing that your profit, paycheck, and tax obligations are already secure.
At Patrick Accounting, we’ve seen how this system transforms businesses. We've helped dozens of clients go from financial stress to consistent profitability.
Want to avoid costly mistakes? Check out our article “Why You Shouldn’t Attempt Profit First Alone” to learn why professional support makes all the difference.
Every month you wait is another month of potential profit lost. If you're ready to make your business profitable and eliminate financial anxiety, let's talk about implementing Profit First in your business today.
