Positive cash flow is the lifeblood of any business, allowing you to take advantage of new opportunities and cover emergencies, like replacing broken equipment or those other non-planned events that affect us all as business owners. But if you often find yourself worrying about how much cash is available, it’s hard or even impossible to take advantage of opportunities like growing your business, hiring new talents and boosting your marketing efforts.
According to a 2019 survey involving small businesses, 61% struggled with cash flow, with 32% even unable to pay their employees, vendors and creditors. If you think that this statistic applies to you, continue reading below as we explain how the team of Sum of All Numbers can help you improve not just your cash flow but the long-term success of your business.
Profit First Method: Why paying yourself first matters
Before we explain the benefits of paying yourself first, which is the core principle of the Profit First model, let’s understand the ingenious idea behind it.
Traditionally, businesses use this equation: Revenue – Expenses = Profit
However, the Profit First model is a bit different: Revenue – Profit = Expenses
With the Profit First model, all the money your business generates goes to the “INCOME” account. Nothing gets paid out of the bank account! 100% gets transferred out of this bank account. And where does it go? That revenue is strategically allocated to (1) profit, (2)taxes, (3) owner’s compensation and (4)operating expenses. Do you see the brilliance? In traditional bookkeeping, your business would pay you what was left at the end of the day and only if there was still some money left.
At a glance, you’d probably think that the owner’s compensation and profit are the same. But in reality, they are actually different.
The owner’s compensation is the money you pay yourself for all the hats you wear running your business: the CEO, CFO, COO, marketer, social media manager, salesperson, janitor, human resource director etc.
Profit is different. It’s the whole reason why you became an entrepreneur. Profit is a reward you give yourself for being a great business owner who does their own research to improve the bottom line, develop new ideas and strategies, etc. Profit is the reward you give yourself for taking the risk of owning your own company!
What are the benefits of the Profit First model?
You’d probably think that Profit First is just about playing around with the equation. But the truth is, this model has a positive impact on a business owner’s psychological mindset.
Here at Sum of All Numbers, our bookkeepers and business consultants are experts at knowing your numbers and using that information to help catapult your company forward. We explain the “why” behind Profit First and then adapt this system to your personal strengths and behaviors, making this model applicable to small companies of any size.
It helps you stay motivated.
Allocating even just 1% of your sales into your profit account gives you a sense of reward and a boost of motivation. While some might dismiss it as nothing but a numbers game, this is actually a great way to remind yourself that your efforts don’t go to waste.
By contrast, paying yourself last and only if there is still some money left will leave you feeling discouraged and unmotivated, especially if this has been going on for a long time.
The model helps you become more creative with the money.
When you pay yourself first, you end up with a fixed amount that you’ll use to cover your operating expenses and taxes. The beauty of this equation is that your mind will find creative ways to make this possible.
Perhaps you realize that you should cancel a service subscription you’re not frequently using. Or maybe your inventory is too big that it doesn’t make any sense. Or perhaps you need to shorten the billing or accounts receivable period rather than batch your invoice to improve your cash flow.
When you’re dealing with a fixed amount of money to cover your expenses, your instinct to make this possible kicks in.
It reduces your stress.
If you own a small- or medium-sized company, you might remember some instances when you didn’t want to look at your finances. But with the Profit First model in which you AUTOMATICALLY and CONSISTENTLY allocate a portion of your revenue to your profit account (no ifs and buts), looking at your financial record will even give a motivational boost as you see the amount of money piling up in your account.
Contact us if you want to know the ideal percentage you should allocate to your profit account and how frequently you should do the allocation.
At Sum of All Numbers, our bookkeepers can help you determine the appropriate frequency for your allocations.
It helps you take advantage of opportunities.
If you have sufficient money stashed in your profit account, you actually leverage yourself since you have the funds to take advantage of opportunities and favorable circumstances.
How Entrepreneurs Can Use The Profit First Method
We understand that bookkeeping is a complicated and time-consuming task that may prevent you from focusing on the most important part of being a business owner–ensuring profitability. For this reason, we at Sum of All Numbers, not just provide bookkeeping services but also consult services based on the ingenious principles of the Profit First model.
Fill out this form or call us at + (888) 564-5777 to learn more about how we can help you turn your business into a money-making machine.
