For many people, opening a small business or starting work on their own is a way to achieve economic independence. Unfortunately, however, many businesses struggle to generate a real profit, being trapped in a continuous succession of deadlines and moments of endless crisis.
Trying to grow a business that does not generate profit and that consumes all our resources only risks generating a money-eating monster.
Using traditional accounting systems, which we are all used to, we learn that profit is whatever remains after ordinary management. Leaving profit as a last step, however, we fall into a trap: that of survival.
The good news is, it doesn’t have to be that way. If we decide to change the formula, we can immediately take a part of our revenues, our profit. All that remains will cover the expenses. And we can start immediately.
The basic principles of the Profit First method
The Profit First method aims to revolutionize our way of conceiving the accounting management of our business, creating a system that finally allows us to achieve the long-awaited economic independence, and to no longer be slaves to our business.
In some ways, the Profit First system is similar to a proper diet. The same principles that can help us adopt a healthier diet can help us restore our business to health.
Why use “smaller dishes”
When our revenues increase, we are led to increase expenses. A profitable period often leads us to be too optimistic, increasing expenses, often with a view to making our business grow. The more money we have, the less problems we have to approve new purchases, even when they are not needed. Who among us hasn’t taken some whim after finishing a big sale?
A tip that is often given to those who want to lose weight is to reduce the size of the dishes they use. In doing so, it will automatically be brought to serve smaller portions, without the mind feeling a lack of respect than usual.
Applying the same philosophy to our business, the idea is to not keep a single account in which to bring together all revenues and from which to scale all expenses. Dividing our accounting management into different current accounts is the first step towards a more efficient management system.
The first step is to immediately create an account to be dedicated exclusively to profit. This account must be absolutely distinct from the main one, and will receive our share of profit. In no case (except one that we will see later) will we be able to withdraw from here to cover business expenses.
We start immediately to transfer 1% of our income to this account. If we receive a payment of 1000 €, we pay 10 to the Profit account . After all, if we can keep the business going with 1000 €, we can also do it with 990. It might seem little, but that little money will begin to show us that it is possible to make a profit.
Over time, as our business becomes more optimized, the percentage of our profit will go up, but it is important to start immediately.
Make sure you always have a profit
Another tip that often accompanies diets is to eat those foods that are rich in nutrients, such as vegetables first. Similarly, the nutrients of our business are represented by our profit.
By putting profit first, we turn it into a certainty we can count on, rather than letting it be an eventuality that “could” happen, but rarely does.
If our first step is to put our profit aside, we will automatically be led to manage our business with what remains, making decisions based on what we can actually afford.
Often, this will lead us to downsize the business, but this is a fundamental step to create a business that is not only profitable, but also sustainable and efficient.
Remove the temptations
If our goal is to eat healthier, eliminating sweets and junk foods is definitely a good method. If we don’t have something available, we are much less inclined to give in to temptation. When something is at hand, it becomes difficult to resist, and we are much more inclined to commit some rudeness.
According to this principle, in addition to the Profit account , we can create different accounts for each expense we face. Ideally, each type of expense will have its own dedicated account, where we transfer a percentage of each revenue.
There are five accounts that we should open to follow the Profit First model :
1. Income: this is the account into which all income will flow. Twice a month, on fixed and set days, we will transfer money from this account to others.