25 Jan What is Profit First?
You’re probably familiar with the tried-and-true formula for calculating business profits. You start with all your revenues—the money you’ve brought into your business. You subtract the expenses. What you’re left with is profit—at least, in theory. As many business owners have discovered, however, it’s not so much fun relying on “leftovers” to grow your business. And, as additional expenses pop up, it’s all too easy for those profits to evaporate altogether, reallocated to other things.
This conventional model, though mathematically sound, doesn’t account for some basic human behaviors—and that’s why it’s ultimately lacking. The good news for business owners is that there is an alternative cash flow system, known as Profit First.
At Contractor in Charge, we’re certified as Profit First coaches, and we’ve used this system to unlock staggering hidden cash profits in a wide range of businesses. Today, we’re going to offer just a few introductory thoughts on what this system is, and how it could impact your business.
The Profit First system comes from a book of the same name, written by Mike Michalowicz. It advocates for a simplified accounting process—combined with a few mindset tweaks—to result in a far more financially successful business than you’ve dared to imagine previously.
There are no tricks or gimmicks—just a new way of looking at things. And it all starts with something called Parkinson’s Law.
The Law is often summarized in this way: Work expands to fill the time available for its completion. In other words, if you’re given eight hours for a project, you’ll probably use the full eight hours to get the job done—just as you would if you were given four hours, or 10 hours, or even more.
Profit First extrapolates from this that the demand upon a resource tends to expand to match the supply of it. Business owners know this to be true: Have you ever noticed how, no matter how much money you bring in, you always end up spending exactly that much money on various expenses?
What this means is that you never have those “leftovers” for profit, or at least not as much profit as you should have. Profit First offers a new way of doing your accounting—one in which, when you bring in new money, you immediately set aside part of it to go into a savings account. Those are your profits—cash in the bank. Then, with whatever is left over from that, you cover expenses.
A Paradigm Shift
This new perspective can take some getting used to—but it’s not as extreme as you might think. In a lot of ways, it’s just a retooling of priorities. You take your profits before you do anything else, rather than leaving it until last. As a result, you are always growing your business; you are always profiting.
The Profit First system can change the way you handle cash flow—and we’d love to talk more with you about how to implement it. Reach out to Contractor in Charge to schedule your free Profit First consultation!