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Why Business Owners Need to Pay Attention to Profit First

April 03, 20237 min read

Big statement, right? First, let me introduce myself, my name is Nicole, and I recently joined the team here at Competitive Edge to do marketing. But, for many years (15+), I was a small business owner in the marketing field, obviously. One of the first things I took on when hired was reading the Profit First Book by Mike Michalowicz, as we are a Profit First Professional firm. So, one weekend I sat down and started reading. As I was reading the first chapter, I began feeling upset and a little shocked as I felt like the book pointed at all the errors I made with my small businesses. My reaction was to put the book down.

Spoiler Alert: I finished the book and genuinely believe you need to consider this system of managing your business finances. Seriously, you need to know this. It will make your business profitable and make sure you get paid first.

I didn’t want to pick this “mean” book up again and continue to read about the errors of my ways as a business owner, it was many years ago, and I have moved on, but I still didn’t want to read about it 😊. But, of course, I was going to read it. I loved my new job (if you haven’t met the team here, I can vouch for them as a fantastic group of people), and Profit First is part of it.

I won’t deny that a big part of me also wanted to know what the Profit First solution was. A solution that would ensure a business would be able to consistently:

  • Be able to pay the owner first.

  • Have actual Profit in the bank.

  • Have the money for tax bills ready and waiting.

I don’t know about you, but those were my top 3 struggle areas as a business owner. All I could do was doubt. I mean, all these cash issues are dealt with in this book? Seriously? So with great hesitation, I sat down with a cup of coffee one afternoon and dove in. Here are the basics of what I learnt.

Many business owners ignore their financial statements. This was a habit of mine, just checking my bank account and ignoring those statements. I would even react to a dip in revenue with a response that involved more money, most times from my pocketbook, impacting my personal life and happiness.

You see, my solution of using my pocketbook to get my businesses through tough times inevitably played a role in the end of my companies. The other very serious player in the scenario was my advanced skill of ignoring my financials and only watching my bank account. As I was reading Profit First, imagine my shock to find out many, many, many business owners do the same thing.

I began to wonder why business owners don’t talk more about these issues and why so many of us avoid the topic of money and the realities of business ownership. If we did talk about it, we could all support each other, find better ways to manage our Profit, and make sure owners get paid first every pay period.

The majority of business owners have the same goal, to be good stewards of their money. This is the reason I am writing this blog. I know this book can help every business owner be better stewards of their money. So let’s dig into the details I took away from my first (of I am sure many) reads of Profit First.

The Topline is not the Top number.

Revenue is often referred to as the Topline, so if you increase your topline revenue, your business will be OK, right? Wrong. More revenue will not take care of the problem. In fact, revenue tends to make the problem, not solve it. Topline revenue can not tell you anything about your business’s health.

Bigger is not always better.

You’ve heard it before “Bigger is Better”. In business, this thought philosophy drives us to think if cash is tight in our business, we should grow it. Add the new service, expand your offices or whatever you feel will make your business bigger and grow your revenue.

If you have done this, you are not alone. I did it. I expanded services, changed facilities, and rented new equipment to solve cash problems. Turns out many businesses do this too. Who knew? I mean, we don’t talk about it. Well, the book is correct. It never solved a thing for me.

Remember Human Nature and Adjust

Now this realization for me was absolutely mind-blowing for a couple of reasons. The first reason was that it seemed so logical. Why had others not taught about it….for example, in business school (admittedly, I have not been in business school for many years now, maybe they do)? Secondly, because it was so simple, a few adjustments to my business practices considering my human nature, could have solved many of my problems.

The first human behaviour tendency pointed out was that we tend to eat what is in front of us. I don’t know about you, but I was taught to always eat all the food on my plate…if I wanted dessert. The book’s simple solution is >> to make the plate smaller.

The second tendency may be problematic for some to adjust to simply because it is what we have been taught. When we make a list, we put the most important things at the top, which is generally true if you think about it. Priority list, task lists etc. So when we look at the old business class equation:

Sales – Expenses = Profits

Profits are last. They are what’s left over…the last thought. The book’s solution>> change the equation to:

Sales – Profits = Expenses

Mathematically it’s the same, but in terms of human nature and how we absorb things, it’s vastly different. If you take your Profit out first, your expenses are left over. This forces you to be creative and innovative about what you spend your money on.

Separate Your Money

I hope I am not the only one, but if something is allocated to something specific or hard to reach, I tend to leave it where it is. The Profit First book guides you through a new money management style of managing your finances by immediately separating your money into different “plates” or accounts after getting paid. These accounts are in addition to your account that receives all your business income. The first account is Profit, of course. The others are owner’s pay, taxes, and operating expenses. This method ensures you have Profit (confirmed in the bank profit) and enough set aside for taxes and your paycheck.

Do you see why I was so upset…no one teaches you this, well, I mean, not in a formal setting when I was in university. Firms like Competitive Edge, along with Mike and many other Profit First Professionals, are trying to spread the word and help make businesses profitable. And well, I guess I just joined the team 🥳.

The Next Steps to Making Your Business Profitable

The first thing I recommend is reading Profit First. If you are still unsure, take a few moments one morning to download and read the first 2 chapters for free.

As you know from the start of this article, I am a marketing expert, not a Profit First Professional. So, I reached out to our in-house guru and owner Emily who has a Mastery Level in Profit First. Here are the steps she recommends.

  1. Read the book.

  2. Consider working with a Profit First Professional. Working with a professional will allow for a quicker implementation timeline and an accountability partner and coach. Consider working with us if you want a partner to help you implement the Profit First system. Book a non-obligation assessment. We would love to help.

  3. Set up 4 bank accounts: Profit, Owners Pay, Taxes, and Operating Expenses. You will need to decide the revenue amounts to be dispersed in specific percentages to each account. Disbursements should occur in the order given (Profit, Owners Pay, Taxes, Operating Expenses).

  4. Whether you are implementing Profit First on your own or with the help of a Profit First Professional like us, start out easy. Start with just 1% of your revenue going to profit, etc. Grow it from there. If you want to figure out if you can go higher with your percentages, book a call, and we can help you!

Profit FirstProfitOwner CompensationBookkeeping
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Nicole McDonald

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