Why Profit First is The Most Straightforward Way To Create A Budget
The beginning of the year is the perfect time to create a budget, but if this is your first year in business or a season of constant change (hello, pandemic!) then it can feel impossible. This isn’t the only challenge business owners face when creating a budget.
Budgeting can give you small indications of whether you need to charge more or less, but if you are needing specific information you are going to need a process. This is why we recommend a profit-first approach to all of our clients as the most straightforward way to create a budget.
What is Profit First?
When it comes to following a budget, we often take the income from whatever profit is leftover. With Profit First, this is flipped. You first pay yourself and then your expenses are paid with whatever is leftover. This puts you in a mindset of – what do I really need?
Typically with a Profit First approach, you will have about 4 bank accounts. One for profit, tax, owners pay, and operating expenses. As income comes in, you divide it into four groups. Then you have your budgeted amounts for what you can spend within each category.
Why we Recommend Profit First
Profit First is quickly becoming one of the most popular ways to manage a business’s finances. Not only is it straightforward to follow but business owners are finding themselves happier because of this method. Here are a few of the main reasons we recommend Profit First:
- It ensures you get paid!
- It cuts down on expenses
- It’s super straightforward
I don’t know about you, but the fact that it is super straightforward is the best.
Why is it so Straightforward?
Every dollar you earn has a predetermined place. For example, let’s say your categories and percentages are:
35% Owners Pay
35% Operating Expenses
You know exactly where every penny of that dollar is going.
This is your outline for spending. For whatever you make, you have 35% of that to use within your business.
How Easy is it to Implement?
To get started with Profit First, determine what your percentage distributions should be. Above we give you one general example for percentage distribution.
Now that you have a plan for what to do with every dollar you make, create separate bank accounts. Most banking institutions will let you change the name of each account. We recommend doing this so whenever you open your banking dashboard, you know what funds are available within each category.
As your sales come in, stay on top of transferring the sales into the respective bank account categories. This will help ensure you are keeping up with your budget.
As the operating expenses come up, be sure to pay out of your operating bank account. When it comes time for you to collect your pay, make sure you are pulling from the appropriate account as well.
When The Numbers Aren’t Working
Look, we understand Profit First is not a quick fix to your cash flow needs or getting yourself that big paycheck you are wanting to cash in. It’s a set of guidelines that should be pushing you in the right direction. So what should you do when your operating expenses are high and you’re not sure where to cut back?
You should reach out. Bookkeepers are trained on this sort of thing. We know where a process is being inefficient and needs an update. We know how to look at your profit first approach and determine whether it is an expenses problem or a pricing problem.
So if you are ready to start implementing Profit First or have already done so and looking for a helping hand, reach out to us by visiting the link below.