What if the traditional view of determining your profit is wrong? What if there’s a better alternative – such as taking your profit first, instead of last?
History has shown and science has debunked a lot of assumptions and myths over the years.
Here are a few examples:
- The earth is flat.
- The earth is the center of the solar system.
- The earth is the only planet with water.
- If you drink soda with Pop Rocks your stomach will explode.*
*This urban legend has been disproved, however we can’t guarantee that this volatile combination won’t make you feel miserable!
In fact, in this era of viral news, there is even a show called “MythBusters” dedicated to using elements of the scientific method to test the validity of rumors, internet videos and popular beliefs.
Sometimes when long-held theories or approaches are turned upside down it has little-to-no impact on our day-to-day lives. (Like when Pluto was downgraded to a “dwarf planet” in 2006.)
However, as business owners, it’s key to stay up on and open to new approaches as we learn from the victories and stumbles of other entrepreneurs. Even if we’re “old dogs,” when need to be receptive to “new tricks.” Even tricks that turn everything we’ve thought about how we manage our company’s finances on its head.
New Ways of Thinking Change Things
It’s amazing how we can go through life convinced about the absolute certainty of something until someone comes along and introduces new information that completely changes our thinking.
Better results based on better thinking isn’t just for explorers, scientists and kids who like fizzing candy. You can see huge benefits for your life and small business by constantly learning and seeking wisdom.
What are you doing today–convinced it’s the best way–that could change drastically for the better with just a little bit of new information?
Here’s one for you: There is a better way to manage your finances and profit to make your business better!
Take your profit first
For as long as business has been around, the basic formula has been: Sales – Expenses = Profit. But what if that’s not actually the best way?
In his latest book, Profit First, Mike Michalowicz introduces a radically refreshing idea when it comes to your business finances…take your profits out first! He flips the formula so it becomes: Sales – Profit = Expenses.
Most small business owners like us brace ourselves for the end of the month when we find out if there is any profit left over after our expenses have been paid. It’s not unusual to become anxious, or even physically ill, as we watch the money run away. Michalowicz’s book gives us a way to keep that feeling from ever happening again.
The Profit First Five
The foundation of the Profit First system is five bank accounts which you use to manage your money. Think about it like the envelope system promoted by folks like Dave Ramsey. The five accounts are:
- Income (money received when paid for your products and services)
- Owner’s pay (for your paycheck)
- Operating expenses (for expenses related to running your business)
- Profit (yep, profit)
- Taxes (for your taxes)
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Money is allocated to each account based on target allocation percentages (TAPs) which are determined by a variety of factors.
The reason for using multiple accounts is that most business owners rely on bank balance accounting. How often do you check your account balance? Daily? A couple times a day? Weekly? We do this because it’s easy. Instead of trying to change our behavior, Profit First leverages it to help us run a better, more profitable business.
Profit First also builds on Parkinson’s Law which says that our demand for a resource increases to meet the supply of it. In other words, when we have limited supplies, we find a way to get the job done with those limited supplies. Conversely, when we have more resources, we tend to use all of those resources to get the same job done.
By taking your profit first and lowering the amount of money for expenses, you are required to find ways to get the same work done for less money.
In the near future, I’m going to unpack this idea some more and give you an accountant’s perspective on it. I’ll let you in on how we’re applying it at Patrick Accounting and with our clients. And I’ll show you how you can apply it to your small business to become instantly profitable.
Imagine knowing that you have the money you need for yourself, taxes, rainy days, and all of your expenses. Imagine also seeing your profit margin rising month after month.
Thousands of small businesses have seen it happen, and I’m convinced it can happen for you too. Come on back to find out exactly how. (Check out the box in the footer to subscribe to our blogs so you know when the next post in this series is hot off the presses!)
In Your Corner
Contact Patrick Accounting online or call us in Memphis (901-755-5858) or Little Rock (501-834-5757 to set up a time to talk about your accounting and bookkeeping needs.
