The Profit First Method Guide for New Business Owners

The Profit First Method Guide for New Business Owners

The Profit First Method Guide for New Business Owners

As a new business owner, it’s important to clearly understand your financials and focus on maximizing profits from the beginning. One method that can help you do this is the Profit First method, developed by entrepreneur and business coach Mike Michalowicz


By following the guidelines outlined in the Profit First Method, entrepreneurs can take control of their finances, allocate resources effectively, and increase profitability. In this article, we will provide a brief overview of the Profit First Method and how it can benefit you as a new business owner.


At Sum of All Numbers, we provide bookkeeping and consulting services using the Profit First system. Call us at + (888) 564-5777 or schedule an appointment here.


What is the Profit First Method?

The Profit First method has been popular among small business owners and entrepreneurs as a way to improve their financial stability and increase profitability. It’s based on the idea that businesses should prioritize profitability in their financial decision-making. The system encourages business owners to allocate a certain percentage of their revenue to profit first before covering expenses or paying themselves. 


The goal of this method is to help implement a new financial management system in a business, including specific guidelines for setting up financial accounts, tracking income and expenses, and making financial decisions.




How to Start Implementing the Profit First Method

With a little planning and discipline, you are well on your way to creating a strong foundation for long-term financial success. Here are the steps you can follow to start implementing the Profit First Method in your business:


1. Determine your target profit percentage

The first step is to determine what percentage of your revenue you want to set aside as profit. This will depend on your specific business goals and needs, but a good starting point is to set aside 5-15% as profit.


2. Set up separate bank accounts

Once you have determined your target profit margin, it’s time to open separate bank accounts. You’ll need one very specific designated account for all income you receive, one checking account for your operating expenses, one savings or checking account for your tax savings, one checking account for your personal pay, and one savings account for your profits. This will help you to track and manage your finances clearly.


3. Set up automatic transfers

With your bank accounts all setup, the first step is to make sure that each and every penny that the company earns in revenue is deposited into the Income account and that no expenses are paid out of this account.  The next step is to set up a time to make regular transfers out of your Income bank account into the 4 other bank accounts based on target allocation percentages.. For example, if you’ve determined that 10% of your revenue should be set aside as profit, you’ll want to automatically transfer 10% of your revenue into your monthly profit account.  100% of the amount in the Income account should be transferred out among (1) profit, (2) operating expenses, (3) owners pay and (4) taxes so that the balance in the Income account is now zero until your next revenue is received.


4. Monitor and Adjust

As you implement the Profit First method, your target allocation percentages allow you to plan for the future.  Your financial reports within your bookkeeping platform give you a historical viewpoint on your business.  Looking from these 2 vantage points allows you to adjust your business spending for greater profitability.  Most often, a business implementing Profit First will take 4-12 months of adjusting allocation percentages to obtain the profitability goals established in Mike Michalowicz’s Profit First book..


The Benefits of Using the Profit First Method

Improved Profitability Right Off the Bat

One of the key benefits of the Profit First method is that it helps you focus on profitability right from the start rather than simply trying to maximize revenue. By setting aside a specific percentage of your revenue as profit, you’re more likely to prioritize profitability and make decisions aligned with that goal.


Simplified Cash Flow Management

By separating your finances into different accounts and allocating a percentage of income into each one, you are proactively ensuring that you have sufficient funds available to meet your goals and expenses. This makes it easier for you to understand and manage the financial health of your business.


Increased Discipline

The Profit First Method requires discipline and planning in order to be successful. By following the principles of the method, businesses can improve their financial discipline and make better financial decisions. 


One example of this is the act of “batching” expenses. Rather than paying bills as they come in, you’ll pay your bills on a predetermined schedule (e.g. once a week or once a month). This helps you to avoid overspending.


Enhanced Understanding of Finances

The Profit First method helps you understand your business finances better and, subsequently, identify areas for improvement. By regularly monitoring and adjusting your financials, you can pinpoint areas where you’re spending too much or where you can stand to generate more revenue.


For example, if you notice that a particular expense is eating into your profits, you might consider ways to reduce that expense or find a more cost-effective solution. Similarly, if you notice that a particular product or service is generating a lot of revenue, you might consider ways to expand or invest in that area of your business.


The Profit First Method in Action

Imagine you own a small clothing and accessories retail store. Despite having a steady stream of customers, you have struggled to profit consistently. In an effort to turn your financial situation around, you decide to try the Profit First method.


Under this system, you allocate 20% of each sale towards profit, setting aside $20 for every $100 in sales before covering expenses or paying yourself. After doing this for a few months, you are pleased to see that you are regularly generating profits and are finally able to pay yourself a regular salary. Additionally, you now have a cushion of profit to cover unexpected expenses or downturns in your business.


Through the Profit First method, you are now able to make more financially sound decisions and ensure that your business has a steady source of income rather than just breaking even or operating at a loss.


Final Words on Profit First Method Guide 

As a new business owner, it is important to prioritize profitability and financial stability from the outset. The Profit First Method offers a clear and structured approach to managing your finances and maximizing your profits. Remember that this method is not a quick fix or a magic solution; it takes time and effort to implement and to see results. 


By following the steps and principles outlined in this guide, you can create a solid foundation for long-term financial success. With a little discipline and patience, you can successfully implement the Profit First Method in your business and achieve your financial goals.




Get in touch with us to learn how applying these principles can help you grow your business faster. Contact us at + (888) 564-5777 or

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