In his book, Profit First, author Mike Michalowicz explains how the long term standard of calculating profit is not working. Reports show profit, but the bank account sits empty. He developed the profit first methodology to shift the perspective to one that allows money to jingle the pockets of the owners as well as in the bottom line of the P&L reports.
Here is a really super simple explanation of the profit first methodology:
How we were taught for years and years:
Let’s say you make $10000 / month in your business. This revenue is deposited in the business bank account, the same account from which the bills are paid, our taxes are saved and our owners draw is pulled from. What’s left over is profit.
In other words, sales – expenses = profit.
To be fair, this formula can produce good or even great P&L reports. But in reality, there is little or no money in the bank account with which to celebrate. Furthermore, many business owners prioritize the growth of the business and reinvest every bit they can, not stopping to enjoy their success.
A better way, put profit first.
The profit first methodology instructs you to first open three new no frills, no cost, bank accounts. Next, deposit 1% of the $10000 revenue into one of these new accounts for your profit, deposit 1% into a new account designated just for taxes and a third 1% in a new account for owners draw. Now rename the main business account to opex (operating expense) and use what is left to pay your expenses.
Our new equation reads: sales – profit = expenses.
A change of perspective.
Do you think you can’t afford to put any money aside? Use this formula as a fact check: Revenue x 97% = operating expense. When expenses exceed 97% of the monthly revenue, that’s a good indicator that something in your business needs to change.
Make profit a priority and focus on why expenses are smothering out profit. You didn’t go into business to make everyone else happy.
Schedule a consultation today to see where you stand on profitability.