Profit First Accounting
I had the pleasure of presenting the simple but oh so effective ‘Profit First’ accounting system (from the book of the same title) at a coaching book club yesterday. For those who missed it, here are the key points:
1. Few of us do a cash flow or profit forecast and so on. Instead, we use ‘bank balance accounting’: we check our business bank balance almost daily and we feel better or worse depending on how much is in it!
2. Revenue less Costs = Profit. It’s also true that Revenue less Profit = Costs. In other words, take your PROFIT FIRST, then use whatever is left to run the business.
3. The way to take your profit first is to set TAPs: TARGET ALLOCATION PERCENTAGES. The recommended TAPs for small businesses to work towards are:
- Profit: 5%
- Tax: 15%
- Owners Pay: 50%
- Costs: 30%
Start with TAPs you can manage, e.g. 2.5% Profit, 15% Tax, and 25% Pay, leaving 57.5% in the business bank account. Review and increase TAPs quarterly.
4. Set up new bank accounts for Profit and Tax. You can have your Owners Pay paid directly to your personal bank account.
5. Twice a month, say 10th and 25th of each month, or the nearest available working day, make your allocations from your business bank account in accordance with your TAPs. Also pay your bills and invoices. By establishing this twice-a-month rhythm, you will soon have a really good idea of your revenues and your costs.
6. Profit First accounting helps you to focus on and drive down costs. It also changes how your feel about your business: as the book sub title says, it ‘transforms your business from a cash-hungry monster to a money-making machine’! You will start to enjoy your twice a month allocations and take delight in working out how to cut costs and pay your self more :-).
You can read more about it on the author’s website: http://www.mikemichalowicz.com/
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