The Profit First Approach: A Game-Changer for Small Business Finances
If you’re like most business owners, your financial strategy probably goes something like this: Revenue – Expenses = Profit. Seems logical, right? Well, that formula is exactly why so many entrepreneurs find themselves hustling nonstop but still feeling broke.
Enter the Profit First Approach, the game-changing financial system that flips the script on how you manage your money.
Instead of treating profit as an afterthought, this method makes it the star of the show. Curious how it works? Let’s break it down—because once you start putting profit first, you’ll never go back.
What Is the Profit First Approach?
Developed by Mike Michalowicz in his bestselling bookProfit First, the approach is simple but powerful. Instead of waiting to see what’s left over after paying all your expenses, you allocate a portion of your revenue to profitfirst.The new formula looks like this:Revenue – Profit = ExpensesBy prioritizing profit, you force your business to operate within its means. It’s like paying yourself before you pay anyone else—because guess what? You deserve it.
How the Profit First System Works
The Profit First Approach isn’t just about mindset—it’s a practical, step-by-step system that you can implement today. Here’s how it works:
1. Set Up Multiple Bank Accounts
To make the system work, you’ll need to divide your revenue into separate accounts. At a minimum, set up the following accounts:
Income: Where all your revenue lands initially.
Profit: A percentage of your income that’s set aside for your business’s profit.
Owner’s Pay: Money you pay yourself as the business owner.
Taxes: Funds reserved for tax obligations.
Operating Expenses: Money left over to cover the day-to-day costs of running your business.
By physically separating your money, you’ll avoid the temptation to overspend.
2. Allocate Percentages to Each Account
As revenue comes in, you’ll allocate it to each account based on predetermined percentages. For example:
Profit: 10%
Owner’s Pay: 35%
Taxes: 15%
Operating Expenses: 40%
The exact percentages will depend on your business, but the key is to make profit a non-negotiable priority.
3. Pay Yourself First
Once you’ve allocated funds, transfer your profit and owner’s pay to their respective accounts. This ensures that you’re prioritizing your financial well-being instead of letting expenses dictate your paycheck (or lack thereof).
4. Use the Remaining Funds for Expenses
The money in your operating expenses account is all you have to run your business. If it’s not enough, don’t dip into other accounts—look for ways to cut costs or generate more revenue.
Why the Profit First Approach Works
At its core, the Profit First Approach is about changing habits. It’s designed to help business owners stop overspending, build reserves, and create a sustainable financial model.Here’s why it works:
Forces Discipline: By capping your operating expenses, you’re less likely to overspend or waste money.
Builds Financial Security: Regularly setting aside profit creates a cash buffer for emergencies or future investments.
Prioritizes You: Too many business owners put themselves last—but the Profit First system ensures you’re compensated for your hard work.
Common Challenges (and How to Overcome Them)
“I Don’t Have Enough Money to Pay Myself Yet.”
If your business isn’t generating enough revenue to pay you, the problem isn’t the Profit First system—it’s your business model. Focus on increasing sales, cutting unnecessary expenses, or both.
“This Feels Too Restrictive.”
Good. That’s the point. The Profit First system forces you to operate within your means instead of relying on debt or dipping into tax reserves to cover overspending.
“Won’t This Hurt My Growth?”
Actually, the opposite is true. When you’re disciplined with your finances, you’ll make smarter decisions about where to invest your resources. Growth fueled by profit is far more sustainable than growth built on debt.
How to Get Started with Profit First
Ready to try the Profit First Approach? Here’s how to get started:
Open Your Accounts: Visit your bank and set up the separate accounts you’ll need. If that feels overwhelming, start with just two: Profit and Operating Expenses.
Start Small: Begin with modest percentages for profit and owner’s pay—say, 1-2%—and gradually increase them as you adjust to the system.
Track and Adjust: Review your allocations regularly to ensure they reflect your business’s financial reality.
Pro Tip: Use accounting software to automate your allocations, making it easier to stick to the system.
Final Thoughts: Make Profit a Priority
The Profit First Approach isn’t just a financial system—it’s a mindset shift. It’s about putting yourself and your business’s sustainability first, instead of letting expenses run the show.As an entrepreneur or business owner, you didn’t start your business to live paycheck to paycheck (or worse, no paycheck at all). By adopting the Profit First system, you’ll gain clarity, build financial stability, and finally start seeing the rewards of your hard work.So, take the leap. Open those bank accounts, set your allocations, and start putting profit first. Your future self will thank you.
