Profit First is a radical accounting system specially developed for building your business in a sustainable way that will lead to long-term success. While most entrepreneurs think of expenses as unavoidable, you can actually delay, avoid, or even eliminate them with the Profit First formulae. With this formula, you start by accounting for your profit, taxes as well as your pay and whatever is left will have to be managed to cover everything else the business needs. Below are tips to help you put the Profit First formula to work for your business.
First, create smaller spending buckets for your business to help you get more granular with cash allocation. The easiest way go about this is by setting up bank accounts, depending on the core functions of your business and the goals you are seeking to achieve. Use your current bank account as your revenue account, and that will be one less bank account for you to open. Read more about certified profit first professional here.
Secondly, determine your Current Allocation Percentages (CAPs) and Target Allocation Percentages (TAPs). CAPs show where your revenue is spent right now, while TAPs show where you want your revenue to be spent once your business is running efficiently and profitably. Generally, this is the most interesting part of the Profit First formula since most entrepreneurs rarely pay attention to this information. A certified First Profit Professional will prove to be a valuable asset to help you determine the best percentages for your business.
The next step entails transferring the accumulating cash in your income account to your other accounts. How often you transfer your cash is completely up to you, but once you establish your rhythm, make sure you stick to it. Read more about color accounting certification now.
After your cash transfer, pay your bills using your profit first accounts. The key here is ensuring that each account is only used for its intended purpose. The profit account is used for emergencies, debt reduction, and giving you a bonus for all your hard work. Since the First Profit Formula is implemented with profit in mind, the profit account should always come first. The owner’s account for paying you after-tax salary or wages comes next, followed by the tax account for meeting your tax obligations. Operating expenses come last, and since this is all the money your business has for its expenses, make a point of spending it wisely.
Finally, review the system and adjust it accordingly at the end of every quarter. The Profit First mindset will definitely challenge you to evaluate every element of your business model and lead to changes in your cash needs as well as account transfers. Learn more about management accounting at https://en.wikipedia.org/wiki/Management_accounting.
