Profit First Step-by-Step
In episode 16 we learned the basics of the Profit First system of Mike Michaleowicz and now we will do a Profit First method deep dive helping business owners to do a mindet shift with how they are managing their total income. With these steps from the profit first formula, you’ll learn how to manage your money to create a healthy profitable business as a business owner.
One Time Setup
When you first start this specific type of money management, there are three steps to setting up the Profit First system and you only have to do it once.
Step #1
Set up five accounts.
You and/or your accountant will most likely have some resistance to this. You may be worried about:
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Cost
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Paperwork
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Excess Bookkeeping
Don’t worry about the cost because there are different ways you can get the fees waived.
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Some banks don’t have fees
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Some will waive the fees if you have a certain amount in the account
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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 bank accounts are split into:
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Income - all incoming money will go to this one account first and will be transferred later.
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Profit - the money you get from it is a reward. It should be used for things you enjoy, not for daily living.
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Owner’s Pay - this is your salary that will be used for personal finances, specifically daily living.
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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.
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Operating Expenses - for every expense and own business finances in the firm except owner’s pay.
Step #2
Set up two additional accounts in a separate bank for your 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 in your savings account.
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 all the other accounts.
Step #3 - Target Allocation Percentages
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.
Profit First Cheat Sheet Timing
Daily:
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Put all of your income into the income account.
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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:
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Distribute the money from the income account into the other accounts based on your current target allocation percentages of that quarter.
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Move all the money from your tax and profit accounts to the accounts in your other bank.
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Pay yourself from the owner’s pay account.
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Pay all upcoming bills.
End of Every Quarter:
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Profit distribution. Take 50% of the balance from the profit account in the external bank for yourself as gain. Remember this money is to be used for something you enjoy, this way it motivates you to do better.
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Pay any tax liabilities from the tax account in your external bank.
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Internal meeting. If you’re working with a Profit First executive, 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:
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Review your financials with a Profit First executive or an accountant.
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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.
If you would like help, see the link below for our Profit First Implementation Pod.
Let’s Start Taking Our Profit Home Today
Resources
Episode 16 - Take Your Profit First
https://www.profitwithlaw.com/016
Profit First by Mike Michalowicz
https://profitwithlaw.com/profitfirstbook
Audible version
https://www.audible.com/pd/Profit-First-Audiobook/B06X15WX5B
Profit First Cheat Sheet and First Two Chapters of the Book
https://www.profitwithlaw.com/profitfirst
Profit First Implementation Pod
https://www.profitwithlaw.com/pfapply
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Author
Moshe Amsel
Author
Moshe Amsel the host of the Profit with Law podcast is not an attorney. As the owner of a successful accounting firm DreamBuilder Financial and Law Firm Growth coaching organization Profit with Law, Moshe has proven that there are better and different ways for a law firm to do business and be successful.
