Is profit first a good idea?

If you've been scrolling socials or put the word profit into your google search, there's a pretty good chance you've seen or heard about the concept of profit first. 

Business owners see it as their nirvana, while for others it just adds to the business money confusion. So, what is profit first and is it right for you and your business or perhaps there's another way. In today's podcast, I'm spilling the tea on everything profit first so you can decide for yourself. 

Dive in and start making more money in your business.

Transcript

Speaker 1 0:35

You're listening to the Secrets of Successful Business podcast, your go-to source for business tips, tricks and proven strategies that will help you create a streamlined and profitable business. We chat to the best minds in business about their journey. It's my business and I'll do it my way, how they started, rather than going harder to get more focus on growing more with what you have. What they learned along the way. How long are you going to give this?

Speaker 2 1:03

What compromises are you going to make? Just because you can do it doesn't mean that you should do it.

Speaker 1 1:08

It's really important to remember that it's a long game and, of course, we'll ask them for their secret sauce for creating a successful business. If you're not failing, you're not doing it right. You should be struggling at times. That is part of the journey. Join us as we take a sneak peek behind the curtain, talk solutions for those business pain points, working smarter, not harder, mindset and the challenges of fitting it all in with the demands of today's busy lifestyle. If you're a business owner, side hustler or just starting your business journey, this podcast is for you. Now here's your host, business coach and content creator, justine McLean from Flossie Creative.

Speaker 2 1:48

Hello and thanks for joining me on the podcast today. In case we haven't met, I'm Justine, a small business owner on a mission to uncover and share the secrets of creating and running a profitable, sustainable and successful business. I've been in business for over 20 years now and I get to use all that I've learned along the way to help other women in business reduce the overwhelm, gain visibility around their numbers, charge what they're worth and make more money. It's about designing a life you love that fits into your definition of success. So if I can help you create the profitable business you deserve, please reach out Now without further ado. Let's dive into today's episode. Hello and welcome, and thank you for tuning into another episode of the podcast. Big shout out to all of my listeners who are in Asia, because there are so many of you and I really appreciate you tuning in. So thank you so much.

Speaker 2 2:47

Now in today's episode, I want to talk about profit and specifically the idea of profit first and making a profit in business has always been the goal for most business owners anyway. I remember when I first started my business I was told yep, to make a profit, all you've got to do is spend less than you earn, and that is what good business is all about. And of course, to be able to do that, no doubt you've got to manage your finances effectively, and more so for small business, particularly those small businesses that are run with small teams or solo owners, than for those bigger businesses, although it's true no matter what sort of business you have, and it's especially true when we find ourselves in the downturn that we're currently facing and I think it's fair to say that the downturn is not just here in Australia but potentially all over the world when purse strings really have been tightened, consumers are being extra careful with their money and spending way less than they did before, and getting people over the line that final kind of push to sell is becoming harder, and so for a lot of businesses, they're finding that they're really struggling financially right now. But the thing is, with either profit first or with any good financial management system, if you've been effectively planning and looking at your finances over months and months, the idea is, when you get to these downturns, when you get to these autumn and winter seasons of business which we're always going to face because, as we know, business is very months the idea is, when you get to these downturns when you get to these autumn and winter seasons of business which we're always going to face because, as we know, business is very cyclical, it should mean that you can anticipate for these things, save for your business costs, have money saved for wages and have money in reserve in that rainy day fund.

Speaker 2 4:36

But of course, the reality is it's just easier to say that than to do it. And so now for many small business owners, we're finding ourselves in this precarious or less than ideal financial situation and we're often looking for the quick fix. How do we get out of this quickly? There are lots of different strategies. Sometimes it comes down to really tightening up on the expenses. Other times it's about offering more or putting massive discounts on our offers. It could be about adding a few extra things to our business. Maybe it's about getting rid of big expenses by cutting staff or downsizing our business. So many different ways to look for that quick fix. But interestingly, over the last few months, one of those quick fixes that keeps being suggested to me time and time again is this idea of introducing the profit first system into business, because, like some miracle, like some magic wand, so many business owners think that just doing that is going to be the answer. It's going to help deliver nirvana when it comes to their business and it really helps save the day. That's why I really want to talk about profit first today and we're going to get into the nitty gritty of that.

Speaker 2 5:57

But for anyone who's listening and they're not completely sure what profit even means, basically the profit in your business is whatever is left over after you subtract all of your expenses from the revenue. So all of that money that you've got coming into your business, your turnover or revenue. You take out all of the expenses, including your wages and what you need to pay for taxes, what you want to save, put into your savings account, and that is your profit. In other words, that is the portion of money that you plan to allocate as profit and pop into a profit account, if that's what you choose to do. When you look at your business reports and you have a look at your P&L or your profit and loss statement, quite often the profit that you are collecting should match the profit number, the net profit number that is at the very bottom of that statement. So that is all of the revenue less all of those expenses.

Speaker 2 6:58

The thing about that is that, while it should be as easy as it is on paper, look at my P&L and say that I've made $10,000 in profit and I should have that sitting in the bank, the reality is that most business owners, especially now, will probably have not a single cent of that profit money. Maybe a lot of people are actually running their business at a loss and, as someone said to me the other day, justine, I don't have any profit because I need money for groceries, so there's no point stashing it away as profit when I don't have money to go to the supermarket and buy food, and of course, that makes a lot of sense. And so, for any small business owners who are finding themselves in that position and who are thinking that profit first is going to be the answer, I thought I would just go through it today, because there's the profit first way, the really regimented profit first way, and then I'm going to suggest my way as well, and hopefully you can find some middle ground. Essentially, creating that profit in your business is where the sanity comes in. So they say and I've said it here before revenue is for vanity, profit is for sanity, and that really is true. So what we're trying to do is come up with a way that we can make that bit extra in our business where we can afford to stash that away or, if we really need to, we can afford to use that as a bump for our wages so that we can go to the supermarket and buy the groceries that we need to buy without freaking out because it's taking money out of some other area in our business.

Speaker 2 8:38

Now that you know what profit is, what's Profit First? Okay, profit First is a financial management system that was developed by Mike Michalowicz, aimed at helping small businesses really ensure their profitability, and he came up with this system by prioritizing profit allocation over any other expenses. So the idea being that you allocate the profit in your business first. So it flips this approach of whatever's left is your profit on its head by suggesting that profit needs to be prioritized and collected from whatever you earn from the outset. So that means looking at your turnover. You've already decided on a predetermined percentage of revenue as profit and you take that out of your turnover before you pay for anything else. So that is the nuts and bolts of the profit first system. Once you've done that, then the remaining funds can be used to cover your expenses, so your operating costs, your staff wages, your taxes, your wages or your drawings, and again, there's usually a predetermined percentage allocation for those business expenses.

Speaker 2 9:55

But in essence, the idea of profit first is that you are supposed to have whatever's left over, so that money that is left over as the only money that you have to spend on those expenses.

Speaker 2 10:12

So businesses are more or less being forced to operate more effectively and efficiently by prioritizing their spending on only the things that are essential. So one of the key aspects of profit first is its emphasis on using real-time financial data to make these decisions. So it means that you are regularly reviewing things like what's in the bank, what you actually earned so not your budgeted amount, but what you actually earned, what actually ended up in the bank looking at your expenses and then your overall cash flow and using that data to identify your areas for improvement or to ensure that your business can continue to run. The other key aspect of Profit First is that the percentage allocation, so that you will need to adjust that and the strategy that you use for profit first accordingly as the business ebbs and flows. So when you're starting out, there are some pretty standard profit percentages that Mike suggests and I'll go through those in a minute. But the idea essentially is that when you really have a look at your business and you get a good idea of how your business is running. Then you settle on some of those numbers and then it's just a matter of allocating those religiously, week in, week out. So allocating those percentages of your revenue, your turnover, into a whole bunch of separate accounts, week in, week out.

Speaker 2 11:44

So to successfully implement profit first in your business, you need to do a few things. The first one is you need to set up separate bank accounts, and there are five of them that you need to set up. So you'll need to have a bank account for your revenue, you'll need to have one for your operating expenses, you'll need to have one for your taxes, one for your wages and another one for your profit. So that's five in total, and essentially what you're going to do is you're going to send a percentage of everything you earn, all of your turnover, to each one of those accounts. The next thing that you need to do is put into place some time for financial management, and you've heard me talk about this before. It's that money Monday, that finance Friday, where you look at your actual numbers and then you do the allocations that you've decided on to your different bank accounts. And that's in addition to doing all the other money stuff too, and then adjusting that profit first strategy as you need to the third one, to make profit first a success, is really determining those profit percentages, so deciding on the suitable percentages of your revenue that you're going to allocate as profit, and then wages, taxes and then, of course, whatever's left over for your expenses. So there are ranges that you can choose from and, as I said, you'll decide on what your actual number is through a bit of trial and error.

Consistency and Simplicity in Profit Management

Speaker 2 13:13

But if you want to get started with Profit First, the first allocation is for profit, and this is usually between 5% and 15% of your turnover, depending on your stage of business and the profitability goals that you have for your business. Now, most people who are starting with Profit First start with a lower percentage and then gradually increase that profit percentage as the business grows and as the Profit First system is embedded. The next one is for the owner's wages or drawings, and typically this ranges from 30 to 50% of the turnover and that's going to depend on a lot of factors like your role in the business, what the standards are for your industry that you're in, whether or not your business can actually afford that full-time salary or not. So again it comes back to the stage of your business, and quite often it can be determined based on whether or not you want to employ staff. However, in essence, if we're being purely profit, first, we're going to allocate 30 to 50% of our turnover towards our wages or drawings. Then you have to allocate a percentage of revenue to cover your taxes, and this is usually around 15 to 20% if you're in Australia, but it's going to vary depending on your business structure, the location of your business and the tax obligations that apply to you specifically in your region. So you should check that out. But around 15 to 20% is pretty much the standard allocation. Now, once you've allocated all of those things, what's left over that balance is what has to cover your operating expenses. Now, this can obviously be worked out as a percentage after you allocate all of the other percentages, but it's important to note that whatever that number is, you have to spend on all of the operating expenses, so that's even on things like your staff wages. So keep that in mind.

Speaker 2 15:11

The last way to ensure that you successfully implement Profit First, of course, is to be consistent, and that is about consistency in maintaining that weekly time, the weekly allocations that you need to make, and one of the best ways to do this is to set up a spreadsheet. I find people who I work with who really want to embrace the profit first system. We set up a spreadsheet that will work out and spit out the profit first numbers for them. So ideally what they're doing is they're working out what their revenue was for a week, they're throwing it into the spreadsheet, spitting out all the percentages, and then they just go away and allocate and they can do that. Once I've shown them how to do it, they can do that on their own, week in, week out.

Speaker 2 15:56

But the thing is it can become a really big time suck in your business and so as a result, and certainly in my experience, I found the profit-first movement to be like a good diet. Once you fall off the wagon it gets forgotten, particularly after you've missed a week or two. So that's why you need to either be really determined to allocate that consistent time to work on your finances and your Profit First, or you need to hire a bookkeeper who is proficient in Profit First to help. But if you can get the right mix and maintain the system, there is no doubt that Profit First can help to improve your cash flow management. It can help to increase your profitability in your business and it can also help to reduce your financial stress.

Speaker 2 16:47

But look, in all honesty, out of the hundreds of business owners that I've worked with over many years and not just work with, but spoken to over many years that have actually tried Profit First, not many have stuck with it only a handful, to be honest. And of that handful, only a few of them have done it successfully and usually after a few false starts. That's because it takes time, organisation and consistency to do it. Business owners often don't want to monitor their expenses and be constrained to only spending what's been allocated for their expenses. So there's this real fear around reducing their expenses or having to work and try and run a business within those constraints and of course, people can become really resistant to change. On the flip side of that the people who do it really well and who absolutely love a profit first, it becomes like a drug for them. It's almost like it gamifies their business and this idea of getting that profit every week and squirreling that away and watching that account grow it's like that adrenaline that they need to keep going and do better. So there's definitely lots of pluses, but the reality is, for a lot of people it just doesn't work.

Speaker 2 18:01

Now, personally, I don't use the profit first system in my business and I certainly don't recommend it as the be all and end all, because, let's be honest, finance is already unsexy enough, but when you come up with a complicated or a time consuming system to help manage your money, the truth is that people are just less likely to stick with it in the long term. So for me, when I'm working with my clients, I recommend a much simpler approach, and it starts with your bank accounts. So I tell people that you really only need a maximum of three accounts. One is an operating account, so all the money comes into that account, all the money goes out of that account. You need an account set up for your taxes and your super. That's where all of your savings for your taxes and your super goes. And then I like to have a third account which is a general savings account, a general business savings account, and that's where all of my profit goes as well. So much simpler doing three transfers than five.

Profitable Pricing Strategies for Business

Speaker 2 19:02

The next one is to really understand what it costs you to run your business and whether you're doing a profit first or whether you're doing this system, understanding what it costs you to run your business and whether you're doing a profit first or whether you're doing this system. Understanding what it costs you to run your business and, most importantly, the wage as part of those costs that you need to take to live a sustainable life really understanding those couple of things from the get-go is going to be a key to your success. There's no doubt about that, and so one of the best ways to do that is to sit down and have a look at all of those things that you're spending money on, create a cash flow forecast for your business and do one for your life, if that helps you, so you know when you can spend, you know when you need to save, you know where all the money is going months in advance of it going out. And as you start to regularly review that cash flow and your profit and loss statement, you're going to see where costs are blowing out or where they're going to be likely to blow out. But just doing those cost of doing business and the cost of doing living exercises is really going to put a spotlight on how much you're spending and where you can save, and so it's going to enable you to try and lean up your business and maybe even lean up your life, to save where you can save and stop the unnecessary spending too.

Speaker 2 20:29

Of course, it's always important to use a pricing strategy that is going to ensure profit in your business. Now I have a pricing strategy that I call the profitable pricing formula and I'll pop a link down in the show notes so if you want to go and download that, you can download the calculator there you can. But essentially my pricing strategy revolves around incorporating the cost of doing business your wages, your super, your taxes and your savings into each billable hour. In other words, you take all of those things cost of doing business wages, super taxes and savings and work out what you need to charge for every billable hour Remember, I said billable there that you deliver and that then becomes the jumping off point for all of your pricing decisions. And that way you can create a range of prices that ensure that you are always covering those costs in your business. So you're never going to have that shortfall every single time you work for one of your clients. And in addition to that, what you're going to do is you're going to add a pricing percentage on top. So, no matter what you do, no matter what you charge, you're covering off all of your business expenses, but you're always making a profit on top of that. So, as I said, profitable pricing formula calculator. Go ahead and have a look in the show notes and you can go and download that Now.

Speaker 2 22:05

When the money comes into your business, one of the most important things that you need to understand is that not all of the money belongs to you, and that is part of running a small business. No matter where you work in the world, no matter where you run your business, part of your job is to be a tax collector for the government. So don't go spending or don't believe that you can spend everything that comes into your business, because it's not all yours. Definitely work out what you need to allocate the taxes and make sure you put that to one side and then, finally, to ensure that you always have profit. And obviously, in addition to all of those practical things I've just mentioned, it's really important to save for a rainy day, so that you can not only know that when you are working, you've included profit, you've covered off everything it costs you to run your business, but you're also banking savings so that when there is a downturn you are going to be okay.

Speaker 2 23:11

And it's really important in my book to allocate that weekly amount to a specific savings account. So, whether that's just the profit that you've added on top of your hourly rate or on top of every service you offer, or whether that's money in addition to that, the aim is to try and get three months worth of to that. The aim is to try and get three months worth of expenses, for example, banked so that if there is some disaster or an emergency or you need to take time off or things slow down, you've got that money there as a backup. And, of course, if you've added profit to your offers, you can move that across in addition to savings or, as I said, it can be the only thing that you transfer into your savings account. So, as you can see my idea of saving, creating and saving profit in your business, it's not unlike the profit first system.

Speaker 2 24:02

In principle it's a bit more of a simplified version, I think to some degree, but in essence both ideas are still the same, and that is that business should be all about profit, but instead of taking a percentage off the top of what you've earned, like you do in Profit First, with no real strategy to actually incorporate that into your pricing. In my system you're actually deliberately incorporating that and then you're allocating that profit to yourself as well. So, as you can see, the system that I have just outlined it's very similar to profit first. I think it's a bit more of a simplified version to some degree, but in essence we're still talking the same language, and that is that the main purpose of business is to make money, to make profit.

Speaker 2 24:57

In my system, instead of just taking a percentage of profit off the top of what you've earned, off the top of the turnover that's coming into your account, as profit first suggests, and then, with fingers crossed, allocating the rest and really hoping that you've got enough to cover your expenses, my method is suggesting that you deliberately price for profit from the outset, but you do that knowing that each and every time you deliver a service, it is also going to include your cost of doing business, all of your expenses, including your wages, your savings, both tax savings, personal savings and then a profit as well.

Speaker 2 25:29

So it's just, in my opinion, a system that gives then a profit as well. So it's just, in my opinion, a system that gives you a little bit more peace of mind. Bottom line sanity in business is definitely about the profit. It is about having that extra unencumbered money that you can stash away or that you can use for those groceries when you need to, because you know that is extra money for those groceries when you need to, because you know that is extra money that's unencumbered money that you don't have to use for anything else. So profit is definitely the way to go in my opinion.

Speaker 1 26:00

But it doesn't matter which method you choose.

Speaker 2 26:02

Profit first. My method, most important thing is to make the decision to work towards a profitable business, starting right now. So no matter where your business is right now, whether it's absolutely in the doldrums or whether it's flying go back, revisit your numbers, have a look at what you need to adjust and make sure you add in that profit number. And, of course, if you need help, reach out. I offer one-to-one sessions, group workshops and group sessions. And then there's my business money magnet program and, of course, my brand new book of the same name, which is out very soon. So here's to your success and your profit Until next time.

Speaker 1 26:45

Thanks for listening to the Secrets of Successful Business Podcast. For more information on all things business, head to flossycomau and make sure you hit subscribe on the show so you don't miss another new episode. If you're enjoying the show, please give it a quick rating or review, share it on your socials or with friends who might enjoy it. Catch you next time.