Profit First: Have a profitable business no matter the season

As we wind up 2023, a lot of us will be reflecting on the year we have had and what we have achieved. It has been a challenging year for many, especially in small business. With the price of materials going up faster than ever, and the constant compliance and mounting paperwork to be done, it’s surprising so many of us are still ready to go another round. Thankfully, there is a better way.

The business sector in Australia is dominated by small and medium-sized enterprises (SMEs), with 97% classed as small business (0-19 employees). Sadly, approximately 20% of new businesses fail within their first year and 60% don’t make it to 5 years. 

A huge challenge for small businesses is cash flow and money stress. Many small business owners have heard of Profit First, but don’t know much about what it is, or how it works. Not only a cash management system, Profit First is also a behavioural system that will challenge your current thought process. 

Traditionally, the Profit formula is Sales – Expenses = Profits. With this formula Sales comes first, then Expenses are paid out, and whatever’s left is your Profits. But imagine if you prioritised your Profits first. Imagine if you paid yourself what you are worth for running your business and realised that if you’re not paying yourself what you’re worth, and taking a profit, then you only have the equivalent of an underpaid job.

Sitting down and mapping out your goals and your “Why” with a Profit First professional may be the most enlightening moment you have in your business. After all, we go into business for a clear reason but often get stuck there and lose sight of our initial mission. The daily grind of the business keeps us stuck. Dreams and hopes drift to the back burner before financial year end arrives and, yet again, we’re back at the accountant’s office asking, where are the profits? Where is the cash?

When you are running your business under the Profit First methodology, you are intentionally making cash flow decisions that build your Profits and minimise expenses. You intentionally put money aside, into various accounts, just like the old envelope system. When BAS time comes around, you can then draw from that account and pay it on time, without having the stress and worry of not having the money available because someone doesn’t pay you an invoice on time.  

Many business owners are working so hard that they haven’t even had time to thoroughly go through their books and review their financial situation. I often find business owners are increasing their sales at a rapid rate, and increasing their expenses in the same, or higher, proportion, resulting in less profits and higher sales. Parkinson’s Law creeps in, and the more we earn, the more we spend.

Many people have money blockages that we can work with through the Profit First system, breaking down old beliefs and thought patterns that may not serve you well today, or cause stress in your business. The first step in implementing Profit First is to do an assessment on your business. Once you know your Current Allocation Percentages (CAPs), you can map out where you want to be and work towards your Target Allocation Percentages (TAPs). You can do this by yourself or with a Profit First professional to guide you.