Embrace Profit First Management in Your Shop

BY ERIC JOERN, PARTNER, KAIZEN CPAS + ADVISORS

YOU MAY HAVE HEARD OF THE “PROFIT FIRST” METHOD, WHICH HELPS BUSI- NESS OWNERS MANAGE THEIR PROFIT MARGIN TO ULTIMATELY BECOME MORE PROFITABLE. Implementing Profit First in your shop may initially seem daunting, but it can be done systematically. By breaking down the specifics of the different types of Profit First accounts and following a step-by-step implementation process, you can prepare your shop for financial success.

1. Income Account: This account is where all the revenue gener- ated by your shop is deposited. It acts as a central hub for incom- ing funds from sales, services, or any other sources of income. 
2. Profit Account: The Profit Account is where a portion of your income is allocated to accumulate profits. This account priori- tizes profit and ensures you set money aside for your business's long-term sustainability and growth. The profit allocated to this account is not meant for immediate spending but serves as a reward for the business owner's hard work and a buffer for future investments. 
3. Tax Account: This account allocates funds to cover your tax obli- gations. By separating tax liabilities from operating expenses, you will ensure that you have sufficient funds to meet tax requirements.
4. Owner's Compensation Account: This account is dedicated to compensating the business owner(s) for their efforts and work. It allows for a fair and consistent salary for the owners, ensuring they are adequately rewarded for their time and expertise. 
5. Operating Expenses Account: This account, also known as an OpEx account, puts aside funds for daily operating costs such as rent, utilities, inventory, payroll, and marketing.

Getting started

To ease into the Profit First system, it is essential to gradually build a rhythm. Start by conducting an instant assessment to evaluate your current financial situation. This assessment will help you determine the target allocation percentages for each account. Once you have determined your target allocation percentages for each account, you can act.

The first task we assign a shop owner is to open a profit account and commit to transferring 1% of your deposits on the 10th and 25th of each month. This small percentage is manageable and lets you become comfortable with the process. Aim to maintain this transfer for three to six months until it becomes a consistent habit. By the end of the trial, you will have accumulated a small amount of profit, showcasing the system's effectiveness.

Once you have successfully established the habit of transferring funds to your profit account, you can open the remaining accounts. This step ensures you have a dedicated place for every dollar entering your shop. Each account holds a specific purpose, which will help grow your business financials healthily.

The next step in implementing Profit First is to reroute all your deposits to the income account. Initially, this may require manual transfers to your operating expenses (OpEx) account until you estab- lish a smooth flow of funds through the income account. By consol- idating your income in one place, you gain clarity on your shop's financial inflows and outflows.

With the accounts set up and your deposits streamlined, it's time to execute the transfer process based on the target allocation percentages determined earlier. In the beginning, it is recommended to have a call or consultation session to ensure a clear understanding of the calculations and processes involved. This guidance can help you navigate the initial transfers successfully.

Starting small yields big profits

By following this gradual process, you can implement Profit First in your shop effectively. The key is to start small, establish a rhythm, and gradually expand your implementation efforts. It is important to stay consistent to ensure long-term success. Stick to your designated transfer schedule and monitor your accounts regularly to ensure you stay on track.

Implementing Profit First in your shop offers numerous benefits. It helps you prioritize profit, ensures you set aside funds for taxes, provides fair compensation for owners, and allows for proper alloca- tion of operating expenses. With a clear financial structure, you gain better control over your shop's finances, improving profitability and financial stability.

In conclusion, while implementing Profit First may seem over- whelming, breaking it down into manageable steps can make the process much smoother. You can successfully implement Profit First in your shop by starting with a gradual approach, establishing a rhythm, and following the target allocation percentages. Embrace this finan- cial management system and enjoy its benefits to your business.

Eric Joern is a licensed certified public accountant (CPA) and key business advisor. Small business is in his blood. Eric comes from generations of entrepreneurs and has spent his professional career getting his hands dirty working with concrete, increasing profits and efficiency managing an automotive service department, and is currently a key resource for many small business owners. He puts his family first and views his clients as family.