May 6, 2024 • 27 mins
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.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:01):
You're listening to the Secrets of Successful
Business podcast, your go-tosource for business tips, tricks
and proven strategies that willhelp you create a streamlined
and profitable business.
We chat to the best minds inbusiness about their journey.
It's my business and I'll do itmy way, how they started,
rather than going harder to getmore focus on growing more with
(00:25):
what you have.
What they learned along the way.
How long are you going to givethis?
Speaker 2 (00:29):
What compromises are you going to make?
Just because you can do itdoesn't mean that you should do
it.
Speaker 1 (00:33):
It's really important to remember that it's a long
game and, of course, we'll askthem for their secret sauce for
creating a successful business.
If you're not failing, you'renot doing it right.
You should be struggling attimes.
That is part of the journey.
Join us as we take a sneak peekbehind the curtain, talk
solutions for those businesspain points, working smarter,
not harder, mindset and thechallenges of fitting it all in
(00:57):
with the demands of today's busylifestyle.
If you're a business owner,side hustler or just starting
your business journey, thispodcast is for you.
Now here's your host, businesscoach and content creator,
justine McLean from FlossieCreative.
Speaker 2 (01:13):
Hello and thanks for joining me on the podcast today.
In case we haven't met, I'mJustine, a small business owner
on a mission to uncover andshare the secrets of creating
and running a profitable,sustainable and successful
business.
I've been in business for over20 years now and I get to use
all that I've learned along theway to help other women in
business reduce the overwhelm,gain visibility around their
(01:37):
numbers, charge what they'reworth and make more money.
It's about designing a life youlove that fits into your
definition of success.
So if I can help you create theprofitable business you deserve
, please reach out Now withoutfurther ado.
Let's dive into today's episode.
Hello and welcome, and thankyou for tuning into another
(02:01):
episode of the podcast.
Big shout out to all of mylisteners who are in Asia,
because there are so many of youand I really appreciate you
tuning in.
So thank you so much.
Now in today's episode, I wantto talk about profit and
specifically the idea of profitfirst and making a profit in
(02:21):
business has always been thegoal for most business owners
anyway.
I remember when I first startedmy business I was told yep, to
make a profit, all you've got todo is spend less than you earn,
and that is what good businessis all about.
And of course, to be able to dothat, no doubt you've got to
manage your finances effectively, and more so for small business
(02:44):
, particularly those smallbusinesses that are run with
small teams or solo owners, thanfor those bigger businesses,
although it's true no matterwhat sort of business you have,
and it's especially true when wefind ourselves in the downturn
that we're currently facing andI think it's fair to say that
the downturn is not just here inAustralia but potentially all
(03:07):
over the world when pursestrings really have been
tightened, consumers are beingextra careful with their money
and spending way less than theydid before, and getting people
over the line that final kind ofpush to sell is becoming harder
, and so for a lot of businesses, they're finding that they're
really struggling financiallyright now.
(03:27):
But the thing is, with eitherprofit first or with any good
financial management system, ifyou've been effectively planning
and looking at your financesover months and months, the idea
is, when you get to thesedownturns, when you get to these
autumn and winter seasons ofbusiness which we're always
going to face because, as weknow, business is very months
the idea is, when you get tothese downturns when you get to
these autumn and winter seasonsof business which we're always
going to face because, as weknow, business is very cyclical,
(03:50):
it should mean that you cananticipate for these things,
save for your business costs,have money saved for wages and
have money in reserve in thatrainy day fund.
But of course, the reality isit's just easier to say that
than to do it.
And so now for many smallbusiness owners, we're finding
(04:12):
ourselves in this precarious orless than ideal financial
situation and we're oftenlooking for the quick fix.
How do we get out of thisquickly?
There are lots of differentstrategies.
Sometimes it comes down toreally tightening up on the
expenses.
Other times it's about offeringmore or putting massive
(04:32):
discounts on our offers.
It could be about adding a fewextra things to our business.
Maybe it's about getting rid ofbig expenses by cutting staff
or downsizing our business.
So many different ways to lookfor that quick fix.
But interestingly, over thelast few months, one of those
quick fixes that keeps beingsuggested to me time and time
(04:54):
again is this idea ofintroducing the profit first
system into business, because,like some miracle, like some
magic wand, so many businessowners think that just doing
that is going to be the answer.
It's going to help delivernirvana when it comes to their
business and it really helpssave the day.
(05:16):
That's why I really want totalk about profit first today
and we're going to get into thenitty gritty of that.
But for anyone who's listeningand they're not completely sure
what profit even means,basically the profit in your
business is whatever is leftover after you subtract all of
your expenses from the revenue.
(05:37):
So all of that money thatyou've got coming into your
business, your turnover orrevenue.
You take out all of theexpenses, including your wages
and what you need to pay fortaxes, what you want to save,
put into your savings account,and that is your profit.
In other words, that is theportion of money that you plan
to allocate as profit and popinto a profit account, if that's
(06:01):
what you choose to do.
When you look at your businessreports and you have a look at
your P&L or your profit and lossstatement, quite often the
profit that you are collectingshould match the profit number,
the net profit number that is atthe very bottom of that
statement.
So that is all of the revenueless all of those expenses.
(06:24):
The thing about that is that,while it should be as easy as it
is on paper, look at my P&L andsay that I've made $10,000 in
profit and I should have thatsitting in the bank, the reality
is that most business owners,especially now, will probably
have not a single cent of thatprofit money.
Maybe a lot of people areactually running their business
(06:46):
at a loss and, as someone saidto me the other day, justine, I
don't have any profit because Ineed money for groceries, so
there's no point stashing itaway as profit when I don't have
money to go to the supermarketand buy food, and of course,
that makes a lot of sense.
And so, for any small businessowners who are finding
(07:08):
themselves in that position andwho are thinking that profit
first is going to be the answer,I thought I would just go
through it today, becausethere's the profit first way,
the really regimented profitfirst way, and then I'm going to
suggest my way as well, andhopefully you can find some
middle ground.
Essentially, creating thatprofit in your business is where
(07:29):
the sanity comes in.
So they say and I've said ithere before revenue is for
vanity, profit is for sanity,and that really is true.
So what we're trying to do iscome up with a way that we can
make that bit extra in ourbusiness where we can afford to
stash that away or, if we reallyneed to, we can afford to use
(07:50):
that as a bump for our wages sothat we can go to the
supermarket and buy thegroceries that we need to buy
without freaking out becauseit's taking money out of some
other area in our business.
Now that you know what profit is, what's Profit First?
Okay, profit First is afinancial management system that
(08:11):
was developed by MikeMichalowicz, aimed at helping
small businesses really ensuretheir profitability, and he came
up with this system byprioritizing profit allocation
over any other expenses.
So the idea being that youallocate the profit in your
business first.
So it flips this approach ofwhatever's left is your profit
(08:35):
on its head by suggesting thatprofit needs to be prioritized
and collected from whatever youearn from the outset.
So that means looking at yourturnover.
You've already decided on apredetermined percentage of
revenue as profit and you takethat out of your turnover before
you pay for anything else.
(08:56):
So that is the nuts and boltsof the profit first system.
Once you've done that, then theremaining funds can be used to
cover your expenses, so youroperating costs, your staff
wages, your taxes, your wages oryour drawings, and again,
there's usually a predeterminedpercentage allocation for those
(09:19):
business expenses.
But in essence, the idea ofprofit first is that you are
supposed to have whatever's leftover, so that money that is
left over as the only money thatyou have to spend on those
expenses.
So businesses are more or lessbeing forced to operate more
(09:41):
effectively and efficiently byprioritizing their spending on
only the things that areessential.
So one of the key aspects ofprofit first is its emphasis on
using real-time financial datato make these decisions.
So it means that you areregularly reviewing things like
what's in the bank, what youactually earned so not your
(10:04):
budgeted amount, but what youactually earned, what actually
ended up in the bank looking atyour expenses and then your
overall cash flow and using thatdata to identify your areas for
improvement or to ensure thatyour business can continue to
run.
The other key aspect of ProfitFirst is that the percentage
(10:24):
allocation, so that you willneed to adjust that and the
strategy that you use for profitfirst accordingly as the
business ebbs and flows.
So when you're starting out,there are some pretty standard
profit percentages that Mikesuggests and I'll go through
(10:47):
those in a minute.
But the idea essentially isthat when you really have a look
at your business and you get agood idea of how your business
is running.
Then you settle on some ofthose numbers and then it's just
a matter of allocating thosereligiously, week in, week out.
So allocating those percentagesof your revenue, your turnover,
into a whole bunch of separateaccounts, week in, week out.
(11:10):
So to successfully implementprofit first in your business,
you need to do a few things.
The first one is you need toset up separate bank accounts,
and there are five of them thatyou need to set up.
So you'll need to have a bankaccount for your revenue, you'll
need to have one for youroperating expenses, you'll need
to have one for your taxes, onefor your wages and another one
(11:32):
for your profit.
So that's five in total, andessentially what you're going to
do is you're going to send apercentage of everything you
earn, all of your turnover, toeach one of those accounts.
The next thing that you need todo is put into place some time
for financial management, andyou've heard me talk about this
(11:53):
before.
It's that money Monday, thatfinance Friday, where you look
at your actual numbers and thenyou do the allocations that
you've decided on to yourdifferent bank accounts.
And that's in addition to doingall the other money stuff too,
and then adjusting that profitfirst strategy as you need to
the third one, to make profitfirst a success, is really
(12:15):
determining those profitpercentages, so deciding on the
suitable percentages of yourrevenue that you're going to
allocate as profit, and thenwages, taxes and then, of course
, whatever's left over for yourexpenses.
So there are ranges that youcan choose from and, as I said,
you'll decide on what youractual number is through a bit
(12:38):
of trial and error.
But if you want to get startedwith Profit First, the first
allocation is for profit, andthis is usually between 5% and
15% of your turnover, dependingon your stage of business and
the profitability goals that youhave for your business.
Now, most people who arestarting with Profit First start
with a lower percentage andthen gradually increase that
(13:00):
profit percentage as thebusiness grows and as the Profit
First system is embedded.
The next one is for the owner'swages or drawings, and
typically this ranges from 30 to50% of the turnover and that's
going to depend on a lot offactors like your role in the
business, what the standards arefor your industry that you're
(13:22):
in, whether or not your businesscan actually afford that
full-time salary or not.
So again it comes back to thestage of your business, and
quite often it can be determinedbased on whether or not you
want to employ staff.
However, in essence, if we'rebeing purely profit, first,
we're going to allocate 30 to50% of our turnover towards our
(13:45):
wages or drawings.
Then you have to allocate apercentage of revenue to cover
your taxes, and this is usuallyaround 15 to 20% if you're in
Australia, but it's going tovary depending on your business
structure, the location of yourbusiness and the tax obligations
that apply to you specificallyin your region.
So you should check that out.
(14:05):
But around 15 to 20% is prettymuch the standard allocation.
Now, once you've allocated allof those things, what's left
over that balance is what has tocover your operating expenses.
Now, this can obviously beworked out as a percentage after
you allocate all of the otherpercentages, but it's important
to note that whatever thatnumber is, you have to spend on
(14:30):
all of the operating expenses,so that's even on things like
your staff wages.
So keep that in mind.
The last way to ensure that yousuccessfully implement Profit
First, of course, is to beconsistent, and that is about
consistency in maintaining thatweekly time, the weekly
(14:51):
allocations that you need tomake, and one of the best ways
to do this is to set up aspreadsheet.
I find people who I work withwho really want to embrace the
profit first system.
We set up a spreadsheet thatwill work out and spit out the
profit first numbers for them.
So ideally what they're doingis they're working out what
their revenue was for a week,they're throwing it into the
(15:12):
spreadsheet, spitting out allthe percentages, and then they
just go away and allocate andthey can do that.
Once I've shown them how to doit, they can do that on their
own, week in, week out.
But the thing is it can become areally big time suck in your
business and so as a result, andcertainly in my experience, I
found the profit-first movementto be like a good diet.
(15:33):
Once you fall off the wagon itgets forgotten, particularly
after you've missed a week ortwo.
So that's why you need toeither be really determined to
allocate that consistent time towork on your finances and your
Profit First, or you need tohire a bookkeeper who is
proficient in Profit First tohelp.
(15:55):
But if you can get the rightmix and maintain the system,
there is no doubt that ProfitFirst can help to improve your
cash flow management.
It can help to increase yourprofitability in your business
and it can also help to reduceyour financial stress.
But look, in all honesty, out ofthe hundreds of business owners
(16:15):
that I've worked with over manyyears and not just work with,
but spoken to over many yearsthat have actually tried Profit
First, not many have stuck withit only a handful, to be honest.
And of that handful, only a fewof them have done it
successfully and usually after afew false starts.
That's because it takes time,organisation and consistency to
(16:38):
do it.
Business owners often don'twant to monitor their expenses
and be constrained to onlyspending what's been allocated
for their expenses.
So there's this real feararound reducing their expenses
or having to work and try andrun a business within those
constraints and of course,people can become really
resistant to change.
(16:59):
On the flip side of that thepeople who do it really well and
who absolutely love a profitfirst, it becomes like a drug
for them.
It's almost like it gamifiestheir business and this idea of
getting that profit every weekand squirreling that away and
watching that account grow it'slike that adrenaline that they
need to keep going and do better.
(17:20):
So there's definitely lots ofpluses, but the reality is, for
a lot of people it just doesn'twork.
Now, personally, I don't use theprofit first system in my
business and I certainly don'trecommend it as the be all and
end all, because, let's behonest, finance is already
unsexy enough, but when you comeup with a complicated or a time
(17:42):
consuming system to help manageyour money, the truth is that
people are just less likely tostick with it in the long term.
So for me, when I'm workingwith my clients, I recommend a
much simpler approach, and itstarts with your bank accounts.
So I tell people that youreally only need a maximum of
three accounts.
One is an operating account, soall the money comes into that
(18:04):
account, all the money goes outof that account.
You need an account set up foryour taxes and your super.
That's where all of yoursavings for your taxes and your
super goes.
And then I like to have a thirdaccount which is a general
savings account, a generalbusiness savings account, and
that's where all of my profitgoes as well.
So much simpler doing threetransfers than five.
(18:28):
The next one is to reallyunderstand what it costs you to
run your business and whetheryou're doing a profit first or
whether you're doing this system, understanding what it costs
you to run your business andwhether you're doing a profit
first or whether you're doingthis system.
Understanding what it costs youto run your business and, most
importantly, the wage as part ofthose costs that you need to
take to live a sustainable lifereally understanding those
(18:50):
couple of things from the get-gois 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 havea look at all of those things
that you're spending money on,create a cash flow forecast for
your business and do one foryour life, if that helps you, so
(19:13):
you know when you can spend,you know when you need to save,
you know where all the money isgoing months in advance of it
going out.
And as you start to regularlyreview that cash flow and your
profit and loss statement,you're going to see where costs
are blowing out or where they'regoing to be likely to blow out.
But just doing those cost ofdoing business and the cost of
(19:35):
doing living exercises is reallygoing to put a spotlight on how
much you're spending and whereyou can save, and so it's going
to enable you to try and lean upyour business and maybe even
lean up your life, to save whereyou can save and stop the
unnecessary spending too.
Of course, it's always importantto use a pricing strategy that
(19:59):
is going to ensure profit inyour business.
Now I have a pricing strategythat I call the profitable
pricing formula and I'll pop alink down in the show notes so
if you want to go and downloadthat, you can download the
calculator there you can.
But essentially my pricingstrategy revolves around
(20:19):
incorporating the cost of doingbusiness your wages, your super,
your taxes and your savingsinto each billable hour.
In other words, you take all ofthose things cost of doing
business wages, super taxes andsavings and work out what you
need to charge for everybillable hour Remember, I said
(20:41):
billable there that you deliverand that then becomes the
jumping off point for all ofyour pricing decisions.
And that way you can create arange of prices that ensure that
you are always covering thosecosts in your business.
So you're never going to havethat shortfall every single time
(21:04):
you work for one of yourclients.
And in addition to that, whatyou're going to do is you're
going to add a pricingpercentage on top.
So, no matter what you do, nomatter what you charge, you're
covering off all of yourbusiness expenses, but you're
always making a profit on top ofthat.
So, as I said, profitablepricing formula calculator.
(21:24):
Go ahead and have a look in theshow notes and you can go and
download that Now.
When the money comes into yourbusiness, one of the most
important things that you needto understand is that not all of
the money belongs to you, andthat is part of running a small
business.
No matter where you work in theworld, no matter where you run
(21:48):
your business, part of your jobis to be a tax collector for the
government.
So don't go spending or don'tbelieve that you can spend
everything that comes into yourbusiness, because it's not all
yours.
Definitely work out what youneed to allocate the taxes and
make sure you put that to oneside and then, finally, to
(22:10):
ensure that you always haveprofit.
And obviously, in addition toall of those practical things
I've just mentioned, it's reallyimportant to save for a rainy
day, so that you can not onlyknow that when you are working,
you've included profit, you'vecovered off everything it costs
you to run your business, butyou're also banking savings so
(22:33):
that when there is a downturnyou are going to be okay.
And it's really important in mybook to allocate that weekly
amount to a specific savingsaccount.
So, whether that's just theprofit that you've added on top
of your hourly rate or on top ofevery service you offer, or
whether that's money in additionto that, the aim is to try and
(22:55):
get three months worth of tothat.
The aim is to try and get threemonths worth of expenses, for
example, banked so that if thereis some disaster or an
emergency or you need to taketime off or things slow down,
you've got that money there as abackup.
And, of course, if you've addedprofit to your offers, you can
move that across in addition tosavings or, as I said, it can be
(23:15):
the only thing that youtransfer into your savings
account.
So, as you can see my idea ofsaving, creating and saving
profit in your business, it'snot unlike the profit first
system.
In principle it's a bit more ofa simplified version, I think to
some degree, but in essenceboth ideas are still the same,
(23:36):
and that is that business shouldbe all about profit, but
instead of taking a percentageoff the top of what you've
earned, like you do in ProfitFirst, with no real strategy to
actually incorporate that intoyour pricing.
In my system you're actuallydeliberately incorporating that
and then you're allocating thatprofit to yourself as well.
(23:59):
So, as you can see, the systemthat I have just outlined it's
very similar to profit first.
I think it's a bit more of asimplified version to some
degree, but in essence we'restill talking the same language,
and that is that the mainpurpose of business is to make
money, to make profit.
(24:22):
In my system, instead of justtaking a percentage of profit
off the top of what you'veearned, off the top of the
turnover that's coming into youraccount, as profit first
suggests, and then, with fingerscrossed, allocating the rest
and really hoping that you'vegot enough to cover your
expenses, my method issuggesting that you deliberately
price for profit from theoutset, but you do that knowing
that each and every time youdeliver a service, it is also
(24:45):
going to include your cost ofdoing business, all of your
expenses, including your wages,your savings, both tax savings,
personal savings and then aprofit as well.
So it's just, in my opinion, asystem that gives then a profit
as well.
So it's just, in my opinion, asystem that gives you a little
bit more peace of mind.
Bottom line sanity in businessis definitely about the profit.
(25:06):
It is about having that extraunencumbered money that you can
stash away or that you can usefor those groceries when you
need to, because you know thatis extra money for those
groceries when you need to,because you know that is extra
money that's unencumbered moneythat you don't have to use for
anything else.
So profit is definitely the wayto go in my opinion.
Speaker 1 (25:25):
But it doesn't matter which method you choose.
Speaker 2 (25:27):
Profit first.
My method, most important thingis to make the decision to work
towards a profitable business,starting right now.
So no matter where yourbusiness is right now, whether
it's absolutely in the doldrumsor whether it's flying go back,
revisit your numbers, have alook at what you need to adjust
(25:48):
and make sure you add in thatprofit number.
And, of course, if you needhelp, reach out.
I offer one-to-one sessions,group workshops and group
sessions.
And then there's my businessmoney magnet program and, of
course, my brand new book of thesame name, which is out very
soon.
So here's to your success andyour profit Until next time.
Speaker 1 (26:11):
Thanks for listening to the Secrets of Successful
Business Podcast.
For more information on allthings business, head to
flossycomau and make sure youhit 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 yoursocials or with friends who
might enjoy it.
(26:31):
Catch you next time.
You're listening to the Secrets of Successful
Business podcast, your go-tosource for business tips, tricks
and proven strategies that willhelp you create a streamlined
and profitable business.
We chat to the best minds inbusiness about their journey.
It's my business and I'll do itmy way, how they started,
rather than going harder to getmore focus on growing more with
(00:25):
what you have.
What they learned along the way.
How long are you going to givethis?
Speaker 2 (00:29):
What compromises are you going to make?
Just because you can do itdoesn't mean that you should do
it.
Speaker 1 (00:33):
It's really important to remember that it's a long
game and, of course, we'll askthem for their secret sauce for
creating a successful business.
If you're not failing, you'renot doing it right.
You should be struggling attimes.
That is part of the journey.
Join us as we take a sneak peekbehind the curtain, talk
solutions for those businesspain points, working smarter,
not harder, mindset and thechallenges of fitting it all in
(00:57):
with the demands of today's busylifestyle.
If you're a business owner,side hustler or just starting
your business journey, thispodcast is for you.
Now here's your host, businesscoach and content creator,
justine McLean from FlossieCreative.
Speaker 2 (01:13):
Hello and thanks for joining me on the podcast today.
In case we haven't met, I'mJustine, a small business owner
on a mission to uncover andshare the secrets of creating
and running a profitable,sustainable and successful
business.
I've been in business for over20 years now and I get to use
all that I've learned along theway to help other women in
business reduce the overwhelm,gain visibility around their
(01:37):
numbers, charge what they'reworth and make more money.
It's about designing a life youlove that fits into your
definition of success.
So if I can help you create theprofitable business you deserve
, please reach out Now withoutfurther ado.
Let's dive into today's episode.
Hello and welcome, and thankyou for tuning into another
(02:01):
episode of the podcast.
Big shout out to all of mylisteners who are in Asia,
because there are so many of youand I really appreciate you
tuning in.
So thank you so much.
Now in today's episode, I wantto talk about profit and
specifically the idea of profitfirst and making a profit in
(02:21):
business has always been thegoal for most business owners
anyway.
I remember when I first startedmy business I was told yep, to
make a profit, all you've got todo is spend less than you earn,
and that is what good businessis all about.
And of course, to be able to dothat, no doubt you've got to
manage your finances effectively, and more so for small business
(02:44):
, particularly those smallbusinesses that are run with
small teams or solo owners, thanfor those bigger businesses,
although it's true no matterwhat sort of business you have,
and it's especially true when wefind ourselves in the downturn
that we're currently facing andI think it's fair to say that
the downturn is not just here inAustralia but potentially all
(03:07):
over the world when pursestrings really have been
tightened, consumers are beingextra careful with their money
and spending way less than theydid before, and getting people
over the line that final kind ofpush to sell is becoming harder
, and so for a lot of businesses, they're finding that they're
really struggling financiallyright now.
(03:27):
But the thing is, with eitherprofit first or with any good
financial management system, ifyou've been effectively planning
and looking at your financesover months and months, the idea
is, when you get to thesedownturns, when you get to these
autumn and winter seasons ofbusiness which we're always
going to face because, as weknow, business is very months
the idea is, when you get tothese downturns when you get to
these autumn and winter seasonsof business which we're always
going to face because, as weknow, business is very cyclical,
(03:50):
it should mean that you cananticipate for these things,
save for your business costs,have money saved for wages and
have money in reserve in thatrainy day fund.
But of course, the reality isit's just easier to say that
than to do it.
And so now for many smallbusiness owners, we're finding
(04:12):
ourselves in this precarious orless than ideal financial
situation and we're oftenlooking for the quick fix.
How do we get out of thisquickly?
There are lots of differentstrategies.
Sometimes it comes down toreally tightening up on the
expenses.
Other times it's about offeringmore or putting massive
(04:32):
discounts on our offers.
It could be about adding a fewextra things to our business.
Maybe it's about getting rid ofbig expenses by cutting staff
or downsizing our business.
So many different ways to lookfor that quick fix.
But interestingly, over thelast few months, one of those
quick fixes that keeps beingsuggested to me time and time
(04:54):
again is this idea ofintroducing the profit first
system into business, because,like some miracle, like some
magic wand, so many businessowners think that just doing
that is going to be the answer.
It's going to help delivernirvana when it comes to their
business and it really helpssave the day.
(05:16):
That's why I really want totalk about profit first today
and we're going to get into thenitty gritty of that.
But for anyone who's listeningand they're not completely sure
what profit even means,basically the profit in your
business is whatever is leftover after you subtract all of
your expenses from the revenue.
(05:37):
So all of that money thatyou've got coming into your
business, your turnover orrevenue.
You take out all of theexpenses, including your wages
and what you need to pay fortaxes, what you want to save,
put into your savings account,and that is your profit.
In other words, that is theportion of money that you plan
to allocate as profit and popinto a profit account, if that's
(06:01):
what you choose to do.
When you look at your businessreports and you have a look at
your P&L or your profit and lossstatement, quite often the
profit that you are collectingshould match the profit number,
the net profit number that is atthe very bottom of that
statement.
So that is all of the revenueless all of those expenses.
(06:24):
The thing about that is that,while it should be as easy as it
is on paper, look at my P&L andsay that I've made $10,000 in
profit and I should have thatsitting in the bank, the reality
is that most business owners,especially now, will probably
have not a single cent of thatprofit money.
Maybe a lot of people areactually running their business
(06:46):
at a loss and, as someone saidto me the other day, justine, I
don't have any profit because Ineed money for groceries, so
there's no point stashing itaway as profit when I don't have
money to go to the supermarketand buy food, and of course,
that makes a lot of sense.
And so, for any small businessowners who are finding
(07:08):
themselves in that position andwho are thinking that profit
first is going to be the answer,I thought I would just go
through it today, becausethere's the profit first way,
the really regimented profitfirst way, and then I'm going to
suggest my way as well, andhopefully you can find some
middle ground.
Essentially, creating thatprofit in your business is where
(07:29):
the sanity comes in.
So they say and I've said ithere before revenue is for
vanity, profit is for sanity,and that really is true.
So what we're trying to do iscome up with a way that we can
make that bit extra in ourbusiness where we can afford to
stash that away or, if we reallyneed to, we can afford to use
(07:50):
that as a bump for our wages sothat we can go to the
supermarket and buy thegroceries that we need to buy
without freaking out becauseit's taking money out of some
other area in our business.
Now that you know what profit is, what's Profit First?
Okay, profit First is afinancial management system that
(08:11):
was developed by MikeMichalowicz, aimed at helping
small businesses really ensuretheir profitability, and he came
up with this system byprioritizing profit allocation
over any other expenses.
So the idea being that youallocate the profit in your
business first.
So it flips this approach ofwhatever's left is your profit
(08:35):
on its head by suggesting thatprofit needs to be prioritized
and collected from whatever youearn from the outset.
So that means looking at yourturnover.
You've already decided on apredetermined percentage of
revenue as profit and you takethat out of your turnover before
you pay for anything else.
(08:56):
So that is the nuts and boltsof the profit first system.
Once you've done that, then theremaining funds can be used to
cover your expenses, so youroperating costs, your staff
wages, your taxes, your wages oryour drawings, and again,
there's usually a predeterminedpercentage allocation for those
(09:19):
business expenses.
But in essence, the idea ofprofit first is that you are
supposed to have whatever's leftover, so that money that is
left over as the only money thatyou have to spend on those
expenses.
So businesses are more or lessbeing forced to operate more
(09:41):
effectively and efficiently byprioritizing their spending on
only the things that areessential.
So one of the key aspects ofprofit first is its emphasis on
using real-time financial datato make these decisions.
So it means that you areregularly reviewing things like
what's in the bank, what youactually earned so not your
(10:04):
budgeted amount, but what youactually earned, what actually
ended up in the bank looking atyour expenses and then your
overall cash flow and using thatdata to identify your areas for
improvement or to ensure thatyour business can continue to
run.
The other key aspect of ProfitFirst is that the percentage
(10:24):
allocation, so that you willneed to adjust that and the
strategy that you use for profitfirst accordingly as the
business ebbs and flows.
So when you're starting out,there are some pretty standard
profit percentages that Mikesuggests and I'll go through
(10:47):
those in a minute.
But the idea essentially isthat when you really have a look
at your business and you get agood idea of how your business
is running.
Then you settle on some ofthose numbers and then it's just
a matter of allocating thosereligiously, week in, week out.
So allocating those percentagesof your revenue, your turnover,
into a whole bunch of separateaccounts, week in, week out.
(11:10):
So to successfully implementprofit first in your business,
you need to do a few things.
The first one is you need toset up separate bank accounts,
and there are five of them thatyou need to set up.
So you'll need to have a bankaccount for your revenue, you'll
need to have one for youroperating expenses, you'll need
to have one for your taxes, onefor your wages and another one
(11:32):
for your profit.
So that's five in total, andessentially what you're going to
do is you're going to send apercentage of everything you
earn, all of your turnover, toeach one of those accounts.
The next thing that you need todo is put into place some time
for financial management, andyou've heard me talk about this
(11:53):
before.
It's that money Monday, thatfinance Friday, where you look
at your actual numbers and thenyou do the allocations that
you've decided on to yourdifferent bank accounts.
And that's in addition to doingall the other money stuff too,
and then adjusting that profitfirst strategy as you need to
the third one, to make profitfirst a success, is really
(12:15):
determining those profitpercentages, so deciding on the
suitable percentages of yourrevenue that you're going to
allocate as profit, and thenwages, taxes and then, of course
, whatever's left over for yourexpenses.
So there are ranges that youcan choose from and, as I said,
you'll decide on what youractual number is through a bit
(12:38):
of trial and error.
But if you want to get startedwith Profit First, the first
allocation is for profit, andthis is usually between 5% and
15% of your turnover, dependingon your stage of business and
the profitability goals that youhave for your business.
Now, most people who arestarting with Profit First start
with a lower percentage andthen gradually increase that
(13:00):
profit percentage as thebusiness grows and as the Profit
First system is embedded.
The next one is for the owner'swages or drawings, and
typically this ranges from 30 to50% of the turnover and that's
going to depend on a lot offactors like your role in the
business, what the standards arefor your industry that you're
(13:22):
in, whether or not your businesscan actually afford that
full-time salary or not.
So again it comes back to thestage of your business, and
quite often it can be determinedbased on whether or not you
want to employ staff.
However, in essence, if we'rebeing purely profit, first,
we're going to allocate 30 to50% of our turnover towards our
(13:45):
wages or drawings.
Then you have to allocate apercentage of revenue to cover
your taxes, and this is usuallyaround 15 to 20% if you're in
Australia, but it's going tovary depending on your business
structure, the location of yourbusiness and the tax obligations
that apply to you specificallyin your region.
So you should check that out.
(14:05):
But around 15 to 20% is prettymuch the standard allocation.
Now, once you've allocated allof those things, what's left
over that balance is what has tocover your operating expenses.
Now, this can obviously beworked out as a percentage after
you allocate all of the otherpercentages, but it's important
to note that whatever thatnumber is, you have to spend on
(14:30):
all of the operating expenses,so that's even on things like
your staff wages.
So keep that in mind.
The last way to ensure that yousuccessfully implement Profit
First, of course, is to beconsistent, and that is about
consistency in maintaining thatweekly time, the weekly
(14:51):
allocations that you need tomake, and one of the best ways
to do this is to set up aspreadsheet.
I find people who I work withwho really want to embrace the
profit first system.
We set up a spreadsheet thatwill work out and spit out the
profit first numbers for them.
So ideally what they're doingis they're working out what
their revenue was for a week,they're throwing it into the
(15:12):
spreadsheet, spitting out allthe percentages, and then they
just go away and allocate andthey can do that.
Once I've shown them how to doit, they can do that on their
own, week in, week out.
But the thing is it can become areally big time suck in your
business and so as a result, andcertainly in my experience, I
found the profit-first movementto be like a good diet.
(15:33):
Once you fall off the wagon itgets forgotten, particularly
after you've missed a week ortwo.
So that's why you need toeither be really determined to
allocate that consistent time towork on your finances and your
Profit First, or you need tohire a bookkeeper who is
proficient in Profit First tohelp.
(15:55):
But if you can get the rightmix and maintain the system,
there is no doubt that ProfitFirst can help to improve your
cash flow management.
It can help to increase yourprofitability in your business
and it can also help to reduceyour financial stress.
But look, in all honesty, out ofthe hundreds of business owners
(16:15):
that I've worked with over manyyears and not just work with,
but spoken to over many yearsthat have actually tried Profit
First, not many have stuck withit only a handful, to be honest.
And of that handful, only a fewof them have done it
successfully and usually after afew false starts.
That's because it takes time,organisation and consistency to
(16:38):
do it.
Business owners often don'twant to monitor their expenses
and be constrained to onlyspending what's been allocated
for their expenses.
So there's this real feararound reducing their expenses
or having to work and try andrun a business within those
constraints and of course,people can become really
resistant to change.
(16:59):
On the flip side of that thepeople who do it really well and
who absolutely love a profitfirst, it becomes like a drug
for them.
It's almost like it gamifiestheir business and this idea of
getting that profit every weekand squirreling that away and
watching that account grow it'slike that adrenaline that they
need to keep going and do better.
(17:20):
So there's definitely lots ofpluses, but the reality is, for
a lot of people it just doesn'twork.
Now, personally, I don't use theprofit first system in my
business and I certainly don'trecommend it as the be all and
end all, because, let's behonest, finance is already
unsexy enough, but when you comeup with a complicated or a time
(17:42):
consuming system to help manageyour money, the truth is that
people are just less likely tostick with it in the long term.
So for me, when I'm workingwith my clients, I recommend a
much simpler approach, and itstarts with your bank accounts.
So I tell people that youreally only need a maximum of
three accounts.
One is an operating account, soall the money comes into that
(18:04):
account, all the money goes outof that account.
You need an account set up foryour taxes and your super.
That's where all of yoursavings for your taxes and your
super goes.
And then I like to have a thirdaccount which is a general
savings account, a generalbusiness savings account, and
that's where all of my profitgoes as well.
So much simpler doing threetransfers than five.
(18:28):
The next one is to reallyunderstand what it costs you to
run your business and whetheryou're doing a profit first or
whether you're doing this system, understanding what it costs
you to run your business andwhether you're doing a profit
first or whether you're doingthis system.
Understanding what it costs youto run your business and, most
importantly, the wage as part ofthose costs that you need to
take to live a sustainable lifereally understanding those
(18:50):
couple of things from the get-gois 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 havea look at all of those things
that you're spending money on,create a cash flow forecast for
your business and do one foryour life, if that helps you, so
(19:13):
you know when you can spend,you know when you need to save,
you know where all the money isgoing months in advance of it
going out.
And as you start to regularlyreview that cash flow and your
profit and loss statement,you're going to see where costs
are blowing out or where they'regoing to be likely to blow out.
But just doing those cost ofdoing business and the cost of
(19:35):
doing living exercises is reallygoing to put a spotlight on how
much you're spending and whereyou can save, and so it's going
to enable you to try and lean upyour business and maybe even
lean up your life, to save whereyou can save and stop the
unnecessary spending too.
Of course, it's always importantto use a pricing strategy that
(19:59):
is going to ensure profit inyour business.
Now I have a pricing strategythat I call the profitable
pricing formula and I'll pop alink down in the show notes so
if you want to go and downloadthat, you can download the
calculator there you can.
But essentially my pricingstrategy revolves around
(20:19):
incorporating the cost of doingbusiness your wages, your super,
your taxes and your savingsinto each billable hour.
In other words, you take all ofthose things cost of doing
business wages, super taxes andsavings and work out what you
need to charge for everybillable hour Remember, I said
(20:41):
billable there that you deliverand that then becomes the
jumping off point for all ofyour pricing decisions.
And that way you can create arange of prices that ensure that
you are always covering thosecosts in your business.
So you're never going to havethat shortfall every single time
(21:04):
you work for one of yourclients.
And in addition to that, whatyou're going to do is you're
going to add a pricingpercentage on top.
So, no matter what you do, nomatter what you charge, you're
covering off all of yourbusiness expenses, but you're
always making a profit on top ofthat.
So, as I said, profitablepricing formula calculator.
(21:24):
Go ahead and have a look in theshow notes and you can go and
download that Now.
When the money comes into yourbusiness, one of the most
important things that you needto understand is that not all of
the money belongs to you, andthat is part of running a small
business.
No matter where you work in theworld, no matter where you run
(21:48):
your business, part of your jobis to be a tax collector for the
government.
So don't go spending or don'tbelieve that you can spend
everything that comes into yourbusiness, because it's not all
yours.
Definitely work out what youneed to allocate the taxes and
make sure you put that to oneside and then, finally, to
(22:10):
ensure that you always haveprofit.
And obviously, in addition toall of those practical things
I've just mentioned, it's reallyimportant to save for a rainy
day, so that you can not onlyknow that when you are working,
you've included profit, you'vecovered off everything it costs
you to run your business, butyou're also banking savings so
(22:33):
that when there is a downturnyou are going to be okay.
And it's really important in mybook to allocate that weekly
amount to a specific savingsaccount.
So, whether that's just theprofit that you've added on top
of your hourly rate or on top ofevery service you offer, or
whether that's money in additionto that, the aim is to try and
(22:55):
get three months worth of tothat.
The aim is to try and get threemonths worth of expenses, for
example, banked so that if thereis some disaster or an
emergency or you need to taketime off or things slow down,
you've got that money there as abackup.
And, of course, if you've addedprofit to your offers, you can
move that across in addition tosavings or, as I said, it can be
(23:15):
the only thing that youtransfer into your savings
account.
So, as you can see my idea ofsaving, creating and saving
profit in your business, it'snot unlike the profit first
system.
In principle it's a bit more ofa simplified version, I think to
some degree, but in essenceboth ideas are still the same,
(23:36):
and that is that business shouldbe all about profit, but
instead of taking a percentageoff the top of what you've
earned, like you do in ProfitFirst, with no real strategy to
actually incorporate that intoyour pricing.
In my system you're actuallydeliberately incorporating that
and then you're allocating thatprofit to yourself as well.
(23:59):
So, as you can see, the systemthat I have just outlined it's
very similar to profit first.
I think it's a bit more of asimplified version to some
degree, but in essence we'restill talking the same language,
and that is that the mainpurpose of business is to make
money, to make profit.
(24:22):
In my system, instead of justtaking a percentage of profit
off the top of what you'veearned, off the top of the
turnover that's coming into youraccount, as profit first
suggests, and then, with fingerscrossed, allocating the rest
and really hoping that you'vegot enough to cover your
expenses, my method issuggesting that you deliberately
price for profit from theoutset, but you do that knowing
that each and every time youdeliver a service, it is also
(24:45):
going to include your cost ofdoing business, all of your
expenses, including your wages,your savings, both tax savings,
personal savings and then aprofit as well.
So it's just, in my opinion, asystem that gives then a profit
as well.
So it's just, in my opinion, asystem that gives you a little
bit more peace of mind.
Bottom line sanity in businessis definitely about the profit.
(25:06):
It is about having that extraunencumbered money that you can
stash away or that you can usefor those groceries when you
need to, because you know thatis extra money for those
groceries when you need to,because you know that is extra
money that's unencumbered moneythat you don't have to use for
anything else.
So profit is definitely the wayto go in my opinion.
Speaker 1 (25:25):
But it doesn't matter which method you choose.
Speaker 2 (25:27):
Profit first.
My method, most important thingis to make the decision to work
towards a profitable business,starting right now.
So no matter where yourbusiness is right now, whether
it's absolutely in the doldrumsor whether it's flying go back,
revisit your numbers, have alook at what you need to adjust
(25:48):
and make sure you add in thatprofit number.
And, of course, if you needhelp, reach out.
I offer one-to-one sessions,group workshops and group
sessions.
And then there's my businessmoney magnet program and, of
course, my brand new book of thesame name, which is out very
soon.
So here's to your success andyour profit Until next time.
Speaker 1 (26:11):
Thanks for listening to the Secrets of Successful
Business Podcast.
For more information on allthings business, head to
flossycomau and make sure youhit 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 yoursocials or with friends who
might enjoy it.
(26:31):
Catch you next time.
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