Best Of: Profit First Step-By-Step

Uncategorized Jul 07, 2020

In episode 16 we learned the basics of the Profit First system and now we will do a Profit First deep dive. With these steps you’ll learn how to manage your money to create a healthy business.

One Time Setup

When you first start there are three steps to setting up the Profit First system and you only have to do it once:

Step #1

Set up five bank accounts.

You and/or your accountant will most likely have some resistance to this. You may be worried about:

Cost
Paperwork
Excess Bookkeeping

Don’t worry about the cost because there are different ways you can get the fees waived.

Some banks don’t have fees
Some will waive the fees if you have a certain amount in the account
Some will waive the fees if you use multiple services from them

Change. You will have resistance because this is a big change, but don’t skip this step because it’s the whole point of this system.

The five accounts are split into:

Income - all deposits will go here first and will be transferred later.
Profit - the money you get from profit is a reward. It should be used for things you enjoy, not for daily living.
Owner’s Pay - this is your salary that will be used for daily living.
Tax - this is used to set aside taxes throughout the year, so that you don’t have any surprise tax bills at the end of the year, that you can’t afford.
Operating Expenses - for every expense in the firm except owner’s pay.

Step #2

Set up two additional accounts in a separate bank for you profit and tax accounts.

This step is to try and eliminate the temptation of moving money between your accounts. It’s for the profit and tax accounts specifically because they will have money sitting there, not being used.

The trick is to know your limitations and according to what they are you can take the appropriate steps to keep yourself from touching those accounts. Another step you can take if needed is to not give yourself online access to these accounts.

Step #3

Determine your target allocation percentages.
Target allocation percentages - a percentage for each of these categories and how it gets allocated.

For example if your firm has a revenue of 0 - 250k the percentages would be split like this:

Profit 5%
Owner’s pay 50%
Tax 15%
Expenses 30%

For all the money that comes in, it will be distributed into these accounts based on your target allocation percentages.

These percentages are not set in stone and are subject to change based on everyone’s own firm.

Using Target Allocation Percentages

Your target allocation percentages are a goal. You have to work towards them slowly because until now you’ve been using different percentages. Changing them drastically will throw you off course.
Determine the gap between the percentages you have today and the percentages you want and then over an 18 month period, you’ll slowly close that gap.

Timing

Daily:

Put all of your income into the income account.
Check your income and expenses accounts to determine what the normal is for your firm. Once you determine your firm’s “normal” then you can recognize any issues more easily. You need to know if you’re income is slowing down and if there is enough money in the operating expenses account to cover any upcoming bills.

Twice a Month:
Pick two days of the month that make sense for your firm and those days will be when you:

Distribute the money from the income account into the other accounts based on your current target allocation percentages of that quarter.
Move all the money from your tax and profit accounts to the accounts in your other bank.
Pay yourself from the owner’s pay account.
Pay all upcoming bills.

End of Every Quarter:

Profit distribution. Take 50% of the balance from the profit account in the external bank for yourself as profit. Remember this money is to be used for something you enjoy, this way it motivates you to do better.
Pay any tax liabilities from the tax account in your external bank.
Internal meeting. If you’re working with a Profit First professional, then you meet with them. If not, you meet with yourself or your internal staff.
This is when you come up with your plan for the next quarter. Revisit your target allocation percentages and see what you need to aim for in the upcoming quarter.

End of Year:

Review your financials with a Profit First professional or an accountant.
Now that the year is over and you paid all the taxes, you get to decide what to do with any extra money that may be left in the account. You can take it as an extra profit, you can leave it there for next year's taxes, you can invest it in your business, you can use it to hire someone that you couldn’t afford before, etc.

Final Step

You need to decide if this system is something you can implement yourself or if you need a Profit First professional to help you get started.

Let’s Start Taking Our Profit Home Today

Resources mentioned:

Law Firm Growth Free Coaching Call

https://www.profitwithlaw.com/freecoaching

Episode 16 - Take Your Profit First

https://www.profitwithlaw.com/016

Profit First by Mike Michalowicz

https://www.profitwithlaw.com/profitfirstbook

Profit First by Mike Michalowicz Audible version

https://www.audible.com/pd/Profit-First-Audiobook/B06X15WX5B