The Profit First method has changed my business for the better. I used to pay so many business expenses that at the end of the month I just “hoped” I could afford to pay myself . I was putting in all this work only to take home next to nothing. It was so frustrating. And even if I did pay myself, I was guessing how much my business could afford to pay me as my salary.

Since implementing the Profit First method, I’m confident in what I can pay myself and the expenses I can afford to take on. I never thought I would feel sure about my business finances until I learned about Profit First. So, if you’ve never heard of it or haven’t implemented it yet, this is your sign to do it! Although there might be a learning curve, it’s well worth it!

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What is Profit First?

Profit First is a methodology developed by Mike Michalowicz to help business owners prioritize paying themselves before paying expenses. 

I know what you’re thinking – “How can I possibly pay myself before making sure I can pay my expenses first?!”

Stick with me – I had the same thought before I discovered the magic of Profit First. Profit First helps make sure your business is profitable. If you aren’t able to pay yourself, why are you in business? 

The Profit First method divides your business income across multiple bank accounts, each dedicated to its own purpose. These are the five basic accounts, but some business owners choose to get more granular.

• Income: All income lands in this account before being distributed.
• Operating Expenses: All business expenses are paid from this account.
• Salary: The account you use to pay yourself.
• Profit: A savings account for emergencies, investments, and owner’s bonus pay.
• Taxes: Savings for taxes, whether paid quarterly or annually.

How do you decide how much money goes into each account?

This is where a little strategy comes into play. You’re receiving payments from clients throughout the month, which gets collected in the income account. Then, at the end of the month (or the beginning if you want!), you distribute everything in the Income account to the other accounts.

It’s based on a percentage system, equaling 100%. Profit First has recommended percentages based on your business income, but you may have to slightly tweak it depending on your situation. Here are my percentages as an example:

• Expenses – 12%
• Salary – 55% 
• Taxes – 30%
• Profit – 3%

Your expense and salary accounts will have the highest percentages. You need to save a lot of what you make to pay expenses and yourself. Tax savings will vary slightly depending on your personal circumstances, but it’s typically around 15%. Profit is a small percentage but it still ensures that you are a profitable business. You aren’t sacrificing your profit margin to grow.

The best part about the Profit account is that you get to pay yourself a quarterly bonus from it! You’re the business owner and deserve a little bonus every once in a while. Take 50% of the Profit account as a bonus every quarter.

Your income may vary month to month but you’re distributing the same percentages every time. You start to build a little buffer in each account over time and don’t have to worry if you have a lower income month because you have some money saved up from higher income months.

Why Profit First Works for Small Business Owners

Did you know that 45% of small businesses fail within the first five years? Usually, it’s because they weren’t managing their money properly and went bankrupt. It’s so unfortunate because those businesses were helping people in some way, and now they’re just gone.

Anyway, that’s a tangent for another day, but with Profit First, there’s no reason to go bankrupt. You’re saving the right amount for expenses, salary, taxes, and profit: no more and no less. 

You get so much clarity in your finances by breaking your income into these four categories instead of having all your income in one big account. You can see how much you actually have in your Expense account and know if you can afford that coaching program or contractor. Or maybe you’re thinking about giving yourself a raise – your Salary account will tell you if you can afford to do that. No more guessing!

My Journey with Profit First

Profit First has improved my business financial management. After implementing this system, I discovered I was underpaying myself! I immediately gave myself a raise. Now, I’m confident in paying myself the same amount every month, even if I’m in a slower season. My Salary account has a little buffer, so I don’t have to take a pay cut. 

As a web designer, I’m project-based, which means some months might result in lower income than others. My Pinterest management retainer services help to offset that a little bit, but the majority of my income comes from web design and branding. With Profit First, I know I’m good financially if I have a lower income month. I can still afford to pay my expenses and myself. I’m so happy not to have that stress anymore!

Tips for Getting Started with Profit First

So, are you convinced that you need to implement the Profit First method?! Here’s how you get started.

1. Open a Relay Bank Account

Relay is the bank I chose for my business finances. It was built with Profit First in mind, so it makes everything super easy. You can input your percentages and automate the distributions every month, so you don’t have to think about it. 

Relay also doesn’t have account minimums, which was a problem I ran into at other banks. Since the Income account gets zeroed out every month, I was getting hit with low balance fees. Relay knows that the point of the Income account is to zero it out every month, so they don’t penalize you for doing that.

I highly recommend signing up!

2. Create Your Accounts

Again, the first five you should create are Income, Expenses, Salary, Profit, and Taxes. If you want to get more granular, you can break expenses into annual and monthly expenses. You can also create other accounts like emergency savings or payroll.

3. Decide Your Percentages

Pick the percentages that make sense for your business. You may decide to start with Profit First’s recommendations and tweak from there. It takes a little research and calculations to find out how much you have in expenses and what you can afford to pay yourself. You can also tweak your percentages along the way if they aren’t quite right. Just remember to contribute at least a few percentage points to each account, even profit!

Once you do those three steps, you can start distributing your income every month! You’re on your way to creating sustainable growth and maximizing your profit. I hope this blog helped you see that managing your business finances doesn’t have to be intimidating. Utilize automation and the Profit First method to feel more confident in your finances.