In the spring of 2016, I read the book Profit First by Mike Michalowicz. I had heard a talk about the Profit First concept from Cathy Sexton of The Productivity Experts who gave a presentation about it to the St. Louis chapter of the National Association of Productivity and Organizing Professionals. I was intrigued so I bought the book. After I read the book, I decided to implement the system. It’s been wonderful for my business and for my financial security.
The basic premise of the system is to pay yourself first and also put away money for taxes and profit, before paying operating expenses. Most people pay operating expenses first and risk running out of money for taxes or for paying themselves. Michalowicz calls it “reverse engineering your profitability.”
I set up a spreadsheet in which I enter each payment I receive from a client. In the spreadsheet I designate how much of that deposit was paid out in wages and materials. The difference is my Real Revenue. In the spreadsheet I allocate 15 percent of Real Revenue for taxes, 5 percent for profit and 50 percent for owner’s pay. The remaining 30 percent is for operating expenses. According to Michaelowicz, if I can’t afford to pay my operating expenses from that 30 percent, then I need to cut my operating expenses.
Twice a month, I tally up my taxes, profit and owner’s pay amounts and transfer them from default Operating Expenses bank account into the appropriate bank accounts. This means that I have four bank accounts (Operating Expenses, Owner’s Pay, Tax and Profit), rather than the two I formerly had for my business (Checking and Savings). Once the tiny bit of work to set up those accounts was done, it became very easy.
This shift in thinking has been revolutionary for me. My revenue, like that of many professional organizers and small business owners, fluctuates. By consistently transferring 50 percent of my Real Revenue into my Owner’s Pay account and then transferring a set amount from the Owner’s Pay account into the joint account shared by my husband and me, I avoid suffering because of that fluctuation. During flush times, the balance of the Owner’s Pay account grows, creating a reserve for the lean times.
When it’s time to pay my quarterly estimated taxes, the money is waiting for me in my Tax account. Watching my Profit account grow is a real joy. Even more enjoyable is the quarterly bonus I give myself. Profit First mandates that you take one-half of the amount you transferred into your Profit account each quarter as a quarterly bonus. (The rest stays in the Profit account as a reserve.) You’re not supposed to use the bonus for your business. It’s supposed to be used for something fun, like a vacation.
In my case, I purchased tickets to see Hamilton, my favorite musical, in Chicago with my bonuses. I’ve now seen it twice! I can spend a hefty amount for this pleasure without guilt because of Profit First. That feels amazing.
If you’re a small business owner, I heartily recommend reading this book and giving serious thought to implementing the program. There are detailed instructions, including what the appropriate percentages for your business are. A second edition came out earlier this year, which I purchased I read. It’s so worthwhile!