I’ve now read Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine twice. The first time was last year and I immediately applied the advice to my business, and I’ve just re-read it as a refresher.
The premise of the book is that the established way of looking at your business finances doesn’t work for most people. By this I mean, taking your income, subtracting running expenses and then what you are left with is your profit. That makes sense really, doesn’t it? But in a lot of cases this means that you never get as far as making profit because you are concentrating on covering your expenses. And when it comes to judging whether you’ve got the funds to make a purchase, the natural thing to do is to check your bank balance and make a judgement call on that. I know that’s what I do.
Mike’s system turns this on its head. It makes you put aside a percentage of all income into pots for different things – profit (first), tax, your salary, and expenses. Then you can confidently look at your expenses pot to check whether you can afford to make that purchase without taking away from the other pots. You might not think that’s rocket science but it’s actually very clever.
When I first started doing it last year, I decided on the percentages for each pot and then every time some money comes in I carefully distribute it. It’s made a massive difference to our business finances. When it came to paying our corporation tax, not only did I have enough to comfortably cover it without wiping us out but I even had a chunk of money left over for next year’s payment. That was a great feeling.
And when it comes to spending it has done two things for me:
1) It has made me hyper aware of any outgoings and I question everything – do we really need that, are we paying the best price for it? This has resulted in me getting rid of some things we’d been paying for but not really using.
2) For the things we really need I can be confident that we’ve got enough to cover it without digging into our salaries or tax etc.
It really has taken a lot of the pressure off when it comes to managing our budget.
This has turned into more of a discussion of how I’m using the Profit First system, rather than a review of the book. But I hope that speaks for itself – the fact that I’m actively applying it means that I must have rated the book, right?
The book is a very enjoyable read in itself, Mike comes across very well (I do love it when the author’s personality really comes through), and it very much instills a feeling of hope that it will make a real difference to your business (which it did!).
Now for my confession. Mike’s very firm instruction is that you should set up different bank accounts for your different pots, and that you absolutely definitely shouldn’t use a spreadsheet to track it. I know that if Mike reads this he will very disappointed in me … but I’ve stuck to my two existing bank accounts (one for profit and tax, and the other for salary and expenses) and I’m using a spreadsheet to keep track of it. I know, I’m a bad bad person. But I just couldn’t bear the thought of having multiple bank accounts to manage. And I’m being very careful to play by the rules apart from that – when I want to know how much money I’ve got for expenses, I make sure to check the figure on my spreadsheet and not the bank balance. Please forgive me!